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, 1998
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: $214,000
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: 6,330,414 as of March
17, 1999 (346,872 shares at $18.25 per share).
As of March 26, 1999, the issuer has 404,668 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1998 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.
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INDEX
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PAGE
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PART I
Item 1. Description of Business ....................................... 1
Additional Item. Executive Officers of Registrant
Item 2. Description of Property........................................ 30
Item 3. Legal Proceedings.............................................. 30
Item 4. Submission of Matters to a Vote of Security Holders............ 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 31
Item 6. Management's Discussion and Analysis or Plan
of Operations.................................................. 31
Item 7. Financial Statements........................................... 31
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance with Section 16(a) of the Exchange Act............ 32
Item 10. Executive Compensation......................................... 32
Item 11. Security Ownership of Certain Beneficial Owners
and Management................................................. 32
Item 12. Certain Relationships and Related Transactions................. 32
PART IV
Item 13. Exhibits and Reports on Form 8-K............................... 33
SIGNATURES............................................................... 35
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Lenox Bancorp, Inc. (the "Company" or the "Registrant") 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.
At December 31, 1998, the Company had total assets of $55.1 million and
stockholders' equity of $7.1 million (13.0% 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, 1998, the Bank had invested $34.7 million, or 90.2%, of its total
loan portfolio in one- to four-family mortgage loans. The Bank also invests in
consumer, multi-family and construction loans. Due to the close ties that have
existed between the Bank and Procter & Gamble, the Bank continues to have a high
concentration of borrowers and depositors who are Procter & Gamble employees.
During the fourth quarter of 1998, the Bank began using third party originators
to develop multi-family lending and to increase its loan production. The Bank
also opened a branch office in Hyde Park in October 1997. The new office has
facilitated the Bank's ability to attract new deposits and loan customers. 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, and most recently, through the purchase of collaterialized mortgage
obligations ("CMOs").
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 in
recent years 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 and has
developed the economic characteristics of most large cities in the midwestern
United States. For example, although Cincinnati's economy was founded on
manufacturing, which remained the dominant
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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 and is now the largest employment sector in the
Hamilton County. 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. The remaining
employment is provided by government, finance, insurance and real estate,
construction, transportation and public utilities.
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. 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.
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, 1998, 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
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily
of one- to four-family loans, but also originates consumer, multi-family and
construction loans. At December 31, 1998, the Bank's one- to four-family,
multi-family, construction and consumer loans totalled $34.7 million, $1.9
million, $1.6 million and $800,000, respectively. 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.
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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.
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AT DECEMBER 31,
---------------
1998 1997 1996
-------------------- ----------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- ---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family(1) ........... $34,745 90.18% $35,855 91.93% $35,124 93.68%
Multi-family ..................... 1,561 4.05 798 2.05 -- --
Construction(2) .................. 775 2.01 521 1.34 120 0.32
------- ------ ------- ------ ------- ------
Total real estate loans ....... 37,081 96.24 37,174 95.32 35,244 94.00
OTHER LOANS:
Consumer loans(3) ................ 1,884 4.89 2,092 5.36 2,399 6.39
------- ------ ------- ------ ------- ------
Total loans ................... 38,965 101.13 39,266 100.68 37,643 100.39
------- ------ ------- -------
LESS:
Deferred loan fees ............... 18 0.04 53 0.14 42 0.11
Loans in process ................. 353 0.92 145 0.37 48 0.13
Allowance for loan losses ........ 66 0.17 66 0.17 58 0.15
------- ------ ------- ------ ------- ------
Total reductions ................. 437 1.13 264 0.68 148 0.39
------- ------ ------- ------ ------- ------
TOTAL LOANS RECEIVABLE, NET ........ $38,528 100.00% $39,002 100.00% $37,495 100.00%
======= ====== ======= ====== ======= ======
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AT DECEMBER 31,
---------------
1995 1994
----------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family(1) ........... $30,633 91.76% $29,265 92.60%
Multi-family ..................... -- -- -- --
Construction(2) .................. 53 .16 -- --
------- ------ ------- ------
Total real estate loans ....... 30,686 91.92 29,265 92.60
OTHER LOANS:
Consumer loans(3) ................ 2,817 8.44 2,465 7.80
------- ------ ------- ------
Total loans ................... 33,503 100.36 31,730 100.40
------- -------
LESS:
Deferred loan fees ............... 43 0.13 59 0.19
Loans in process ................. 16 0.05 -- --
Allowance for loan losses ........ 60 0.18 66 0.21
------- ------ ------- ------
Total reductions ................. 119 0.36 125 0.40
------- ------ ------- ------
TOTAL LOANS RECEIVABLE, NET ........ $33,384 100.00% $31,605 100.00%
======= ====== ======= ======
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- ---------------------------
(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.
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LOAN MATURITY. The following table shows the maturity of the Bank's
loans at December 31, 1998. The table does not include principal repayments.
Principal repayments totaled $17.1 million, $8.2 million and $7.3 million for
the years ended December 31, 1998, 1997 and 1996, respectively. At December 31,
1998, the Bank held $220,000 of loans available for sale recorded at the lower
of cost or market. 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.
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<CAPTION>
AT DECEMBER 31, 1998
--------------------------------------------------
ONE- TO
FOUR- MULTI- TOTAL LOANS
FAMILY(1) FAMILY CONSUMER(2) RECEIVABLE
----------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due:
One year or less...................... $ 151 $ -- $ 619 $ 770
After one year:
More than one year to three years... 1,140 -- 741 1,881
More than three years to five years. 1,916 -- 403 2,319
More than five years to ten years... 4,762 850 -- 5,612
More than 10 years to twenty years.. 7,835 711 -- 8,546
More than twenty years.............. 19,716 -- 121 19,837
------ ------- ------ ------
Total due after December 31, 1999. 35,369 1,561 1,265 38,195
------ ------ ----- ------
Total amount due.................. $35,520 $1,561 $1,884 $38,965
======= ====== ====== =======
Less:
Undisbursed loan funds.............. 353
Deferred loan fees, net............. 18
Allowance for loan losses........... 66
-------
Total loans, net............... $38,528
=======
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(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.
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The following table sets forth at December 31, 1998, 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.
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<CAPTION>
DUE AFTER DECEMBER 31, 1998
-----------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family........... $18,717 $16,652 $35,369
Multi-family.................. -- 1,561 1,561
Consumer...................... 999 266 1,265
-------- ------- -------
Total loans................ $19,716 $18,479 $38,195
======= ======= =======
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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,
-------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans:
Loans receivable, beginning of period. $39,068 $37,553 $33,444
Loans originated:
One- to four-family(1)............. 20,505 7,524 9,278
Multi-family....................... 189 -- --
Consumer(2)........................ 1,678 1,360 1,311
Loans purchased....................... 2,468 798 884
Loan sold.......................... (8,179) -- --
Principal repayments.................. (17,170) (8,156) (7,365)
Other changes, net.................... 35 (11) 1
--------- ---------- ----------
Increase (decrease) in loans receivable (474) 1,515 4,109
--------- ------- -------
Loans receivable, end of period....... $38,594 $39,068 $37,553
======= ======= =======
</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.
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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, 1998, the Bank's total loans, net, outstanding were
$38.5 million, of which $34.7 million or 90.2% 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, 52.5% were
fixed-rate loans, and 47.5% were adjustable-rate mortgage ("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 $4.1 million of the Bank's ARM
loans, or 25.3% 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. 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 the one-year
Constant Maturity Index. 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, 1998, the Bank had second mortgage loans totalling $692,000.
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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, 1998, consumer loans amounted to $1.9 million or 4.9% 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, 1998, the Bank had four consumer loans
totalling $3,900 that were 90 days or more delinquent.
MULTI-FAMILY AND CONSTRUCTION LENDING. The Bank originates a limited
amount of multi-family loan and construction loans. 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. The Bank has began originating multi-family loans secured by five
or more unit real estate. Such loans bear greater risk than one- to four- family
loans because the ability of the borrower to pay frequently depends on the cash
flow earned from use of the property. However, such loans generally carry higher
interest rates, which generate greater income for the Bank. At December 31,
1998, the Bank's largest multi-family loan was $850,000. All multi-family loans
were performing in accordance with their respective terms as of that date.
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. Real estate loans in amounts up to
$240,000 may be approved
7
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by either the President or the Chief Operating Officer. Loans for between
$240,000 and less than $500,000 may be approved by two of the Bank's executive
officers. Loans over $500,000 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.
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
8
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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 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, 1998, the Bank had no
real estate owned as a result of foreclosure ("REO"). At December 31, 1998, the
Bank had $39,000 of assets classified as Special Mention, $60,000 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, 1998 AT DECEMBER 31, 1997
----------------------------------------- ----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- ------------------- -------------------- -------------------
PRINCIPAL PRINCIPAL RINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS POF LOANS OF LOANS OF LOANS
---------- --------- --------- --------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...................... 1 $13 1 $51 1 $52 4 $152
Consumer................................. 2 1 2 3 6 18 8 22
-- -- -- -- -- ---- --- ------
Total............................ 3 $14 3 $54 7 $70 12 $174
== === == === == === == ====
Delinquent loans to total gross loans.... 0.03% 0.14% 0.18% 0.44%
==== ====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------
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> <C> <C> <C>
One- to four-family...................... 2 $ 90 3 $ 95
Consumer................................. 6 25 8 14
- --- -- ---
Total............................ 8 $115 11 $109
= ==== == ====
Delinquent loans to total gross loans.... 0.31% 0.29%
</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 $2,109, $8,647, $3,303, $3,146 and $7,470 for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994, 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,
---------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual one- to four-family loans
delinquent 90 days or more.......... $51 $152 $ 95 $ 66 $ 88
Non-accrual consumer loans
delinquent 90 days or more.......... 3 22 14 23 5
-- ----- ---- ----- ------
Total non-performing loans............ 54 174 109 89 93
Total investment in REO............... -- -- -- -- --
---- ------ ------ ---- ----
Total non-performing assets....... $54 $174 $109 $89 $93
=== ==== ==== === ===
Non-performing loans to total loans... 0.14% 0.45% 0.29% 0.27% 0.29%
Non-performing assets to total assets. 0.10% 0.34% 0.23% 0.31% 0.23%
</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, 1998, the Bank's allowance for loan losses was
0.17% of total loans as compared to 0.17% as of December 31, 1997. The Bank had
$54,000 of nonperforming loans at December 31, 1998 and $174,000 at December 31,
1997. 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.
11
<PAGE>
At December 31, 1998, 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-KSB.
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,
-------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period............. $66 $58 $60 $66 $66
Provision (credit) for loan losses......... 18 10 -- (2) --
Charge-offs:
Consumer................................ 21 3 4 5 1
-- --- -- -- --
Total charge-offs.................... 21 3 4 5 1
Recoveries:
Consumer................................ 3 1 2 1 1
--- --- --- -- --
Total recoveries..................... 3 1 2 1 1
--- --- --- -- ---
Net charge-offs............................ 18 2 2 4 --
--- --- --- -- ---
Balance at end of period................... $66 $66 $58 $60 $66
=== === === === ===
Ratio of net loan charge-offs
during the period to average
loans outstanding during period.......... 0.05% 0.01% 0.01% 0.01% -- %
Ratio of allowance for loan losses
to gross loans at end of period.......... 0.17 0.17 0.15 0.18 0.21
Ratio of allowance for loan losses
to non-performing loans
at end of period......................... 122.22 37.93 53.21 66.67 71.17
</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,
-------------------------------------------------------------------------------------------------------------
1998 1997 1996
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN ALLOWANCE LOANS IN EACH
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY TO TOTAL CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------- ---------- ------------- ------ --------- -------------- ------ --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $38 57.58 95.17 $34 51.51% 94.67% $20 34.48% 93.63%
Consumer........... 28 42.42 4.83 32 48.49% 5.33% 38 65.52% 6.37%
-- ----- ----- --- ------ ---- ---- ----- ------
Total allowance for
loan losses.. $66 100.00% 100.00% $66 100.00% 100.00% $58 100.00% 100.00%
=== ====== ====== === ====== ====== === ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------
1995 1994
------------------------------------ -------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN EAC ALLOWANCE LOANS IN EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY
AMOUNT ALLOWANCE TOTAL LOANS H AMOUNT ALLOWANCE TO TOTAL LOANS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $20 33.33% 91.59% $20 30.30% 92.23%
Consumer........... 40 66.67% 8.41% 46 69.70 7.77
--- ------ ---- --- ------ ----
Total allowance for
loan losses.... $60 100.00% 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,
including CMOs, 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. Such limit is
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, 1998, the Bank had a total of $15.0 million in
certificates of deposit, other interest earning deposits, corporate notes,
federal funds and other investment, mortgage-backed securities and CMOs. At
December 31, 1998, $10.2 million of investment and mortgage-backed securities
were classified as available for sale. Included in this total, at December 31,
1998, the Bank had $3.3 million in U.S. Government and agencies securities,
$805,000 in mortgage-backed securities and $2.2 million in CMOs. The Bank also
has CMOs of $5.9 million which are classified as held to maturity. A CMO is a
special type of pass-through debt in which the stream of principal and interest
payments on the underlying mortgages or mortgage-backed securities is used to
create classes with different maturities, and, in some cases, amortization
schedules, as well as a residual interest, with each class possessing different
characteristics. The Bank has recently increased its investment in CMOs because
these securities generally exhibit a more predictable cash flow than
mortgage-pass-through securities. Investments in mortgage-backed securities
carry a reduced credit risk as compared to whole loans; however, such 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. In contrast to mortgage-backed
securities in which cash flow is received (and, hence prepayment risk is shared)
pro rata by all holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such securities
or obligations. A particular tranche may therefore carry prepayment risk that
differs from that of both the underlying collateral or other tranches.
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,
--------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit(1). $ 183 $ 183 $ 173 $ 173 $ 162 $ 162
Other interest-earning deposits 433 433 162 162 357 357
Investment securities:
Federal funds............ 1,327 1,327 84 84 364 364
FHLB stock............... 822 822 625 625 436 436
U. S. government obligations 3,303 3,301 4,294 4,291 6,193 6,089
Mutual Funds............. -- -- 26 26 14 14
Mortgage-backed securities(2) 8,892 8,977 5,792 5,791 1,148 1,148
------ ------ --------- --------- ------- -------
Total................. $14,960 $15,043 $11,156 $11,152 $8,674 $8,570
======= ======= ======= ======= ====== ======
</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, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------
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> <C> <C> <C> <C> <C>
Certificates of Deposit(1)....... $ 95 5.87% $ 88 6.10% $ -- -- %
Other interest-bearing deposits.. 433 4.60 -- -- -- --
Investment securities:
U.S. government obligations.. -- -- 703 6.02 1,600 6.47
Federal funds................ 1,327 4.60 -- -- -- --
FHLB stock................... -- -- -- -- -- --
Mortgage-backed securities(2) -- -- -- -- 1,651 6.68
------ ------ ------ ------ ----- -----
Total...................... $1,855 4.66% $ 791 6.03% $3,251 6.58%
====== ==== ===== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------
MORE THAN TEN YEARS TOTAL
---------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificates of Deposit(1)....... $ -- -- % $ 183 5.98%
Other interest-bearing deposits.. -- -- 433 4.60
Investment securities:
U.S. government obligations.. 1,000 6.52 3,303 6.39
Federal funds................ -- -- 1,327 4.60
FHLB stock................... 822 7.00 822 7.00
Mortgage-backed securities(2) 7,241 6.12 8,892 6.22
------ ---- ------ ----
Total...................... $9,063 6.24% $14,960 6.11%
====== ==== ======= ====
</TABLE>
- -----------------------------
(1) Includes certificates of deposit with original maturities of greater than
90 days.
(2) Includes 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, 1998, certificates of
deposit constituted 68.8% 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>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance beginning of period..... $31,867 $32,551 $33,669
Net increase (decrease)
before interest credited.. (356) (2,171) (2,772)
Interest credited............ 1,556 1,487 1,604
-------- --------- ---------
Balance end of period.... $33,067 $31,867 $32,551
======= ======= =======
</TABLE>
17
<PAGE>
At December 31 , 1998, the Bank had $4.2 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> <C>
Three months or less........................ $ 420 5.69%
Over three through six months............... 1,056 6.36
Over six through 12 months.................. 890 5.92
Over 12 months.............................. 1,858 6.17
----- ----
Total............................... $4,224 6.12%
====== ====
</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,
------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
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> <C> <C> <C> <C> <C> <C> <C> <C>
Statement savings
accounts ...... $ 4,742 14.60% 2.59% $ 5,113 16.42% 2.60% $ 6,047 17.67% 2.58%
NOW and Money
Market
accounts ...... 5,396 16.62 2.58 5,131 16.48 2.75 5,281 15.43 2.46
Total certificate
accounts ..... 22,333 68.78 5.79 20,890 67.1 5.81 22,896 66.90 5.75
------ ----- ------ ---- ------ -----
Total average
deposits ........ $32,471 100.00% 4.79% $31,134 100.00% 4.78% $34,224 100.00% 4.68%
======= ====== ======= ====== ======= ======
</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, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1998 AT DECEMBER 31,
-------------------------------------------------------------- -------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1998 1997 1996
------------ ----------- ----------- ------------ ----------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts(1):
3.00 to 4.00%.................. $ 54 $ -- $ -- $ -- $ -- $ 54 $ -- $ --
4.01 to 5.00%.................. 1,673 246 2 -- -- 1,921 217 412
5.01 to 6.00%.................. 10,294 3,977 1,437 881 1,275 17,864 15,537 16,122
6.01 to 7.00%.................. 1,517 1,089 121 -- 2 2,729 5,309 5,187
7.01 to 8.00%.................. 401 172 -- -- -- 573 558 149
------- ------ ------ ----- ------ ------- ------- -------
Total....................... $13,939 $5,484 $1,560 $881 $1,277 $23,141 $21,621 $21,870
======= ====== ====== ==== ====== ======= ======= =======
</TABLE>
- -------------------------
(1) Certificates of deposit include IRA accounts of $7,287, $8,768 and $9,430
as of December 31, 1998, 1997 and 1996, respectively.
19
<PAGE>
BORROWINGS
At December 31, 1998, the Bank had $14.4 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,
----------------------------------------
1998 1997 1996
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding........................ $14,401 $ 9,499 $5,924
Maximum amount outstanding at any
month-end during the period.................... 15,334 12,287 7,007
Balance outstanding at end of period............... 14,440 12,287 7,007
Weighted average interest rate during the period... 5.64% 5.70% 5.77%
Weighted average interest rate at end of period.... 5.67% 5.78% 5.73%
</TABLE>
PERSONNEL
As of December 31, 1998, the Bank had 12 full-time employees and four
part-time employees. 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.
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.
All FDIC-insured state-chartered 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
21
<PAGE>
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.
FEDERAL 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 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
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, 1998:
GAAP Capital to Total Assets...................... 13.0%
Total Capital to Risk-Weighted Assets............. 24.2%
Tier I Leverage Ratio............................. 11.5%
The FDIC, along with the other federal banking agencies, have 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.
22
<PAGE>
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 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. The federal banking agencies have
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness (the "Guidelines") to implement safety and soundness
standards used to identify and address problems at insured depository
institutions before capital becomes impaired. 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").
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. The
severity of such action depends on the degree of under capitalization.
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%.
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 FDIC 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 FDIC 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. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
23
<PAGE>
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.
The Bank's assessment rate for fiscal 1998 was 0 basis points and the
premium paid for this period was $0. Payments toward the FICO bonds amounted to
$19,000. The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.
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.
THRIFT RECHARTERING LEGISLATION. Legislation enacted in 1996 provided
that the BIF and SAIF were to have merged on January 1, 1999 if there were no
more savings associations as of that date. Various proposals to eliminate the
federal savings association charter, create a uniform financial institutions
charter, abolish the OTS and restrict savings and loan holding company
activities have been introduced in Congress. The Bank is unable to predict
whether such legislation will 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"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 federal law. The aggregate amount of
covered transactions with any individual affiliate is limited 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 federal law and
the purchase of low quality assets from affiliates is generally prohibited.
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, institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no 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 federal law. 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. There is 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. Federal law 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.
24
<PAGE>
ENFORCEMENT. 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 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.
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 regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.4 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 $46.5 million.
The first $4.9 million of otherwise reservable balances (subject to adjustments
by the Federal Reserve Board) are exempted from the reserve requirements. The
Bank complies with the foregoing requirements.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the federal law. As a unitary savings and loan holding
company, the Company is not restricted by federal law as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender. 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. Federal law 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 generally prohibited from acquiring or retaining, more than 5% of
a non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by federal law.
A savings and loan holding company is prohibited from, directly or
indirectly, 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
25
<PAGE>
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 qualified thrift lender.
To be a qualified thrift lender, 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 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, 1998, the Bank maintained
in excess of 85% of its portfolio assets in qualified thrift investments and was
a qualified thrift lender. Recent legislative amendments have broadened the
scope of "qualified thrift investments" that go toward meeting the qualified
thrift lender test to fully include credit card loans, student loans and small
business loans. A savings association may also satisfy the 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 1998 taxable year, the Bank is subject to a maximum federal
income tax rate of 34%.
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, repeals the reserve method of accounting for bad
debts effective for tax years beginning after 1995, and requires savings
institutions to recapture (I.E., take into income) certain portions of their
accumulated bad debt reserves. Thrift institutions eligible to be treated as
"small banks" (assets of $500 million or less) are allowed to use the Experience
Method applicable to such institutions, while thrift institutions that are
treated as large banks (assets exceeding $500 million) are required to use only
the specific charge-off method. The PTI Method of accounting for bad debts is no
longer available for any financial institution.
26
<PAGE>
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 a
two-year suspension if the "residential loan requirement" is satisfied.
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 1996 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.
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 $21,000 which is generally
expected to be taken into income beginning in 1999 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
distribution 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 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.
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.
27
<PAGE>
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 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% 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 0.014% times taxable
net worth.
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.
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. The Company
adopted SFAS No. 130 during 1998 and provided the required disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pension and other Postretirement Standards." This statement is effective
for fiscal years beginning after December 15, 1997. Restatement of comparative
period disclosures is required unless the information is not readily available,
in which case the notes to the financial statements shall include all available
information and a description
28
<PAGE>
of the information not available. This statement standardizes the disclosure
requirements of SFAS No. 87 and No. 106 to the extent practicable and recommends
a parallel format for presenting information about pensions and other
postretirement benefits. Statement 132 does not change any of the measurement or
recognition provisions provided for in SFAS No. 87, No. 88 or No. 106. The
adoption of this standard did not have an effect on the Company's consolidated
financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement amends SFAS No. 52 and 107 and
supercedes SFAS No. 80, 105 and 107. This statement is effective for fiscal
quarters beginning after June 15, 1999. The adoption of this standard should not
have an effect on the Company's consolidated financial condition or results of
operation.
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 12/31/98 and Past Five Years Experience
- ---- -------- ------------------------------
<S> <C> <C>
Michael P. Cooper 41 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. Hunt 43 Vice President, Chief Operating Officer and Secretary of the
Company and the Bank.
</TABLE>
29
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
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 from which it operated. However, 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
Company's continued use of the main office facilities beyond the lease term is
dependent upon decisions of the lessor who is presently evaluating the
situation. There is a reasonable possibility that the Company, in the near term,
may be required to obtain an alternate site for its main office. The effect this
could have on business operations is not known. The net book value of leasehold
improvements at December 31, 1998 was approximately $172,000. 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, 1998
- --------------------------------- -------- ---------- ------------ --------------------
<S> <C> <C> <C> <C>
5255 Beech Street
St. Bernard, Ohio 45217......... Leased 1995 2000 $219,000
3521 Erie Avenue
Cincinnati, Ohio 45208.......... Owned 1997 -- $345,000
</TABLE>
There can be no assurance that Procter & Gamble will renew the Bank's
lease in 2000. Consequently, it may be necessary for the Bank to relocate its
main office in 2000. At December 31, 1998, the Bank had a total of three ATMs.
For further information related to the Bank's properties, see Note 4 to
the Notes to the Financial Statements included in the Company's 1998 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.
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<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 1998 Annual Report to
Stockholders on the back inside cover. On December 31, 1998, the Company had 222
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 January 2, 1999 to all holders of record on December 15,
1998. See also Note 10 to the Notes to the Company's financial statements. The
Company repurchased a total of 3,529 shares of its common stock in fiscal 1998.
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 1998 Annual Report to Stockholders on pages 4 through 13 and is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
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 1998 Annual Report to Stockholders on pages 14
through 51 and are incorporated herein by reference.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
31
<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 30, 1999,
on pages 5 through 7. 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 30, 1999, on pages 10 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 30,
1999, on pages 3 and 5 through 7.
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 30, 1999,
on page 13.
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<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 1998 Annual Report to
Stockholders.
PAGE
----
Independent Auditors' Report................................ 14
Consolidated Balance Sheet
as of December 31, 1998 and 1997............................ 15
Consolidated Statement of Income
for the Three Years Ended December 31, 1998................. 17
Consolidated Statements of Comprehensive Income
for Three Years Ended December 31, 1998..................... 18
Consolidated Statement of Changes in
Stockholders' Equity for the Three Years Ended
December 31, 1998........................................... 19
Consolidated Statement of Cash Flows for
the Three Years Ended December 31, 1998..................... 22
Notes to Consolidated Financial Statements.................. 25
33
<PAGE>
The remaining information appearing in the 1998 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:
<TABLE>
<S> <C>
3.1 Amended Articles of Incorporation of Lenox Bancorp, Inc.*
3.2 Amended and Restated Code of Regulations of Lenox Bancorp, Inc.*
4.0 Stock Certificate of Lenox Bancorp, Inc.**
10.1 Employment Agreement between the Company and the President dated
September 3, 1996
10.2 Employment Agreement between the Bank and the President dated September
3, 1996
10.3 Change in Control Agreement between the Company and the
Chief Operating Officer dated September 3, 1996
10.4 Change in Control Agreement between the Bank and the
Chief Operating Officer dated September 3, 1996
10.5 Change in Control Agreement between the Company and the
Chief Financial Officer dated May 19, 1997.
10.6 Change in Control Agreement between the Bank and the
Chief Operating Financial dated May 19, 1997.
10.7 Amended Lenox Bancorp, Inc. 1997 Incentive Plan
11.0 Statement re: Computation of Per Share Earnings***
13.0 1998 Annual Report to Stockholders
21.0 Subsidiary information is incorporated herein by reference to "Item 1 - General"
23.0 Consent of Clark, Schaefer, Hackett & Co.
27.0 Financial Data Schedule (filed in electronic format only)
</TABLE>
(b) Reports on Form 8-K
None
* Incorporated herein by reference to the Exhibits to Form 10-KSB, Annual
Report, filed on March 25, 1998.
** Incorporated herein by reference to the Exhibits to Form S-1, Registration
Statement, and Pre-Effective Amendment No. 1, filed on August 25, 1996 and
March 8, 1997, respectively, Registration No. 333-96248.
*** Incorporated herein by reference to Note 17 to the Notes to the Financial
Statements included in the Company's 1998 Annual Report to Stockholders.
34
<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. Deisch
-----------------------------------
Virginia M. Deisch
Dated: March 29, 1999 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> <C>
/s/ Virginia M. Deisch President, Chief Executive Officer March 29, 1999
- ----------------------- and Director
Virginia M. Deisch (Principal Executive Officer)
/s/ Michael P. Cooper Chief Financial Officer and Treasurer March 29, 1999
- ----------------------- (Principal Financial and Accounting Officer)
Michael P. Cooper
/s/ Gail R. Behymer Director March 29, 1999
- -----------------------
Gail R. Behymer
/s/ Richard C. Harmeyer Chairman of the Board March 29, 1999
- ------------------------
Richard C. Harmeyer
/s/ Robert R. Keller Director March 29, 1999
- -----------------------
Robert R. Keller
/s/ Henry E. Brown Director March 29, 1999
- -----------------------
Henry E. Brown
/s/ Curtis L. Jackson Director March 29, 1999
- -----------------------
Curtis L. Jackson
/s/ Reba St. Clair Director March 29, 1999
- -----------------------
Reba St. Clair
/s/ John C. Lame Director March 29, 1999
- -----------------------
John C. Lame
</TABLE>
EXHIBIT 10.1 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND PRESIDENT DATED
SEPTEMBER 3, 1996
<PAGE>
LENOX BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of September 3, 1996,
by and between Lenox Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of Ohio, with its principal administrative office at
5255 Beech Street, St. Bernard, Ohio, and Virginia M. Porowski (the
"Executive"). Any reference to "Institution" herein shall mean Lenox Savings
Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as President, Chief Executive Officer and Director of the Holding
Company. The Executive shall render administrative and management services to
the Holding Company such as are customarily performed by persons in a similar
executive capacity. During said period, Executive also agrees to serve, if
elected, as an officer and director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all her
business time, attention, skill, and efforts to the faithful performance of her
duties hereunder including activities and services related to the organization,
operation and management of the Holding Company and its, direct or indirect,
subsidiaries ("Subsidiaries") and participation in community and civic
organizations; provided, however, that,
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with the approval of the Board, as evidenced by a resolution of such Board, from
time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Holding Company or its Subsidiaries, or materially affect the
performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary,
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company
or its Subsidiaries of $62,500 per year ("Base Salary"). Base Salary shall
include any amounts of compensation deferred by Executive under any qualified or
unqualified plan maintained by the Holding Company and its Subsidiaries. Such
Base Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Holding Company shall also provide Executive, at no
premium cost to Executive, with all such other benefits as provided uniformly to
permanent full-time employees of the Holding Company and its Subsidiaries.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Holding Company
and its Subsidiaries will not, without Executive's prior written consent, make
any changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under any employee benefit plans including, but not limited
to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plans, medical coverage or any other
employee benefit plan or arrangement made available by the Holding Company and
its Subsidiaries in the future to its senior executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Executive shall be
entitled to incentive compensation and bonuses as provided in any plan of the
Holding Company and its Subsidiaries in which Executive is eligible to
participate. Nothing paid to the Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which the Executive is
entitled under this Agreement.
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<PAGE>
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing her
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) unless consented to by the
Executive, Executive's resignation from the Holding Company's employ, upon, any
(A) failure to elect or reelect or to appoint or reappoint Executive as
President, Chief Executive Officer and Director, (B) a material change in
Executive's function, duties, or responsibilities with the Holding Company or
its Subsidiaries, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, (C) a relocation of Executive's principal
place of employment by more than 25 miles from its location at the effective
date of this Agreement, (D) a material reduction in the benefits and perquisites
to the Executive from those being provided as of the effective date of this
Agreement, (E) a liquidation or dissolution of the Holding Company or the
Institution, or (F) breach of this Agreement by the Holding Company. Upon the
occurrence of any event described in clauses (A), (B), (C), (D) (E) or (F),
above, Executive shall have the right to elect to terminate her employment under
this Agreement by resignation upon not less than sixty (60) days prior written
notice given within six full calendar months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of her subsequent death, her beneficiary or
beneficiaries, or her estate, as the case may be, a sum equal to the sum of: (i)
the amount of the remaining payments that the Executive would have earned if she
had continued her employment with the Institution during the remaining term of
this Agreement at the Executive's Base Salary at the Date of Termination; and
(ii) the amount equal to the annual contributions that would have been made on
Executive's behalf to any employee benefit plans of the Institution or the
Holding Company during the remaining term of this Agreement based on
contributions made (on an annualized basis) at the Date of Termination. At the
election of the Executive, which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum. In the event that no
election is made, payment to the Executive will be made on a monthly basis in
approximately equal installments during the remaining term of the Agreement.
Such payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
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<PAGE>
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to her termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that; (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in (A) a
Change in Control of the Bank or the Holding Company within the meaning of the
Change in Bank Control Act (""CBCA") and the Rules and Regulations promulgated
by the Federal Deposit Insurance Corporation (the "FDIC") at 12 C.F.R. ss.
303.4(a) with respect to the Bank and the Board of Governors of the Federal
Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding
Company, as in effect on the date hereof or (B) a transaction requiring prior
FRB approval under the Bank Holding Company Act of 1956 ("BHCA") and the
regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in
effect on the date hereof except for the Holding Company's acquisition of the
Bank, provided that the Board shall substitute its judgment for that of the
appropriate regulatory authority in applying the relevant definitions under the
CBCA and the BHCA; or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Institution or the Holding Company
representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries'; or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though she were a member of the Incumbent Board;
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Institution or the Holding Company or
similar transaction occurs or is effectuated in which the Institution or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have occurred or to have been effectuated upon
the receipt of all required federal regulatory approvals not including the lapse
of any statutory waiting periods; or (D) a proxy statement has been distributed
soliciting proxies from stockholders of the Holding Company, by someone other
than the current management of the Holding Company, seeking stockholder approval
of a plan of reorganization, merger or consolidation of the Holding Company or
Institution with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
4
<PAGE>
exchanged for or converted into cash or property or securities not issued by the
Institution or the Holding Company; or (E) a tender offer is made for 20% or
more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and, (d), of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, material reduction in the annual compensation or
benefits or relocation of her principal place of employment by more than 25
miles from its location immediately prior to the change in control), unless such
termination is because of her death, disability, retirement or termination for
Cause; provided, however, the Executive may consent in writing to any such
demotion, loss, reduction or relocation. The effect of any written consent of
the Executive under this Section 5(b) shall be strictly limited to the terms
specified in such written consent.
(c) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Holding Company shall pay Executive, or in the event of her subsequent
death, her beneficiary or beneficiaries, or her estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of: (i)
the payments due for the remaining term of the Agreement; or (ii) three (3)
times Executive's average annual compensation for the five (5) preceding taxable
years. Such annual compensation shall include any commissions, bonuses,
contributions on behalf of Executive to any pension and profit sharing plan,
severance payments, directors or committee fees and fringe benefits paid or to
be paid to the Executive during such years. At the election of the Executive,
which election is to be made prior to a Change in Control, such payment shall be
made in a lump sum. In the event that no election is made, payment to the
Executive will be made on a monthly basis in approximately equal installments
during the remaining term of the Agreement. Such payments shall not be reduced
in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Company will cause to be continued life, medical, dental and
disability coverage substantially equivalent to the coverage maintained by the
Institution for Executive at no premium cost to Executive prior to her
severance. Such coverage and payments shall cease upon the expiration of
thirty-six (36) months following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any
5
<PAGE>
successor thereof, (the "Termination Benefits") would be deemed
to include an "excess parachute payment" under Section 280G of
the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the Non
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses), final cease and desist order or material breach
of any provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against the standards for professional competence
generally prevailing for executive officers having comparable positions in the
savings institution industry. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to her a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for her,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. Any stock options and related limited
rights granted to Executive under any stock option plan, or any unvested awards
granted to Executive under any restricted stock benefit plan of the Holding
Company or its Subsidiaries, shall become null and void effective upon
Executive's receipt of Notice of Termination for Cause pursuant to Section 8
hereof, and shall not be exercisable by or delivered to Executive at any time
subsequent to such Termination for Cause.
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<PAGE>
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive her full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue her as a participant in all compensation, benefit and insurance plans
in which she was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
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<PAGE>
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of her employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of her employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
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11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Holding Company subject to this Section
11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated September 3, 1996,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to her without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate
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only as to the specific term or condition waived and shall not constitute a
waiver of such term or condition for the future as to any act other than that
specifically waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Ohio.
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Association, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of her
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
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20. INDEMNIFICATION.
The Holding Company shall provide Executive (including her heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and her heirs, executors and administrators) to the fullest
extent permitted under Ohio law and as provided in the Holding Company's
articles of incorporation against all expenses and liabilities reasonably
incurred by her in connection with or arising out of any action, suit or
proceeding in which she may be involved by reason of her having been a director
or officer of the Holding Company (whether or not she continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Lenox Bancorp, Inc. has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized officer and
its directors, and Executive has signed this Agreement, on the 3rd day of
September, 1996.
ATTEST: LENOX BANCORP, INC.
/s/ Richard L. Harmeyer By: /s/ Richard O. Plunk
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Secretary Entire Board of Directors
[SEAL]
WITNESS:
/s/ Diane P. Irwin By: /s/ Virginia M. Porowski
- ------------------------------- ------------------------------------
Executive
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EXHIBIT 10.2 EMPLOYMENT AGREEMENT BETWEEN THE BANK AND PRESIDENT DATED
SEPTEMBER 3, 1996
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AMENDED LENOX SAVINGS BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of September 3, 1996 by and among
Lenox Savings Bank (the "Bank"), an Ohio chartered savings institution, with its
principal administrative office at 5255 Beech Street, St. Bernard, Ohio, Lenox
Bancorp, Inc., a corporation organized under the laws of the State of Ohio, the
holding company for the Bank (the "Holding Company"), and Virginia M.
Porowski ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as President, Chief Executive Officer and Director of the Bank. Executive shall
render administrative and management services to the Bank such as are
customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an officer
and director of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be three (3) years unless the Executive elects not
to extend the term of this Agreement by giving written notice in accordance with
Section 8 of this Agreement. The Board will review the Agreement and Executive's
performance annually for purposes of determining whether to extend the Agreement
and the rationale and results thereof shall be included in the minutes of the
Board's meeting. The Board shall give notice to the Executive as soon as
possible after such review as to whether the Agreement is to be extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all her
business time, attention, skill, and efforts to the faithful
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performance of her duties hereunder including activities and services related to
the organization, operation and management of the Bank and participation in
community and civic organizations; provided, however, that, with the approval of
the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Bank may be terminated by the Bank or the Executive during
the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $62,500 per
year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any qualified or unqualified plan maintained by the
Bank. Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Board or by a Committee of the
Board, delegated such responsibility by the Board. The Committee or the Board
may increase Executive's Base Salary. Any increase in Base Salary shall become
the "Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Bank shall also provide Executive, at no
premium cost to Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Bank.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would materially adversely affect Executive's
rights or benefits thereunder; except to the extent such changes are made
applicable to all Bank employees on a non-discriminatory basis. Without limiting
the generality of the foregoing provisions of this Subsection (b), Executive
shall be entitled to participate in or receive benefits under any employee
benefit plans including but not limited to, retirement plans, supplemental
retirement plans, pension plans, profit-sharing plans, health-and-accident
plans, medical coverage or any other employee benefit plan or arrangement made
available by the Bank in the future to its senior executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Executive shall be
entitled to incentive compensation and bonuses as provided in any plan of the
Bank in which Executive is eligible to participate. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
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(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Bank shall pay or reimburse Executive for all reasonable travel and other
reasonable expenses incurred by Executive performing her obligations under this
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a) hereof, or Termination for Cause, as defined in Section 7 hereof; (ii)
unless consented to by the Executive, Executive's resignation from the Bank's
employ upon any (A) failure to elect or reelect or to appoint or reappoint
Executive as President, Chief Executive Officer and Director, (B) a material
change in Executive's function, duties, or responsibilities, which change would
cause Executive's position to become one of lesser responsibility, importance,
or scope from the position and attributes thereof described in Section 1, above,
(C) a relocation of Executive's principal place of employment by more than 25
miles from its location at the effective date of this Agreement, (D) a material
reduction in the benefits and perquisites to the Executive from those being
provided as of the effective date of this Agreement, or (E) a liquidation or
dissolution of the Bank or Holding Company, or (F) breach of this Agreement by
the Bank. Upon the occurrence of any event described in clauses (A), (B), (C),
(D), (E) or (F), above, Executive shall have the right to elect to terminate her
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of her subsequent death, her beneficiary or
beneficiaries, or her estate, as the case may be a sum equal to the sum of:
(i) the amount of the remaining payments that the Executive would have earned
if she had continued her employment with the Bank during the remaining term of
this Agreement at the Executive's Base Salary at the Date of Termination; and
(ii) the amount equal to the annual contributions that would have been made on
Executive's behalf to any employee benefit plans of the Bank or the Holding
Company during the remaining term of this Agreement based on contributions made
(on an annualized basis) at the Date of Termination; provided, however, that any
payments pursuant to this subsection shall not, in the aggregate, exceed three
times Executive's average annual compensation for the five most recent taxable
years that Executive has been employed by the Bank or such lesser number of
years in the event that Executive shall have been employed by the Bank for less
than five years. In the event the Bank is not in compliance with its minimum
capital requirements or if such payments pursuant to this subsection (b) would
cause the Bank's capital to be reduced below its minimum regulatory capital
requirements, such payments shall be deferred until such time as the Bank or
successor thereto is in capital compliance. At the election of the Executive,
which election is to be made prior to an Event of Termination, such payments
shall be made in a lump sum as of
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the Executive's Date of Termination. In the event that no election is made,
payment to Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to her termination at no premium cost to the Executive, except
to the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in (A) a
Change in Control of the Bank or the Holding Company within the meaning of the
Change in Bank Control Act (""CBCA") and the Rules and Regulations promulgated
by the Federal Deposit Insurance Corporation (the "FDIC") at 12 C.F.R. ss.
303.4(a) with respect to the Bank and the Board of Governors of the Federal
Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding
Company, as in effect on the date hereof or (B) a transaction requiring prior
FRB approval under the Bank Holding Company Act of 1956 ("BHCA") and the
regulations promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in
effect on the date hereof except for the Holding Company's acquisition of the
Bank, provided that the Board shall substitute its judgment for that of the
appropriate regulatory authority in applying the relevant definitions under the
CBCA and the BHCA; or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
20% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the Bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though she were a
member of the Incumbent Board, or (C) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Bank or the
Holding Company or similar transaction occurs in which the Bank or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have occurred or to have been effectuated upon
the receipt of
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all required regulatory approvals not including the lapse of any statutory
waiting periods or (D) a proxy statement has been distributed soliciting proxies
from stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company; or (E) a tender offer is made for 20% or more of the
voting securities of the Institution or Holding Company then outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of her principal place of employment by more than 50
miles from its location immediately prior to the Change in Control, unless such
termination is because of her death, disability, retirement or termination for
Cause; provided, however, the Executive may consent in writing to any such
demotion, loss, reduction or relocation. The effect of any written consent of
the Executive under this Section 5(b) shall be strictly limited to the terms
specified in such written consent.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Bank shall pay Executive, or in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to
the greater of: (i) the payments due for the remaining term of the Agreement; or
(ii) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Bank or such
lesser number of years in the event that Executive shall have been employed by
the Bank for less than five (5) years. Such average annual compensation shall
include any commissions, bonuses, contributions on Executive's behalf to any
pension and/or profit sharing plan, severance payments, retirement payments,
directors or committee fees and fringe benefits paid or to be paid to the
Executive in any such year; provided however, that any payment under this
provision shall not exceed three (3) times the Executive's average annual
compensation. In the event the Bank is not in compliance with its minimum
capital requirements or if such payments would cause the Bank's capital to be
reduced below its minimum regulatory capital requirements, such payments shall
be deferred until such time as the Bank or successor thereto is in capital
compliance. At the election of the Executive, which election is to be made prior
to a Change in Control, such payment shall be made in a lump sum as of the
Executive's Date of Termination. In the event that no election is made, payment
to the Executive will be made in approximately equal installments on a monthly
basis over a period of thirty-six (36) months following the Executive's
termination. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to her severance at no premium cost to the
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Executive, except to the extent that such coverage may be changed in its
application for all Bank employees on a non-discriminatory basis. Such coverage
and payments shall cease upon the expiration of thirty-six (36) months following
the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the Non
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against the standards for professional competence
generally prevailing for executive officers having comparable positions in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to her a Notice of Termination which shall include a copy of
a resolution duly adopted by the affirmative vote of not less than a majority of
the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for her,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive
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compensation or other benefits for any period after Termination for Cause. Any
stock options and related limited rights granted to Executive under any stock
option plan or unvested awards granted to Executive under any stock benefit plan
of the Bank, the Holding Company or any subsidiary or affiliate thereof, shall
become null and void effective upon Executive's receipt of Notice of Termination
for Cause pursuant to Section 8 hereof, and shall not be exercisable by or
delivered to Executive at any time subsequent to such Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank . Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
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10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank, will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employees and all
persons acting for or under the direction of Executive. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of her employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the Federal Deposit Insurance Corporation ("FDIC") pursuant to a formal
regulatory request. In the event of a breach or threatened breach by Executive
of the provisions of this Section, the Bank will be entitled to an injunction
restraining Executive from disclosing, in whole or in part, the knowledge of the
past, present, planned or considered business activities of the Bank or
affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Holding Company.
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(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated September 3, 1996,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Bank on a quarterly
basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to her without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
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15. REGULATORY PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 herein above.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(3) or (g)(1) or by notice served by the Ohio Division of Financial
Institutions; the Bank 's obligations under this contract shall be suspended as
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion: (i) pay Executive
all or part of the compensation withheld while their contract obligations were
suspended; and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(4) or (g)(1) or by notice served by the Ohio Division of Financial
Institutions, all obligations of the Bank under this contract shall terminate as
of the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. ss.1813(x)(1) or under the rules of the
Ohio Division of Financial Institutions or otherwise under Ohio law all
obligations of the Bank under this contract shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the FDIC, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. ss.1823(c); or (ii) by the FDIC at the time the FDIC approves a
supervisory merger to resolve problems related to the operations of the Bank or
when the Bank is determined by the FDIC to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k) and any rules and regulations promulgated thereunder as well as the
rules of the Ohio Division of Financial Institutions.
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16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of Ohio.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of her right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
20. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
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21. INDEMNIFICATION.
The Bank shall provide Executive (including her heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and her heirs, executors and administrators) to the fullest extent
permitted under Ohio law and as provided in the Holding Company's articles of
incorporation against all expenses and liabilities reasonably incurred by her in
connection with or arising out of any action, suit or proceeding in which she
may be involved by reason of her having been a director or officer of the Bank
(whether or not she continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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SIGNATURES
IN WITNESS WHEREOF, Virginia M. Porowski and Richard O. Plunk have
caused this Agreement to be executed and their seals to be affixed hereunto by
their duly authorized officers and directors, and Executive has signed this
Agreement, on the 3rd day of September, 1996.
ATTEST: LENOX SAVINGS BANK
/s/ Richard L. Harmeyer By: /s/ Richard O. Plunk
- --------------------------- ------------------------------------
Secretary Entire Board of Directors
[SEAL]
ATTEST: LENOX BANCORP, INC.
(Guarantor)
/s/ Richard L. Harmeyer By: /s/ Richard O. Plunk
- --------------------------- ------------------------------------
Secretary Entire Board of Directors
[SEAL]
WITNESS:
/s/ Patricia Connolly By: Virginia M. Porowski
- --------------------------- ------------------------------------
Executive
13
EXHIBIT 10.3 CHANGE IN CONTROL AGREEMENT BETWEEN THE COMPANY AND THE CHIEF
OPERATING OFFICER DATED SEPTEMBER 3, 1996
<PAGE>
LENOX BANCORP, INC.
CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of September 3, 1996, by and between
Lenox Bancorp, Inc. (the "Holding Company"), a corporation organized under the
laws of the State of Ohio, with its office at 5255 Beech Street, St. Bernard,
Ohio, and Diane P. Irwin ("Executive"). The term "Bank" refers to Lenox Savings
Bank, the wholly-owned subsidiary of the Holding Company or any successor
thereto.
WHEREAS, the Holding Company recognizes the substantial contribution
Executive has made to the Holding Company and wishes to protect his position
therewith for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Holding
Company or an affiliate thereof.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The period of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the date of the execution of this
Agreement, the term of this Agreement shall be extended for one day each day
until such time as the board of directors of the Holding Company (the "Board")
or Executive elects not to extend the term of the Agreement by giving written
notice to the other party in accordance with Section 8 of this Agreement, in
which case the term of this Agreement shall be fixed and shall end on the third
anniversary of the date of such written notice.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Holding Company
(as herein defined) followed at any time during the term of this Agreement by
the termination of Executive's employment, other than for Cause, as defined in
Section 2(c) hereof, the provisions of Section 3 shall apply. Upon the
occurrence of a Change in Control, Executive shall have the right to elect to
voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control; provided, however, the Executive may
consent in writing to any such demotion, loss, reduction or relocation. The
effect of any written consent of the Executive under this Section 2 (a) shall be
strictly limited to the terms specified in such written consent.
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(b) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in (A) a Change in
Control of the Bank or the Holding Company within the meaning of the Change in
Bank Control Act (""CBCA") and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation (the "FDIC") at 12 C.F.R. ss. 303.4(a)
with respect to the Bank and the Board of Governors of the Federal Reserve
System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company,
as in effect on the date hereof or (B) a transaction requiring prior FRB
approval under the Bank Holding Company Act of 1956 ("BHCA") and the regulations
promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the
date hereof except for the Holding Company's acquisition of the Bank, provided
that the Board shall substitute its judgment for that of the appropriate
regulatory authority in applying the relevant definitions under the CBCA and the
BHCA; or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities except for any securities
of the Bank purchased by the Holding Company in connection with the conversion
of the Bank to the stock form and any securities purchased by any employee
benefit plan of the Bank, or (B) individuals who constitute the Board on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board,
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity, or (D) a proxy statement is distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank with one
or more corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company, or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or Holding Company then outstanding.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, regulation (other than traffic violations or similar offenses)
or final cease and desist order, or any material breach of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards of professional competence generally prevailing for officers having
comparable positions in the savings institutions industry. Notwithstanding the
foregoing, Executive shall not be deemed to have been Terminated for Cause
unless and until there shall have
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<PAGE>
been delivered to him a copy of a resolution duly adopted by the affirmative
vote of not less than three-fourths of the members of the Board at a meeting of
the Board called and held for that purpose (after reasonable notice to Executive
and an opportunity for him, together with counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, Executive was
guilty of conduct justifying Termination for Cause and specifying the
particulars thereof in detail. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause. Any
stock options and related limited rights granted to Executive under any stock
option plan, or any unvested awards granted to Executive under any restricted
stock benefit plan of the Holding Company or its subsidiaries, shall become null
and void effective upon Executive's receipt of Notice of Termination For Cause
pursuant to Section 8 hereof, and shall not be exercisable by or delivered to
Executive at any time subsequent to such Termination For Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
Executive's employment, other than for Termination for Cause, the Holding
Company shall be obligated to pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
sum equal to three (3) times Executive's average annual compensation for the
five most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five years, such average annual compensation shall
include any bonuses and any other compensation paid or to be paid to Executive
in any such year, the amount of benefits paid or accrued to Executive pursuant
to any employee benefit plan maintained by the Bank or Holding Company in any
such year and the amount of any contributions made or to be made on behalf of
Executive pursuant to any employee benefit plan maintained by the Bank or the
Holding Company in any such year. At the election of Executive which election is
to be made prior to a Change in Control, such payment shall be made in a lump
sum. In the event that no election is made, payment to Executive will be made on
a monthly basis in approximately equal installments during the remaining term of
this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by
Executive's termination of employment, other than for Termination for Cause, the
Holding Company shall cause to be continued life, medical and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance, except to the extent such coverage may be
changed in its application to all Bank employees. Such coverage and payments
shall cease upon expiration of thirty-six (36 ) full calendar months following
the Date of Termination.
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(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the Non
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering
Amount. The allocation of the reduction required hereby among the Termination
Benefits shall be determined by the Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Holding Company, or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of Termination for Cause, shall not be less than
thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in
4
<PAGE>
effect when the notice giving rise to the dispute was given (including, but not
limited to his current annual salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when the
notice of dispute was given, until the dispute is finally resolved in accordance
with this Agreement. Amounts paid under this Section 4(c) are in addition to all
other amounts due under this Agreement and shall not be offset against or reduce
any other amounts due under this Agreement.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Holding
Company. Further, the Holding Company guarantees such payment and provision of
all amounts and benefits due hereunder to Executive and, if such amount and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid and provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Holding Company and
Executive, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of the Holding Company or shall impose on the Holding
Company any obligation to employ or retain Executive in its employ for any
period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Holding Company and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
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<PAGE>
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) of the Change-in-Control Agreement between Executive and the Bank
dated September 3, 1996 (the "Bank Agreement") during the term of this Agreement
and a Change in Control, as defined herein, occurs the Holding Company will
assume its obligation to pay and Executive will be entitled to receive all of
the termination benefits provided for under Section 3 of the Bank Agreement upon
the notification of the Holding Company of the Bank's receipt of a dismissal of
charges in the Notice.
10. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits are paid to or received by Executive under the Bank
Agreement between Executive and Bank, the amount of such payments and benefits
paid by the Bank will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references herein to the
masculine shall apply to both the masculine and the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Ohio.
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14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) to the fullest
extent permitted under Ohio law and as provided in the Holding Company's
articles of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
17. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Lenox Bancorp, Inc. has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed this
Agreement, on the 3rd day of September, 1996.
ATTEST: LENOX BANCORP, INC.
/s/ Richard L. Harmeyer By: /s/ Virginia M. Porowski
- ------------------------------- -----------------------------------
Secretary Virginia M. Porowski
President and Chief Executive
Officer
WITNESS:
/s/ William T. Bird By: /s/ Diane P. Irwin
- ------------------------------- -----------------------------------
Executive
Seal
8
EXHIBIT 10.4 CHANGE IN CONTROL AGREEMENT BETWEEN THE BANK AND THE CHIEF
OPERATING OFFICER DATED SEPTEMBER 3, 1996
<PAGE>
LENOX SAVINGS BANK
CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of September 3, 1996 by and between
Lenox Savings Bank (the "Bank"), an Ohio chartered savings institution, with its
principal administrative office at 5255 Beech Street, St. Bernard, Ohio,
("Bank"), and Lenox Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of the State of Ohio which is the holding company of
the Bank and Diane P. Irwin ("Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Bank.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The term this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional year.
The Board will review the Agreement and Executive's performance annually for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Bank or the
Holding Company (as herein defined) followed at any time during the term of this
Agreement by the termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control; provided, however, the Executive may
consent in writing to any such demotion, loss, reduction or relocation. The
effect of any written consent of the Executive under this Section 2 (a) shall be
strictly limited to the terms specified in such written consent.
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(b) For purposes of this Plan, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in (A) a Change in
Control of the Bank or the Holding Company within the meaning of the Change in
Bank Control Act (""CBCA") and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation (the "FDIC") at 12 C.F.R. ss. 303.4(a)
with respect to the Bank and the Board of Governors of the Federal Reserve
System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company,
as in effect on the date hereof or (B) a transaction requiring prior FRB
approval under the Bank Holding Company Act of 1956 ("BHCA") and the regulations
promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the
date hereof except for the Holding Company's acquisition of the Bank, provided
that the Board shall substitute its judgment for that of the appropriate
regulatory authority in applying the relevant definitions under the CBCA and the
BHCA; or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities except for any securities
of the Bank purchased by the Holding Company in connection with the conversion
of the Bank to the stock form and any securities purchased by any employee
benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity or (D) a proxy statement has been distributed soliciting
proxies from stockholders of the Holding Company, by someone other than the
current management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Holding Company or
Institution with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Institution or the Holding Company; or (E) a tender offer is made for 20% or
more of the voting securities of the Institution or Holding Company then
outstanding.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards of professional competence
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<PAGE>
generally prevailing for officers having comparable positions in the savings
institutions industry. Notwithstanding the foregoing, Executive shall not be
deemed to have been Terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the Board of Directors of the Bank at a meeting of
the Board called and held for that purpose (after reasonable notice to Executive
and an opportunity for him, together with counsel, to be heard before the Board
at such meeting and which such meeting shall be held not more than 30 days from
the date of notice during which period Executive may be suspended with pay),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. Any stock options or
limited rights granted to Executive under any stock option plan of the Bank, the
Company or any subsidiary or affiliate thereof, shall become null and void
effective upon Executive's receipt of Notice of Termination for Cause and shall
not be exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by termination of the Executive's employment
due to: (1) Executive's dismissal or (2) Executive's voluntary termination
pursuant to Section 2(a), unless such termination is due to Termination for
Cause, the Bank and the Holding Company shall pay Executive, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, a sum equal to three (3) times Executive's average annual
compensation for the five most recent taxable years that Executive has been
employed by the Bank or such lesser number of years in the event that Executive
shall have been employed by the Bank for less than five years, such average
annual compensation shall include any bonuses, and any other compensation paid
or to be paid to Executive in any such year, the amount of benefits paid or
accrued to Executive pursuant to any employee benefit plan maintained by the
Bank or Holding Company in any such year and the amount of any contributions
made or to be made on behalf of Executive pursuant to any employee benefit plan
maintained by the Bank or the Holding Company in any such year. At the election
of Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum. In the event that no election is made,
payment to Executive will be made on a monthly basis in approximately equal
installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical and
disability coverage substantially identical to the coverage maintained by the
Bank or Holding Company for Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank or Holding
Company employees on a nondiscriminatory basis. Such coverage and payments shall
cease upon the expiration of thirty-six (36) full calendar months from the Date
of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:
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(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the Non
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive in connection
with a Change in Control shall be communicated by Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, the Bank will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but
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not limited to his annual salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when the
notice of dispute was given, until the earlier of: (1) the resolution of the
dispute in accordance with this Agreement or (2) the expiration of the remaining
term of this Agreement as determined as of the Date of Termination.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
Further, the Holding Company guarantees such payment and provision of all
amounts and benefits due hereunder to Executive and, if such amounts and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of Bank or shall impose on the Bank any obligation to
employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
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8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REGULATORY PROVISIONS.
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 2 herein above.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1818(e)(3) or (g)(1)) or by notice served by the Ohio Division of Financial
Institutions, the Bank's obligations under this contract shall be suspended as
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay Executive
all or part of the compensation withheld while their contract obligations were
suspended and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1818(c)(4) or (g)(1)) or by notice served by the Ohio Division of Financial
Institutions, all obligations of the Bank under this contract shall terminate as
of the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act or under the rules of the Ohio Division of
Financial Institutions or otherwise under Ohio law, all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Federal Deposit Insurance
Corporation ("FDIC") at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in
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Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Federal
Deposit Insurance Corporation at the time the FDIC approves a supervisory merger
to resolve problems related to operation of the Bank or when the Bank is
determined by the FDIC to be in an unsafe or unsound condition. Any rights of
the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k) and any rules and regulations promulgated thereunder as well as the
rules of the Ohio Division of Financial Institutions.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice of Termination.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Ohio.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank's main office, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
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entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank (which payments are guaranteed by the
Holding Company pursuant to Section 5 hereof) if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) to the fullest
extent permitted under Ohio law and as provided in the Holding Company's
articles of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
17. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Lenox Savings Bank and Lenox Bancorp, Inc. have
caused this Agreement to be executed by their duly authorized officers, and
Executive has signed this Agreement, on the 3rd day of September, 1996.
ATTEST: LENOX SAVINGS BANK
/s/ Richard L. Harmeyer By: /s/ Virginia M. Porowski
- ------------------------------ ---------------------------------
Secretary Virginia M. Porowski
President and Chief Executive Officer
SEAL
ATTEST: LENOX BANCORP, INC.
(Guarantor)
/s/ Richard L. Harmeyer By: /s/ Virginia M. Porowski
- ------------------------------ ---------------------------------
Secretary Virginia M. Porowski
President and Chief Executive Officer
SEAL
WITNESS:
/s/ William T. Bird By: /s/ Diane P. Irwin
- ------------------------------ ---------------------------------
Executive
9
EXHIBIT 10.5 CHANGE IN CONTROL AGREEMENT BETWEEN THE COMPANY AND THE CHIEF
FINANCIAL OFFICER DATED MAY 19, 1997.
<PAGE>
LENOX BANCORP, INC.
CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of May 19, 1997, by and between
Lenox Bancorp, Inc. (the "Holding Company"), a corporation organized under the
laws of the State of Ohio, with its office at 5255 Beech Street, St. Bernard,
Ohio, and Michael P. Cooper ("Executive"). The term "Bank" refers to Lenox
Savings Bank, the wholly-owned subsidiary of the Holding Company or any
successor thereto.
WHEREAS, the Holding Company recognizes the substantial contribution
Executive has made to the Holding Company and wishes to protect his position
therewith for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Holding
Company or an affiliate thereof.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The period of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the date of the execution of this
Agreement, the term of this Agreement shall be extended for one day each day
until such time as the board of directors of the Holding Company (the "Board")
or Executive elects not to extend the term of the Agreement by giving written
notice to the other party in accordance with Section 8 of this Agreement, in
which case the term of this Agreement shall be fixed and shall end on the third
anniversary of the date of such written notice.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Holding Company
(as herein defined) followed at any time during the term of this Agreement by
the termination of Executive's employment, other than for Cause, as defined in
Section 2(c) hereof, the provisions of Section 3 shall apply. Upon the
occurrence of a Change in Control, Executive shall have the right to elect to
voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control; provided, however, the Executive may
consent in writing to any such demotion, loss, reduction or relocation. The
effect of any written consent of the Executive under this Section 2 (a) shall be
strictly limited to the terms specified in such written consent.
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(b) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in (A) a Change in
Control of the Bank or the Holding Company within the meaning of the Change in
Bank Control Act (""CBCA") and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation (the "FDIC") at 12 C.F.R. ss. 303.4(a)
with respect to the Bank and the Board of Governors of the Federal Reserve
System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company,
as in effect on the date hereof or (B) a transaction requiring prior FRB
approval under the Bank Holding Company Act of 1956 ("BHCA") and the regulations
promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the
date hereof except for the Holding Company's acquisition of the Bank, provided
that the Board shall substitute its judgment for that of the appropriate
regulatory authority in applying the relevant definitions under the CBCA and the
BHCA; or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities except for any securities
of the Bank purchased by the Holding Company in connection with the conversion
of the Bank to the stock form and any securities purchased by any employee
benefit plan of the Bank, or (B) individuals who constitute the Board on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by the same
Nominating Committee serving under an Incumbent Board, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board,
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity, or (D) a proxy statement is distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank with one
or more corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company, or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or Holding Company then outstanding.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, regulation (other than traffic violations or similar offenses)
or final cease and desist order, or any material breach of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards of professional competence generally prevailing for officers having
comparable positions in the savings institutions industry. Notwithstanding the
foregoing,
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Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause. Any
stock options and related limited rights granted to Executive under any stock
option plan, or any unvested awards granted to Executive under any restricted
stock benefit plan of the Holding Company or its subsidiaries, shall become null
and void effective upon Executive's receipt of Notice of Termination For Cause
pursuant to Section 8 hereof, and shall not be exercisable by or delivered to
Executive at any time subsequent to such Termination For Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
Executive's employment, other than for Termination for Cause, the Holding
Company shall be obligated to pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
sum equal to three (3) times Executive's average annual compensation for the
five most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five years, such average annual compensation shall
include any bonuses and any other compensation paid or to be paid to Executive
in any such year, the amount of benefits paid or accrued to Executive pursuant
to any employee benefit plan maintained by the Bank or Holding Company in any
such year and the amount of any contributions made or to be made on behalf of
Executive pursuant to any employee benefit plan maintained by the Bank or the
Holding Company in any such year. At the election of Executive which election is
to be made prior to a Change in Control, such payment shall be made in a lump
sum. In the event that no election is made, payment to Executive will be made on
a monthly basis in approximately equal installments during the remaining term of
this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by
Executive's termination of employment, other than for Termination for Cause, the
Holding Company shall cause to be continued life, medical and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance, except to the extent such coverage may be
changed in its application to all Bank employees. Such coverage and payments
shall cease upon expiration of thirty-six (36 ) full calendar months following
the Date of Termination.
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(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to three (3) times Executive's
"base amount," as determined in accordance with said Section 280G
and the Non-Triggering Amount less the product of the marginal
rate of any applicable state and federal income tax and the Non
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering
Amount. The allocation of the reduction required hereby among the Termination
Benefits shall be determined by the Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Holding Company, or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of Termination for Cause, shall not be less than
thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of
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any such dispute, the Holding Company will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his current annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the dispute is finally
resolved in accordance with this Agreement. Amounts paid under this Section 4(c)
are in addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Holding
Company. Further, the Holding Company guarantees such payment and provision of
all amounts and benefits due hereunder to Executive and, if such amount and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid and provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Holding Company and
Executive, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of the Holding Company or shall impose on the Holding
Company any obligation to employ or retain Executive in its employ for any
period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Holding Company and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
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(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) of the Change-in-Control Agreement between Executive and the Bank
dated May 19, 1997 (the "Bank Agreement") during the term of this Agreement and
a Change in Control, as defined herein, occurs the Holding Company will assume
its obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of the Bank Agreement upon the
notification of the Holding Company of the Bank's receipt of a dismissal of
charges in the Notice.
10. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits are paid to or received by Executive under the Bank
Agreement between Executive and Bank, the amount of such payments and benefits
paid by the Bank will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references herein to the
masculine shall apply to both the masculine and the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Ohio.
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14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) to the fullest
extent permitted under Ohio law and as provided in the Holding Company's
articles of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
17. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Lenox Bancorp, Inc. has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed this
Agreement, on the 19th day of May 1997.
ATTEST: LENOX BANCORP, INC.
/s/ Richard L. Harmeyer By: /s/ Virginia M. Porowski
- ------------------------------- ------------------------------------
Secretary Virginia M. Porowski
President and Chief Executive Officer
WITNESS:
/s/ Richard O. Plunk By: /s/ Michael P. Cooper
- ------------------------------- ------------------------------------
Executive
Seal
8
EXHIBIT 10.6 CHANGE IN CONTROL AGREEMENT BETWEEN THE BANK AND THE CHIEF
FINANCIAL OFFICER DATED MAY 19, 1997.
<PAGE>
LENOX SAVINGS BANK
CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of May 19, 1997 by and between Lenox
Savings Bank (the "Bank"), an Ohio chartered savings institution, with its
principal administrative office at 5255 Beech Street, St. Bernard, Ohio,
("Bank"), and Lenox Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of the State of Ohio which is the holding company of
the Bank and Michael P. Cooper ("Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Bank.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The term this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional year.
The Board will review the Agreement and Executive's performance annually for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Bank or the
Holding Company (as herein defined) followed at any time during the term of this
Agreement by the termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control; provided, however, the Executive may
consent in writing to any such demotion, loss, reduction or relocation. The
effect of any written consent of the Executive under this Section 2 (a) shall be
strictly limited to the terms specified in such written consent.
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(b) For purposes of this Plan, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in (A) a Change in
Control of the Bank or the Holding Company within the meaning of the Change in
Bank Control Act (""CBCA") and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation (the "FDIC") at 12 C.F.R. ss. 303.4(a)
with respect to the Bank and the Board of Governors of the Federal Reserve
System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to the Holding Company,
as in effect on the date hereof or (B) a transaction requiring prior FRB
approval under the Bank Holding Company Act of 1956 ("BHCA") and the regulations
promulgated thereunder by the FRB at 12 C.F.R. ss. 225.11, as in effect on the
date hereof except for the Holding Company's acquisition of the Bank, provided
that the Board shall substitute its judgment for that of the appropriate
regulatory authority in applying the relevant definitions under the CBCA and the
BHCA; or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Holding Company representing 20% or more of the
Bank's or the Holding Company's outstanding securities except for any securities
of the Bank purchased by the Holding Company in connection with the conversion
of the Bank to the stock form and any securities purchased by any employee
benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity or (D) a proxy statement has been distributed soliciting
proxies from stockholders of the Holding Company, by someone other than the
current management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or consolidation of the Holding Company or
Institution with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Institution or the Holding Company; or (E) a tender offer is made for 20% or
more of the voting securities of the Institution or Holding Company then
outstanding.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards of professional competence
2
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generally prevailing for officers having comparable positions in the savings
institutions industry. Notwithstanding the foregoing, Executive shall not be
deemed to have been Terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the Board of Directors of the Bank at a meeting of
the Board called and held for that purpose (after reasonable notice to Executive
and an opportunity for him, together with counsel, to be heard before the Board
at such meeting and which such meeting shall be held not more than 30 days from
the date of notice during which period Executive may be suspended with pay),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. Any stock options or
limited rights granted to Executive under any stock option plan of the Bank, the
Company or any subsidiary or affiliate thereof, shall become null and void
effective upon Executive's receipt of Notice of Termination for Cause and shall
not be exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by termination of the Executive's employment
due to: (1) Executive's dismissal or (2) Executive's voluntary termination
pursuant to Section 2(a), unless such termination is due to Termination for
Cause, the Bank and the Holding Company shall pay Executive, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, a sum equal to three (3) times Executive's average annual
compensation for the five most recent taxable years that Executive has been
employed by the Bank or such lesser number of years in the event that Executive
shall have been employed by the Bank for less than five years, such average
annual compensation shall include any bonuses, and any other compensation paid
or to be paid to Executive in any such year, the amount of benefits paid or
accrued to Executive pursuant to any employee benefit plan maintained by the
Bank or Holding Company in any such year and the amount of any contributions
made or to be made on behalf of Executive pursuant to any employee benefit plan
maintained by the Bank or the Holding Company in any such year. At the election
of Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum. In the event that no election is made,
payment to Executive will be made on a monthly basis in approximately equal
installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical and
disability coverage substantially identical to the coverage maintained by the
Bank or Holding Company for Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank or Holding
Company employees on a nondiscriminatory basis. Such coverage and payments shall
cease upon the expiration of thirty-six (36) full calendar months from the Date
of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:
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<PAGE>
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined in
Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") or any successor thereof, (the "Termination Benefits") would
be deemed to include an "excess parachute payment" under Section 280G
of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G and the
Non-Triggering Amount less the product of the marginal rate of any
applicable state and federal income tax and the Non Triggering Amount
would be greater than the aggregate value of the Termination Benefits
(without such reduction) minus (i) the amount of tax required to be
paid by the Executive thereon by Section 4999 of the Code and further
minus (ii) the product of the Termination Benefits and the marginal
rate of any applicable state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering
Amount. The allocation of the reduction required hereby among the Termination
Benefits shall be determined by the Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive in connection
with a Change in Control shall be communicated by Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, the Bank will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but
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<PAGE>
not limited to his annual salary) and continue him as a participant in all
compensation, benefit and insurance plans in which he was participating when the
notice of dispute was given, until the earlier of: (1) the resolution of the
dispute in accordance with this Agreement or (2) the expiration of the remaining
term of this Agreement as determined as of the Date of Termination.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
Further, the Holding Company guarantees such payment and provision of all
amounts and benefits due hereunder to Executive and, if such amounts and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of Bank or shall impose on the Bank any obligation to
employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
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<PAGE>
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REGULATORY PROVISIONS.
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation
or other benefits for any period after Termination for Cause as defined in
Section 2 herein above.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1818(e)(3) or (g)(1)) or by notice served by the Ohio Division of Financial
Institutions, the Bank's obligations under this contract shall be suspended as
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay Executive
all or part of the compensation withheld while their contract obligations were
suspended and (ii) reinstate (in whole or in part) any of the obligations which
were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
ss.1818(c)(4) or (g)(1)) or by notice served by the Ohio Division of Financial
Institutions, all obligations of the Bank under this contract shall terminate as
of the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act or under the rules of the Ohio Division of
Financial Institutions or otherwise under Ohio law, all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Federal Deposit Insurance
Corporation ("FDIC") at the time the FDIC enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in
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Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Federal
Deposit Insurance Corporation at the time the FDIC approves a supervisory merger
to resolve problems related to operation of the Bank or when the Bank is
determined by the FDIC to be in an unsafe or unsound condition. Any rights of
the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k) and any rules and regulations promulgated thereunder as well as the
rules of the Ohio Division of Financial Institutions.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice of Termination.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Ohio.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank's main office, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
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entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
15. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank (which payments are guaranteed by the
Holding Company pursuant to Section 5 hereof) if Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, or in lieu thereof, shall
indemnify Executive (and his heirs, executors and administrators) to the fullest
extent permitted under Ohio law and as provided in the Holding Company's
articles of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
17. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Lenox Savings Bank and Lenox Bancorp, Inc. have
caused this Agreement to be executed by their duly authorized officers, and
Executive has signed this Agreement, on the 19th day of May, 1997.
ATTEST: LENOX SAVINGS BANK
/s/ Richard L. Harmeyer By: /s/ Virginia M. Porowski
- ----------------------------- -------------------------------------
Secretary Virginia M. Porowski
President and Chief Executive Officer
SEAL
ATTEST: LENOX BANCORP, INC.
(Guarantor)
/s/ Richard L. Harmeyer By: /s/ Virginia M. Porowski
- ----------------------------- -------------------------------------
Secretary Virginia M. Porowski
President and Chief Executive Officer
SEAL
WITNESS:
/s/ Richard O. Plunk By: /s/ Michael P. Cooper
- ----------------------------- -------------------------------------
Executive
9
<PAGE>
LENOX BANCORP, INC.
1997 INCENTIVE PLAN
1. DEFINITIONS.
(a) "Affiliate" means (i) a member of a controlled group of corporations
of which the Holding Company is a member or (ii) an unincorporated trade or
business which is under common control with the Holding Company as determined in
accordance with Section 414(c) of the Code and the regulations issued
thereunder. For purposes hereof, a "controlled group of corporations" shall mean
a controlled group of corporations as defined in Section 1563(a) of the Code
determined without regard to Section 1563(a)(4) and (e)(3)(C).
(b) "Alternate Option Payment Mechanism" refers to one of several
methods available to a Participant to fund the exercise of a stock option set
out in Section 11 hereof. These mechanisms include: broker assisted cashless
exercise and stock for stock exchange.
(c) "Award" means a grant of one or some combination of one or more
Non-statutory Stock Options, Incentive Stock Options and Stock Awards under the
provisions of this Plan.
(d) "Bank" means Lenox Savings Bank.
(e) "Board of Directors" or "Board" means the board of directors of the
Holding Company or the Bank and Directors Emeritus of the Holding Company or the
Bank.
(f) "Change in Control" means a change in control of the Bank or Holding
Company of a nature that; (i) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Exchange Act; or (ii) results in a Change
in Control within the meaning of the Home Owners' Loan Act of 1933, as amended
("HOLA") and the Rules and Regulations promulgated by the Office of Thrift
Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under such rules and regulations the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company and any securities
purchased by any tax qualified employee benefit plan of the Bank; or (B)
individuals who constitute the Board of Directors of the Holding Company on the
date hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by the Holding Company's stockholders was approved by a Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (B), considered as though he were a member of the Incumbent Board;
<PAGE>
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity; or (D) after a solicitation of shareholders of the Holding Company, by
someone other than current management of the Holding Company, stockholders
approve a plan of reorganization, merger or consolidation of the Holding Company
or Bank or similar transaction with one or more corporations, as a result of
which the outstanding shares of the class of securities then subject to the plan
would be exchanged for or converted into cash or property or securities not
issued by the Bank or the Holding Company; or (E) a tender offer is made for 20%
or more of the voting securities of the Bank or the Holding Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are defined as Non-Employee Directors as such term is defined under Rule
16b-3(b)(3)(i) under the Exchange Act as promulgated by the Securities and
Exchange Commission.
(i) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share or any stock exchanged for shares of Common Stock pursuant
to Section 15 hereof.
(j) "Date of Grant" means the effective date of an Award.
(k) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned to him or , in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(l) "Effective Date" means July 21, 1997, the effective date of the
Plan.
(m) "Employee" means any person who is currently employed by the Holding
Company or an Affiliate, including officers, but such term shall not include
Outside Directors.
(n) "Employee Participant" means an Employee who holds an outstanding
Award under the terms of the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(p) "Exercise Price" means the purchase price per share of Common Stock
deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
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(q) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low sales prices of the
Common Stock as reported by a national securities exchange which is the primary
trading market for such Common Stock or the average of the high and low bid
prices of the Common Stock as reported by Nasdaq Stock Market ("NASDAQ") if the
NASDAQ serves as the primary trading market for the Common Stock, each as
published in the Wall Street Journal, if published, on such date or, if the
Common Stock was not traded on such date, on the next preceding day on which the
Common Stock was traded thereon or the last previous date on which a sale was
reported. If the Common Stock is not traded on a national securities exchange or
the NASDAQ or the NYSE, the Fair Market Value of the Common Stock is the value
so determined by the Board in good faith, based upon the most recently available
pricing information the Board has regarding the recent closing price per share
of the Common Stock, as reported over-the counter through the National Daily
Quotation Service "Pink Sheet."
(r) "Holding Company" means Lenox Bancorp, Inc.
(s) "Incentive Stock Option" means an Option granted by the Committee to
a Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7 hereof and is intended to be such under Section 422
of the Code.
(t) "Limited Right" means the right to receive an amount of cash based
upon the terms set forth in Section 8 hereof.
(u) "Non-statutory Stock Option" means an Option to a Participant
pursuant to Section 6 hereof, which is not designated by the Committee as an
Incentive Stock Option or which is redesignated by the Committee as a
Non-statutory Stock Option or which is designated an Incentive Stock Option
under Section 7 hereof, but does not meet the requirements of such under Section
422 of the Code.
(v) "Option" means the right to buy a fixed amount of Common Stock at
the Exercise Price within a limited period of time designated as the term of the
option as granted under Section 6 or 7 hereof.
(w) "Outside Director" means a member of the Board of Directors or a
Director Emeritus of the Holding Company or its Affiliates, who is not also an
Employee.
(x) "Outside Director Participant" means an Outside Director who holds
an outstanding Award under the terms of the Plan.
(y) "Participant(s)" means collectively an Employee Participant and/or
an Outside Director Participant who hold(s) outstanding Awards under the terms
of the Plan.
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(z) "Retirement" with respect to an Employee Participant means
termination of employment which constitutes retirement under any tax qualified
plan maintained by the Bank. However, "Retirement" will not be deemed to have
occurred for purposes of this Plan if a Participant continues to serve as a
consultant to or on the Board of Directors of the Holding Company or its
Affiliates even if such Participant is receiving retirement benefits under any
retirement plan of the Holding Company or its Affiliates. With respect to an
Outside Director Participant, "Retirement" means the termination of service from
the Board of Directors of the Holding Company or its Affiliates following
written notice to the Board as a whole of such Outside Director's intention to
retire, except that an Outside Director Participant shall not be deemed to have
"retired" for purposes of the Plan in the event he continues to serve as a
consultant to the Board or as an advisory director or director emeritus,
including pursuant to any retirement plan of the Holding Company or the Bank.
(aa) "Stock Awards" are Awards of Common Stock which may vest
immediately or over a period of time. Vesting of Stock Awards under Section 9
hereof may be contingent upon the occurrence of specified events or the
attainment of specified performance goals as determined by the Committee.
(bb) "Termination for Cause" shall mean, in the case of a Director,
removal from the Board of Directors, or, in the case of an Employee, termination
of employment, in both such cases as determined by the Board of Directors,
because of Participant's personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses).
(cc) "Trust" means a trust established by the Board in connection with
this Plan to hold Plan assets for the purposes set forth herein.
(dd) "Trustee" means that person or persons and entity or entities
approved by the Board to hold legal title to any of the Trust assets for the
purposes set forth herein.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to grant awards to Employees
and establish such rules and regulations as it deems necessary for the proper
administration of the Plan and to make whatever determinations and
interpretations in connection with the Plan it deems necessary or advisable. All
determinations and interpretations made by the Committee shall be binding and
conclusive on all Employee Participants and Outside Director Participants in the
Plan and on their legal representatives and beneficiaries.
(b) Awards to Outside Directors of the Holding Company or its Affiliates
shall be granted by the Board of Directors or the Committee, pursuant to the
terms of this Plan.
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(c) Actual transference of the Award requires no, nor allows any,
discretion by the Trustee.
3. TYPES OF AWARDS AND RELATED RIGHTS.
The following Awards and related rights as described below in Paragraphs
6 through 9 hereof may be granted under the Plan:
(a) Non-statutory Stock Options
(b) Incentive Stock Options
(c) Limited Right
(d) Stock Awards
4. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 15 hereof, the maximum
number of shares of Common Stock reserved for Awards under the Plan is 59,594
shares which number may not be in excess of 14% of the outstanding shares of the
Common Stock determined immediately as of the Effective Date. Subject to
adjustment as provided in Section 15 hereof, the maximum number of shares of
Common Stock reserved hereby for purchase pursuant to the exercise of Options
and Option-related Awards granted under the Plan is 42,567 shares, which number
may not be in excess of 10% of the outstanding shares of Common Stock as of the
Effective Date. 26,500 options will qualify as Incentive Stock Options. The
maximum number of the shares of Common Stock reserved for award as Stock Awards
is 17,027 shares, which number may not be in excess of 4% of the outstanding
shares of Common Stock as of the Effective Date. These shares of Common Stock
may be either authorized but unissued shares or authorized shares previously
issued and reacquired by the Holding Company or acquired by the Trustee. To the
extent that Options and Stock Awards are granted under the Plan, the shares
underlying such Awards will be unavailable for any other use including future
grants under the Plan except that, to the extent that Stock Awards or Options
terminate, expire, or are forfeited without having been exercised (or in cases
where a Limited Right has been granted in connection with an option, the amount
of such Limited Right received in lieu of the exercise of such option), new
Awards may be made with respect to those shares underlying such terminated,
expired or forfeited Options or Stock Awards.
5. ELIGIBILITY.
Subject to the terms herein, all Employees and Outside Directors shall
be eligible to receive Awards under the Plan.
6. NON-STATUTORY STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded under the Plan, from time to time,
grant Non-statutory Stock Options to Employees and Outside Directors, upon such
terms and conditions as the Committee may determine
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and grant Non-statutory Stock Options in exchange for and upon surrender of
previously granted Awards under this Plan under such terms and conditions as the
Committee may determine. Non-statutory Stock Options granted under this Plan are
subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock
Option shall be determined by the Committee. Such Exercise Price shall not be
less than 100% of the Fair Market Value of the Holding Company's Common Stock on
the Date of Grant. Shares of Common Stock underlying a Non-statutory Stock
Option may be purchased only upon full payment of the Exercise Price or upon
operation of an Alternate Option Payment Mechanism set out in Section 11 hereof.
(b) Terms of Non-statutory Stock Options. The term during which each
Non-statutory Stock Option may be exercised shall be determined by the
Committee, but in no event shall a Non-statutory Stock Option be exercisable in
whole or in part more than 10 years from the Date of Grant. The Committee shall
determine the date on which each Non-statutory Stock Option shall become
exercisable. The Committee may also determine as of the Date of Grant any other
specific conditions or specific performance goals which must be satisfied prior
to the Non-statutory Stock Option becoming exercisable. The shares of Common
Stock underlying each Non-statutory Stock Option installment may be purchased in
whole or in part by the Participant at any time during the term of such
Non-statutory Stock Option after such installment becomes exercisable. The
Committee may, in its sole discretion, accelerate the time at which any
Non-statutory Stock Option may be exercised in whole or in part, subject to
applicable rules and regulations. The acceleration of any Non-statutory Stock
Option under the authority of this paragraph shall create no right, expectation
or reliance on the part of any other Participant or that certain Participant
regarding any other unaccelerated Non-statutory Stock Options. Unless determined
otherwise by the Committee and except in the event of the Participant's death or
pursuant to a domestic relations order, a Non-statutory Stock Option is not
transferable and may be exercisable in his lifetime only by the Participant to
whom it is granted. Upon the death of a Participant, a Non-statutory Stock
Option is transferable by will or the laws of descent and distribution.
(c) NSO Agreement. The terms and conditions of any Non-statutory Stock
Option granted shall be evidenced by an agreement (the "NSO Agreement") which
shall be subject to the terms and conditions of the Plan.
(d) Termination of Employment or Service. Unless otherwise determined by
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death or Termination for Cause, the
Participant's Non-statutory Stock Options shall be exercisable only as to those
shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination;
provided that in the event of termination of a Participant's employment or
service due to Retirement, the Participant shall have up to one year following
the Participant's cessation of employment or service to exercise the
Participant's immediately exercisable Non-statutory Options. Notwithstanding any
provisions set
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forth herein or contained in any NSO Agreement relating to an award of a
Non-statutory Stock Option, in the event of termination of the Participant's
employment or service for Disability or death, all Non-statutory Stock Options
held by such Participant shall immediately vest and be exercisable for one year
after such termination of service, and, in the event of a Termination for Cause,
all rights under the Participant's Non-statutory Stock Options shall expire
immediately upon such Termination for Cause. Notwithstanding the above, in no
event shall any Non-statutory Stock Options be exercisable beyond the expiration
of the Non-Statutory Stock Option term.
7. INCENTIVE STOCK OPTIONS.
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded under the Plan, from time to time,
grant Incentive Stock Options to Employees upon such terms and conditions as the
Committee may determine. Incentive Stock Options granted pursuant to the Plan
shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to
an Employee Participant, such Employee Participant owns Common Stock
representing more than 10% of the total combined voting securities of the
Holding Company (or, under Section 424(d) of the Code, is deemed to own Common
Stock representing more than 10% of the total combined voting power of all
classes of stock of the Holding Company, by reason of the ownership of such
classes of stock, directly or indirectly, by or for any brother, sister, spouse,
ancestor or lineal descendent of such Employee Participant, or by or for any
corporation, partnership, estate or trust of which such Employee Participant is
a shareholder, partner or beneficiary), ("10% Owner"), the Exercise Price per
share of Common Stock deliverable upon the exercise of each Incentive Stock
Option shall not be less than 110% of the Fair Market Value of the Common Stock
on the Date of Grant. Shares may be purchased only upon payment of the full
Exercise Price or upon operation of an Alternate Option Payment Mechanism set
out in Section 11 hereof.
(b) Amounts of Incentive Stock Options. Incentive Stock Options may be
granted to any Employee in such amounts as determined by the Committee; provided
that the amount granted is consistent with the terms of Section 422 of the Code.
In the case of an Option intended to qualify as an Incentive Stock Option, the
aggregate Fair Market Value (determined as of the time the Option is granted) of
the Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Employee Participant during any calendar
year (under all plans of the Employee Participant's employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000. The provisions of
this Section 7(b) shall be construed and applied in accordance with Section
422(d) of the Code and the regulations, if any, promulgated thereunder. To the
extent an Award of an Incentive Stock Option under this Section 7 exceeds this
$100,000 limit, the portion of the Award in excess of such limit shall be deemed
a Non-statutory Stock Option. The Committee shall have discretion to redesignate
Options granted as Incentive Stock Options as Non-Statutory Stock Options. Such
Non-statutory Stock Options shall be subject to Section 6
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hereof.
(c) Terms of Incentive Stock Options. The term during which each
Incentive Stock Option may be exercised shall be determined by the Committee,
but in no event shall an Incentive Stock Option be exercisable in whole or in
part more than 10 years from the Date of Grant. If at the time an Incentive
Stock Option is granted to an Employee Participant who is a 10% Owner, the
Incentive Stock Option granted to such Employee Participant shall not be
exercisable after the expiration of five years from the Date of Grant. No
Incentive Stock Option is transferable except by will or the laws of descent and
distribution and is exercisable in his lifetime only by the Employee Participant
to whom it is granted. The designation of a beneficiary does not constitute a
transfer.
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable. The Committee may also determine as of the Date
of Grant any other specific conditions or specific performance goals which must
be satisfied prior to the Incentive Stock Option becoming exercisable. The
shares comprising each installment may be purchased in whole or in part at any
time during the term of such Incentive Stock Option after such installment
becomes exercisable. The Committee may, in its sole discretion, accelerate the
time at which any Incentive Stock Option may be exercised in whole or in part,
subject to applicable rules and regulations. The acceleration of any Incentive
Stock Option under the authority of this paragraph shall not create a right,
expectation or reliance on the part of any other Participant or that certain
Participant regarding any other unaccelerated Incentive Stock Options.
(d) ISO Agreement. The terms and conditions of any Incentive Stock
Option granted shall be evidenced by an agreement (the "ISO Agreement") which
shall be subject to the terms and conditions of the Plan.
(e) Termination of Employment. Unless otherwise determined by the
Committee, upon the termination of an Employee Participant's employment for any
reason other than Disability, death or Termination for Cause, the Employee
Participant's Incentive Stock Options shall be exercisable only as to those
shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination, except
that in the event of the termination of an Employee Participant's employment due
to Retirement, the Participant shall have up to one year following the
Participant's cessation of employment to exercise any Incentive Stock Options
exercisable on that date. Notwithstanding any provision set forth herein or
contained in any ISO Agreement relating to an award of an Incentive Stock
Option, in the event of termination of the Employee Participant's employment for
Disability or death, all Incentive Stock Options held by such Employee
Participant shall immediately vest and be exercisable for one year after such
termination, and, in the event of Termination for Cause, all rights under the
Employee Participant's Incentive Stock Options shall expire immediately upon
termination. Notwithstanding anything contained herein to the contrary, no
Incentive Stock Option shall be eligible for treatment as an Incentive Stock
Option in the event such Incentive Stock Option is exercised more than three
months following the date of a Participant's cessation of employment. In no
event shall an Incentive Stock Option be exercisable beyond the expiration of
the Incentive Stock Option term.
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(f) Compliance with Code. The Incentive Stock Options granted under this
Section 7 are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code, but the Holding Company makes no warranty as
to the qualification of any Option as an incentive stock option within the
meaning of Section 422 of the Code. All Options that do not so qualify shall be
treated as Non-statutory Stock Options.
8. LIMITED RIGHT.
Simultaneously with the grant of any Option to a Participant, the
Committee may grant a Limited Right with respect to all or some of the shares
covered by such Option. Limited Rights granted under this Plan are subject to
the following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
whole or in part before the expiration of six months from the Date of Grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to
be exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
receive from the Holding Company an amount of cash equal to the difference
between the Exercise Price of the underlying option and the Fair Market Value of
the Common Stock subject to the underlying Option on the date the Limited Right
is exercised, multiplied by the number of shares with respect to which such
Limited Right is exercised. Payments shall be less any applicable tax
withholding as set forth in Section 16 hereof.
9. STOCK AWARD.
The Committee (or in the case of an Outside Director Participant, the
Board of Directors) may, subject to the limitations of the Plan, from time to
time, make an Award of shares of Common Stock to Employees and Outside Directors
("Stock Awards"). The Stock Awards shall be made subject to the following terms
and conditions:
(a) Payment of the Stock Award. The Stock Award may only be made in
whole shares of Common Stock. Stock Awards may only be granted from shares
reserved under the Plan but unawarded at the time the new Stock Award is made.
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(b) Terms of the Stock Awards. The Committee shall determine the dates
on which Stock Awards granted to a Participant shall vest and any specific
conditions or performance goals which must be satisfied prior to the vesting of
any installment or portion of the Stock Award. Notwithstanding other paragraphs
in this Section 9, the Committee may, in its sole discretion, accelerate the
vesting of any Stock Award. The acceleration of any Stock Award under the
authority of this paragraph shall create no right, expectation or reliance on
the part of any other Participant or that certain Participant regarding any
other unaccelerated Stock Awards.
(c) Stock Award Agreement. The terms and conditions of any Stock Award
shall be evidenced by an agreement (the "Stock Award Agreement") which such
Stock Award Agreement will be subject to the terms and conditions of the Plan.
Each Stock Award Agreement shall set forth:
(i) the period over which the Stock Award will vest;
(ii) the performance goals, if any, which must be satisfied prior
to the vesting of any installment or portion of the Stock
Award. The performance goals may be set by the Committee on an
individual level, for all Participants, for all Awards made
during a given period of time, or for all Awards for
indefinite periods;
(d) Certification of Attainment of the Performance Goal. No Stock Award
or portion thereof that is subject to a performance goal is to be distributed to
the Participant until the Committee certifies that the underlying performance
goal has been achieved.
(e) Termination of Employment or Service. Unless otherwise determined by
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death or Termination for Cause, the
Participant's unvested Stock Awards as of the date of termination shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void. Notwithstanding any provisions set forth herein or
contained in any Agreement relating to an award of a Stock Option or Stock
Award, in the event of termination of the Participant's service due to
Disability or death, all unvested Stock Awards held by such Participant shall
immediately vest and, in the event of the Participant's Termination for Cause,
the Participant's unvested Stock Awards as of the date of such termination shall
be forfeited and any rights the Participant had to such unvested Stock Awards
shall become null and void.
(f) Non-Transferability. Except to the extent permitted by the Code, the
rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:
(i) The recipient of a Stock Award shall not sell, transfer,
assign, pledge, or otherwise encumber shares subject to the
Stock Award until full vesting of such shares has occurred.
For purposes of this Section, the separation of beneficial
ownership and legal title through the use of any "swap"
transaction is deemed to be a prohibited encumbrance.
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(ii) Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a domestic
relations order, a Stock Award is not transferable and may be
earned in his lifetime only by the Participant to whom it is
granted. Upon the death of a Participant, a Stock Award is
transferable by will or the laws of descent and distribution.
The designation of a beneficiary does not constitute a
transfer.
(iii) If a recipient of a Stock Award is subject to the provisions
of Section 16 of the Exchange Act, shares of Common Stock
subject to such Stock Award may not, without the written
consent of the Committee (which consent may be given in the
Stock Award Agreement), be sold or otherwise disposed of
within six months following the date of grant of the Stock
Award.
(g) Accrual of Dividends. Whenever shares of Common Stock underlying a
Stock Award are distributed to a Participant or beneficiary thereof under the
Plan, such Participant or beneficiary shall also be entitled to receive, with
respect to each such share distributed, a payment equal to any cash dividends or
distributions (other than distributions in shares of Common Stock) and the
number of shares of Common Stock equal to any stock dividends, declared and paid
with respect to a share of the Common Stock if the record date for determining
shareholders entitled to receive such dividends falls between the date the
relevant Stock Award was granted and the date the relevant Stock Award or
installment thereof is issued. There shall also be distributed an appropriate
amount of net earnings, if any, of the Trust with respect to any dividends paid
out.
(h) Voting of Stock Awards. After a Stock Award has been granted but for
which the shares covered by such Stock Award have not yet been earned and
distributed to the Participant pursuant to the Plan, the Participant shall be
entitled to direct the Trustee as to the voting of such shares of Common Stock
which the Stock Award covers subject to the rules and procedures adopted by the
Committee for this purpose. All shares of Common Stock held by the Trust as to
which Participants are not entitled to direct, or have not directed, the voting,
shall be voted by the Trustee in the same proportion as the Common Stock covered
by Stock Awards which have been awarded is voted.
10. PAYOUT ALTERNATIVES
Payments due to a Participant upon the exercise or redemption of an
Award, may be made subject to the following terms and conditions:
(a) Discretion of the Committee. The Committee has the sole discretion
to determine what form of payment (whether monetary, Common Stock, a combination
of payout alternatives or otherwise) it shall use in making distributions of
payments for all Awards. If the Committee requests any or all Participants to
make an election as to form of distribution or payment, it shall not be
considered bound by the election.
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(b) Payment in the form of Common Stock. Any shares of Common Stock
tendered in satisfaction of an obligation arising under this Plan shall be
valued at the Fair Market Value of the Common Stock on the day preceding the
date of the issuance of such stock to the Participant.
11. ALTERNATE OPTION PAYMENT MECHANISM
The Committee has sole discretion to determine what form of payment it
will accept for the exercise of an Option. The Committee may indicate acceptable
forms in the ISO or NSO Agreement covering such Options or may reserve its
decision to the time of exercise. No Option is to be considered exercised until
payment in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
(c) Exchange of Common Stock.
(i) The Committee may permit payment by the tendering of
previously acquired shares of Common Stock. This includes the
use of "pyramiding transactions" whereby some number of
Options are exercised; then the shares gained through the
exercise are tendered back to the Holding Company as payment
for a greater number of Options. This transaction may be
repeated as needed to exercise all of the Options available.
(ii) Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the Fair Market Value of
the Common Stock on the date prior to the date of exercise.
12. RIGHTS OF A SHAREHOLDER: NONTRANSFERABILITY.
No Participant shall have any rights as a shareholder with respect to
any shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such shares. Nothing in this Plan or in any Award granted
confers on any person any right to continue in the employ or service of the
Holding Company or its Affiliates or interferes in any way with the right of the
Holding Company or its Affiliates to terminate a Participant's services as an
officer or other employee at any time.
Except as permitted under the Code (with respect to Incentive Stock
Options) and the rules promulgated pursuant to Section 16(b) of the Exchange Act
or any successor statutes or rules, no Award under the Plan shall be
transferable by the Participant other than by will or the laws of intestate
succession or pursuant to a domestic relations order or unless determined
otherwise by the Committee.
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13. AGREEMENT WITH GRANTEES.
Each Award will be evidenced by a written agreement(s) (whether
constituting an NSO Agreement, ISO Agreement, Stock Award Agreement or any
combination thereof), executed by the Participant and the Holding Company or its
Affiliates that describes the conditions for receiving the Awards including the
date of Award, the Exercise Price if any, the terms or other applicable periods,
and other terms and conditions as may be required or imposed by the Plan, the
Committee, or the Board of Directors, and may describe or specify tax law
considerations or applicable securities law considerations.
14. DESIGNATION OF BENEFICIARY.
A Participant may, with the consent of the Committee, designate a person
or persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by and
delivered to the Holding Company and may be revoked in writing. If a Participant
fails effectively to designate a beneficiary, then the Participant's estate will
be deemed to be the beneficiary.
15. DILUTION AND OTHER ADJUSTMENTS.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, or in the event a capital
distribution is made the Committee will make such adjustments to Awards to
prevent dilution, diminution or enlargement of the rights of the Participant, as
the Committee deems appropriate, including any or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common
Stock or other securities that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common
Stock or other securities underlying Awards already made under the Plan;
(c) adjustments in the exercise price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such Options.
Alternatively, the Committee could provide the participant with a cash
benefit for shares underlying vested, but unexercised options, in order to
achieve the aforementioned effect. All Awards under this Plan shall be binding
upon any successors or assigns of the Holding Company.
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16. TAX WITHHOLDING.
Awards under this Plan shall be subject to tax withholding to the extent
required by any governmental authority. Any withholding shall comply with Rule
16b-3 or any amendment or successive rule. Shares of Common Stock withheld to
pay for tax withholding amounts shall be valued at their Fair Market Value on
the date the Award is deemed taxable to the Participant.
17. AMENDMENT OF THE PLAN.
The Board of Directors may at any time, and from time to time, subject
to applicable rules and regulations, modify or amend the Plan or any Award
granted under the Plan, in any respect, prospectively or retroactively; provided
however, that provisions governing grants of Incentive Stock Options, unless
permitted by the rules and regulations or staff pronouncements promulgated under
the Code shall be submitted for shareholder approval to the extent required by
such law, regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions, sections, and subsections of this Plan will
remain in full force and effect.
No such termination, modification or amendment may adversely affect the
rights of a Participant under an outstanding Award without the written
permission of such Participant.
18. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon being presented to shareholders for
ratification for the purpose of obtaining preferential tax treatment for
Incentive Stock Options. The failure to obtain shareholder ratification for such
purpose will not effect the validity of the Plan and the Options thereunder,
provided, however, that if the Plan is not ratified, the Plan shall remain in
full force and effect, and any Incentive Stock Options granted under the Plan
shall be deemed to be Non-statutory Stock Options.
19. TERMINATION OF THE PLAN.
The right to grant Awards under the Plan will terminate upon the earlier
of: (i) ten (10) years after the Effective Date; (ii) the issuance of a number
of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards which together with the exercise of Limited Rights
is equivalent to the maximum number of shares reserved under the Plan as set
forth in Section 4. The Board of Directors has the right to suspend or terminate
the Plan at any time, provided that no such action will, without the consent of
a Participant, adversely affect a Participant's vested rights under a previously
granted Award.
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20. APPLICABLE LAW.
The Plan will be administered in accordance with the laws of the State
of Ohio and applicable federal law.
21. COMPLIANCE WITH FDIC CONVERSION REGULATIONS
Notwithstanding any other provision contained in this Plan:
(a) unless the Plan is approved by a majority vote of the Holding
Company's stockholders at a duly called meeting of stockholders to consider the
Plan, as required by 12 CFR ss.333.4(f)(2), the Plan shall not become effective
or implemented prior to one year from the date of the Bank's mutual to stock
conversion;
(b) no Award granted prior to one year from the date of the Bank's
mutual to stock conversion shall become vested or exercisable at a rate in
excess of 20% of the total number of Stock Awards or Options (whichever may be
the case) granted to such Participant, provided, that Awards shall become fully
vested or immediately exercisable in the event of a Participant's termination of
service due to death or Disability;
(c) no Award granted to any individual employee prior to one year from
the date of the Bank's mutual to stock conversion may exceed 25% of the total
amount of Awards which may be granted under the Plan;
(d) no Award granted to any individual Outside Director prior to one
year from the date of the Bank's mutual to stock conversion may exceed 5% of the
total amount of Awards which may be granted under the Plan; and
(e) the aggregate amount of Awards granted to all Outside Directors
prior to one year from the date of the Bank's mutual to stock conversion may not
exceed 30% of the total amount of Awards which may be granted under the Plan.
22. DELEGATION OF AUTHORITY
The Committee may delegate all authority for: the determination of forms
of payment to be made by or received by the Plan; the execution of Award
agreements; the determination of Fair Market Value; the determination of all
other aspects of administration of the plan to the executive officer(s) of the
Holding Company or the Bank. The Committee may rely on the descriptions,
representations, reports and estimate provided to it by the management of the
Holding Company or the Bank for determinations to be made pursuant to the Plan,
including the attainment of performance goals. However, only the Committee or a
portion of the Committee may certify the attainment of a performance goal.
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RESOLUTION OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
OF LENOX BANCORP, INC.
NOW, THEREFORE, BE IT RESOLVED, that the Lenox Bancorp, Inc. 1997
Incentive Plan be, and it hereby is, amended by the addition to the Incentive
Plan of the following items 6(e), 7(f) and 9(i):
6(e) CHANGE IN CONTROL. Unless otherwise determined by the Committee,
and notwithstanding any other provision of the Plan, in the event
of a Change in Control, all Non-Statutory Stock Options held by
the Participant, whether or not vested at such time, shall become
vested to the Participant or his legal representatives or
beneficiaries upon the Change of Control.
7(f) CHANGE IN CONTROL. Unless otherwise determined by the Committee,
and notwithstanding any other provision of the Plan, in the event
of a Change in Control, all Incentive Stock Options held by the
Participant, whether or not vested at such time, shall become
vested to the Participant or his legal representatives or
beneficiaries upon the Change of Control.
9(i) CHANGE IN CONTROL. Unless otherwise determined by the Committee,
and notwithstanding any other provision of the Plan, in the event
of a Change in Control, all Stock Awards held by the Participant,
whether or not vested at such time, shall become vested to the
Participant or his legal representatives or beneficiaries upon
the Change of Control.
RESOLVED FURTHER, that the President and Chief Executive Officer of the
Company is hereby authorized and directed to take all action necessary to
implement the amendment to the Lenox Bancorp, Inc. 1997 Incentive Plan.
16
EXHIBIT 13.0 1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
CORPORATE PROFILE
Lenox Bancorp, Inc. is the parent company of Lenox Savings Bank, whose home
office is located in St. Bernard, Ohio. Lenox Savings Bank was founded in 1887
with the goal of providing savings and home loan financial services to the
communities it serves. It continues to fulfill that primary goal today with full
service operations in the Cincinnati, Ohio area. The common stock of Lenox
Bancorp, Inc. trades over-the-counter under the symbol LNXC.
TABLE OF CONTENTS
Letter to Shareholders...................1
FINANCIAL SECTION
Selected Financial Data..................2
Management's Discussion and Analysis.....4
Independent Auditors' Report............14
Consolidated Balance Sheets.............15
Consolidated Statements of Income.......17
Consolidated Statements of
Comprehensive Income....................18
Consolidated Statements of Changes in
Stockholders' Equity....................19
Consolidated Statements of Cash Flows...22
Notes to Financial Statements...........24
Officers and Directors...Inside Back Cover
Corporate Information....Inside Back Cover
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected financial and other data of the Company set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Company and Notes thereto presented elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets........................ $55,089 $51,509 $47,074 $43,149 $39,891
Total liabilities................... 47,943 44,544 39,805 39,301 36,152
Loans, net(1)....................... 38,528 39,002 37,495 33,384 31,605
Mortgage-backed securities(2)....... 8,910 5,796 1,148 1,083 787
Cash and cash equivalents........... 2,351 664 1,115 1,249 1,979
Investments(2)(3)................... 4,306 5,089 6,687 6,639 5,026
Deposits............................ 33,067 31,867 32,551 33,669 35,526
Borrowings.......................... 14,440 12,287 7,012 5,343 447
Stockholders' equity(4)............. 7,147 6,965 7,270 3,848 3,739
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- --------- ---------
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest income..................... $3,869 $3,543 $3,336 $2,981 $2,726
Interest expense.................... 2,368 2,029 1,946 1,848 1,604
------- ------- ------- ----- -------
Net interest income............... 1,501 1,514 1,390 1,133 1,122
Provision (credit) for loan losses.. 18 10 -- (2) --
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses...... 1,483 1,504 1,390 1,135 1,122
Non-interest income................. 292 131 153 102 70
Non-interest expense................ 1,441 1,321 1,276 1,198 1,046
------- ------- ------- ------- -------
Income before income taxes.......... 334 314 267 39 146
Income taxes........................ 120 119 81 10 38
-------- -------- --------- --------- ---------
Net income........................ $ 214 $ 195 $ 186 $ 29 $ 108
======= ======= ======= ======== =======
</TABLE>
(CONTINUED ON NEXT PAGE)
- 2 -
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(5):
Return on average assets .................. 0.39% 0.41% 0.41% 0.07% 0.27%
Return on average equity .................. 3.05 2.71 3.34 0.77 2.91
Average equity to average assets .......... 12.95 14.96 12.17 9.11 9.13
Equity to total assets at year end ........ 12.97 13.52 15.44 8.92 9.37
Average interest rate spread(6) ........... 2.26 2.55 2.72 2.49 2.53
Net interest margin(7) .................... 2.84 3.22 3.15 2.82 2.85
Average interest-earning assets
to average interest-bearing liabilities 112.91 115.64 109.84 107.19 107.73
Non-interest expense to average assets .... 2.65 2.75 2.79 2.88 2.57
REGULATORY CAPITAL RATIOS(5):
Tier I leverage ........................... 11.5 11.9 11.7 8.9 9.5
Total capital to risk-weighted capital .... 24.2 23.8 24.1 17.7 19.6
ASSET QUALITY RATIOS(5):
Non-performing assets as a percent
of total assets(8) .................... 0.10 0.34 0.23 0.21 0.23
Non-performing loans as a percent
of gross loans(8)(9) .................. 0.14 0.45 0.29 0.27 0.29
Allowance for loan losses as a
percent of gross loans(9) ............. 0.17 0.17 0.15 0.18 0.21
Allowance for loan losses as a percent
of non-performing loans(8) ........... 122.22 37.93 53.21 66.87 71.17
</TABLE>
- -----------------------------------
(1) The allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and
1994 was (in thousands) $66, $66, $58, $60 and $66, respectively.
(2) The Bank's investments and mortgage-related securities were classified as
"available for sale" at December 31, 1995. The Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on January 1, 1994. See Footnote
1 to the Financial Statements of the Company.
(3) Includes FHLB stock and certificates of deposit.
(4) Consists solely of retained earnings at December 31, 1995 and 1994.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of year ratios.
With the exception of end of year ratios, all ratios are based on average
monthly balances.
(6) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) Non-performing assets consist of loans 90 days or more overdue and not
accruing interest.
(9) Gross loans include loans, less loans in process, allowance for loan losses
and deferred loan origination fees.
- 3 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company does not transact any material business other than through 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 borrowings. 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,
franchise taxes, federal deposit insurance premiums 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, 1998.
The following pages provide an overview of the general business and
financial condition as of December 31, 1998, and results of operation for fiscal
1998, as compared to 1997 and 1996. 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 not limited
to, those with respect to the following matters.
1. Management's analysis of the interest rate risk of the Bank as set forth
under "Asset 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, 1998 and December 31, 1997" and "Comparison of
Operating Results for the Years Ended December 31, 1997 and December 31,
1996."
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 reprice 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 repricing 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 repricing 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 result in its net interest income growing
at a faster rate then an institution with a positive gap.
- 4 -
<PAGE>
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 repricing
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 assets/liability maturity-repricing profile.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 that are expected
to reprice or mature in each of the future time periods shown, based on certain
assumptions. Except as stated below, the asset 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 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, 1998, based on the
information and assumptions set forth above.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------------------------------------
THREE FOUR ONE TO THREE TO FIVE TO MORE
MONTHS MONTHS TO THREE FIVE TEN THAN
OR LESS ONE YEAR YEARS YEARS YEARS TEN TOTAL
------- -------- ----- ----- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest bearing deposits ............ $ 1,760 $ -- $ -- $ -- $ -- $ -- $ 1,760
Investments .......................... -- 95 88 705 1,595 1,823 4,306
Mortgage-backed securities ........... 312 903 2,004 1,482 2,229 1,980 8,910
Loans receivable, net ................ 2,554 3,782 8,824 6,384 8,994 7,990 38,528
Total interest earning assets .... $ 4,626 $ 4,780 $ 10,916 $ 8,571 $ 12,818 $ 11,793 $ 53,504
------ ------ ------- ------ ------- ------- -------
INTEREST BEARING LIABILITIES:
Certificate accounts ................. $ 4,610 $ 7,477 $ 7,097 $ 2,438 $ -- $ -- $ 23,141
Money market savings accounts ........ 71 208 372 418 1,778 -- 2,847
Passbook accounts .................... 116 340 796 644 2,747 -- 4,643
NOW accounts ......................... 61 178 418 338 1,441 -- 2,436
FHLB advances ........................ 177 2,174 4,465 5,161 2,327 136 14,440
Total interest bearing liabilities $ 5,035 $ 10,377 $ 13,148 $ 8,999 $ 8,293 $ 136 $ 47,507
------ ------- ------- ------ ------ ---- -------
Interest rate sensitivity gap .......... $ (409) $ (5,597) $ (2,232) $ (428) $ 4,525 $ 11,657 $ 5,997
------- ------- ------- -------- ------- ------- --------
Cumulative interest rate sensitivity gap $ (409) $ (6,006) $ (8,238) $ (8,666) $ (4,141) $ 7,516
------- ------- ------- ------- -------
Cumulative interest rate sensitivity gap
as a percentage of total assets ...... (0.79)% (11.66)% (15.99)% (16.82)% (8.04)% 14.59%
===== ====== ====== ====== ===== =====
Cumulative interest rate sensitivity gap (0.92)% (13.48)% (18.49)% (19.45)% (9.30)% 16.87%
as a percent of total liability ...... ===== ====== ====== ====== ===== =====
</TABLE>
- 6 -
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Bank
at December 31, 1998 and for the years ended December 31, 1998, 1997 and 1996.
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, 1998 1997 1996
---------------- ----------------------- ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- ---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Interest bearing deposits....... $ 1,760 4.60% $ 2,682 $ 103 3.84% $ 558 $ 27 4.84% $ 489 $ 25 5.11%
Investments..................... 4,306 6.49 3,983 268 6.73 6,267 451 7.20 7,049 521 7.39
Mortgage-backed securities...... 8,910 6.22 8,480 537 6.33 1,221 88 7.21 1,125 80 7.11
Loans receivable, net........... 35,528 7.63 37,777 2,961 7.84 38,943 2,977 7.64 35,449 2,710 7.64
-------- -------- -------- --------
Total interest-earning assets 53,504 7.20 52,922 3,869 7.31 46,989 3,543 7.54 44,112 3,336 7.56
Non-interest-earning assets....... 1,350 1,355 1,128 1,623
-------- -------- ----- ------
Total assets................. $55,089 $54,277 $48,117 $45,735
------- ------- ------- -------
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Deposits........................ $33,067 4.78% $32,471 $1,556 4.79% $31,134 $1,487 4.78% $34,224 $1,603 4.68%
FHLB advances................... 14,440 5.67 14,401 812 5.64 9,499 541 5.70 5,924 342 5.77
Capitalized lease obligations... - - - - - - - - 13 1 7.69
-------------------------------- ------ ---- ------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilitIES 47,507 5.05 46,872 2,368 5.05 40,633 2,028 4.99 40,161 1,946 4.84
Non-interest-bearing liabilities... 435 378 287 6
--------- -------- ------- -------
Total liabilities............ 47,942 47,250 40,920 40,167
Retained earnings.................. 7,147 7,027 7,197 5,568
-------- -------- ------ -------
Total and retained earnings.. $55,089 $54,277 $48,117 $45,735
======= ======= ======= =======
Net interest income/interest rate
spread 2.15% $1,501 2.26% $1,515 2.55% $1,390 2.72%
===== ====== ===== ====== ==== ====== ====
Net interest-earning assets..........$ 5,997 $ 6,050 $6,356 $3,951
======== ======= ====== ======
Net interest margin.................. 2.84% 3.22% 3.15%
===== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities.... 112.62% 112.91% 115.64% 109.84%
======= ======= ====== ======
</TABLE>
- 7 -
<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, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------- ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------- --------------------
VOLUME RATE NET VOLUME RATE NET
--------- --------- -------- ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest earning deposits............ $ 83 $ (7) $ 76 $ 3 $ -- $ 3
Investments.......................... (153) (30) (183) (56) 1 (55)
Mortgage-backed securities........... 461 (12) 449 7 (14) (7)
Loans receivable, net................ (90) 74 (16) 267 (1) 266
---- -- ---- --- --- ---
Total interest income............. 301 25 326 221 (14) 207
INTEREST-BEARING LIABILITIES:
Deposits............................. 64 5 69 (148) 32 (116)
FHLB advances........................ 276 (5) 271 204 (5) 199
Capitalized lease obligations........ -- -- -- (1) -- (1)
------ ----- ------ ------- ----- -------
Total interest expense............ 340 -- 340 55 27 82
----- ----- ----- ------ ----- ------
Net change in net interest income....... $(39) $ 25 $(14) $166 $(41) $125
===== ==== ==== ==== ==== ====
</TABLE>
- 8 -
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997.
The assets increased $3.6 million, or 7.0%, to $55.1 million at December
31, 1998 from $51.5 million at December 31, 1997. The increase was primarily
attributable to an increase in cash and due from banks and investments. Cash and
due from banks increased $1.7 million, or 254.0%, to $2.4 million at December
31, 1998 from $700,000 at December 31, 1997. Collateralized mortgage obligations
("CMOs") increased $3.3 million, or 70.1%, from $4.8 million at December 31,
1997 to $8.1 million at December 31, 1998, while investment securities and
mortgage-backed securities declined by $1.2 million, or 22.8%, to $4.1 million
at December 31, 1998 from $5.3 million at December 31, 1997, due to a principle
reduction on mortgage-backed securities totaling $255,000 and investment
securities being called. Loans receivable, net decreased $474,000 or 1.2%, to
$38.3 million at December 31, 1998 from $39.0 million at December 31, 1997. FHLB
stock increased $197,000, or 31.5%, to $822,000 at December 31, 1998, from
$625,000 at December 31, 1997. The source of funds used to increase the balance
of investments were from increases in borrowings from the Federal Home Loan Bank
and increases in deposits.
Deposits increased $1.2 million, or 3.8%, to $33.1 million at December
31, 1998 from $31.9 million at December 31, 1997. The increase was primarily due
to the addition of a new branch office located in Hyde Park, which opened in
October 1997.
Advances from the Federal Home Loan Bank ("FHLB") increased $2.2
million, or 17.5%, to $14.4 million at December 31, 1998 from $12.3 million at
December 31, 1997. The FHLB advances were primarily used to purchase CMOs to
leverage the balance sheet.
Stockholders' equity increased $182,000, or 2.6%, to $7.15 million at
December 31, 1998 from $6.96 million at December 31, 1997. The increase was a
combination of net income of $214,000, an increase in unrealized gain on
securities of $10,000, net of income taxes, offset by the cost associated with
the Company's repurchase of 3,529 shares of its common stock totaling $63,000,
and the cost of paying quarterly dividends of $0.05 per share for four quarters
during 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
GENERAL. The Bank's net income for the year ended December 31, 1998,
increased by $19,000, or 9.7%, to $214,000 as compared to $195,000 for the year
ended December 31, 1997, primarily due to an increase in other income of
$161,000 to $292,000 for fiscal year 1998 from $131,000 for fiscal year 1997,
offset by an increase in general, administrative and other expense of $120,000
to $1.4 million for fiscal year 1998 from $1.3 million for fiscal 1997, and a
reduction in net interest income after provision for loan loss of $20,000 to
$1.48 million for fiscal year 1998 from $1.50 million for fiscal year 1997.
INTEREST INCOME. Interest income for the year ended December 31, 1998
was $3.9 million compared to $3.5 million for the year ended December 31, 1997,
an increase of $326,000 or 9.2%. The increase in interest income was primarily
due to a $6.0 million increase in the average interest earning assets from $47.0
million for the year ended December 31, 1997 to $52.9 million for the year ended
December 31, 1998, offset by a 23 basis point decrease in the average yield on
those assets from 7.54% for the year ended December 31, 1997 to 7.31% for the
year ended December 31, 1998. The increase in average interest earning assets
was primarily in CMOs, with an average balance of $7.6 million for fiscal year
1998, compared to $397,000 for fiscal year 1997. Such an increase resulted in
$475,000 in income for the year ended December 31, 1998, compared to a $10,000
in income for the year ended December 31, 1997, for a increase of $465,000. The
average outstanding balance of mortgage-backed securities decreased to $935,000
for the year ended December 31, 1998 from $1.1 million for the year ended
December 31, 1997, decreasing the interest earned on mortgage-backed securities
to $62,000 for the year ended December 31, 1998 from $78,000 for the year ended
December 31, 1997, a decrease of $16,000, or 20.3%. The average balance of
interest bearing deposits increased from $558,000 for the year ended December
31, 1997 to $2.7 million for the year ended December 31, 1998. The increases
were offset by decreases in investments of $2.3 million to $4.0 million for the
year ended December 31, 1998, compared with $6.3 million for the year ended
December 31, 1997. Loans receivable also decreased by $1.2 million to $37.8
million for the year ended December 31, 1998 from $38.9 million for the year
ended December 31, 1997. The reduction in average loans receivable was due to
management's decision to sell low yielding fixed rate loans to protect the Bank
- 9 -
<PAGE>
when interest rates begin to rise.
INTEREST EXPENSE. Interest expense increased by $339,000, or 16.7%, to
$2.4 million for the year ended December 31, 1998 from $2.0 million for the year
ended December 31, 1997. The increase was due to an increase in interest expense
on advances from the FHLB of $271,000, or 50.0%, to $812,000 for the year ended
December 31, 1998 from $541,000 for the year ended December 31, 1997, primarily
due to an increase in the average balance of borrowings from the FHLB increased
$4.9 million from $9.5 million for the year ended December 31, 1997, to $14.4
million for the year ended December 31, 1998. Such cost increased was offset by
a decrease in the interest rate on average borrowings from the FHLB from 5.70%
for the year ended 1997 to 5.64% for the year ended December 31, 1998. Interest
expense on deposits also increased $69,000 from $1.5 million for the year ended
December 31, 1997 to $1.6 million for the year ended December 31, 1998. This was
due to an increase in the average interest bearing deposits of $1.3 million from
$31.1 million for the year ended December 31, 1997 to $32.5 million for the year
ended December 31, 1998, and an increase in the average interest rate paid on
such deposits to 4.79% for the year ended December 31, 1998 compared to 4.78%
for the year ended December 31, 1997.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
increased $7,000 to $18,000 for the year ended December 31, 1998, compared to
$11,000 for the year ended December 31, 1997. The increase resulted from the
Bank replenishing the reserves for the amount that charge offs exceeded
recoveries, or $17,000 for the year ended December 31, 1998 compared to $3,000
for the year ended December 31, 1997. 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 an improvement in non-performing loans as of December 31, 1998 to
$54,000 at December 31, 1998, from $174,000 at December 31, 1997.
OTHER INCOME. Other income increased $161,000, or 122.5%, from $131,000
for the year ended December 31, 1997 to $292,000 for the year ended December 31,
1998. The increase was primarily due to the gain on sale of loans of $124,000
for the year ended December 31, 1998, compared to no such sales for the year
ended December 31, 1997. In February 1998, the Bank received approval to sell
loans to Freddie Mac. During 1998, the Bank sold $8.2 million in loans. The Bank
also had gains on sale of investments of $12,000 and gains on sale of real
estate owned of $6,000 for the year ended December 31, 1998, compared to no
sales for the year ended December 31, 1997. Service fee income also increased in
1998 by $19,000, or 14.2%, for the year ended December 31, 1998 from $131,000
for the year ended December 31, 1997, to $150,000 for the year ended December
31, 1998, primarily due to the Bank changing it's fee structure.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES. General, administrative and
other expenses increased $120,000, or 9.1%, to $1.4 million for the year ended
December 31, 1998 from $1.3 million for the year ended December 31, 1997. The
increase was primarily due to an increase in the compensation and employee
benefits of $104,000, or 18.9%, from $551,000 for the year ended December 31,
1997 to $655,000 for the year ended December 31, 1998. The increase in
compensation and employee benefits is primarily due to an increase in salary
expense due to a full year of staffing the new branch and normal salary
adjustments, as well as the maintenance of stock-based benefit plans. The
occupancy and equipment increased $27,000 or 14.4%, from $185,000 for the year
ended December 31, 1997 to $212,000 for the year ended December 31, 1998,
primarily due to the new branch.
INCOME TAX EXPENSE. The tax expense increased by $1,000 or 1.0% from
$119,000 for the year ended December 31, 1997 to $120,000 for the year ended
December 31, 1998. The increase in income taxes was due to the increase in the
net income before taxes from $314,000 for the year ended December 31, 1997 to
$334,000 the year ended December 31, 1998. The effective tax rate for the year
ended December 31, 1998 and 1997 was 35.9% and 37.9%, respectively.
- 10 -
<PAGE>
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 the 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
the year ended December 31, 1996 to $47.0 million for the year ended 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
ended December 31, 1997 from $35.5 million for the year ended 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 the year ended December 31, 1997 from $343,000 for the year ended December
31, 1996, offset by a decrease in interest expense on deposits of $116,000 from
$1.6 million for the year ended December 31, 1996 to $1.5 million for the 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 ended December 31, 1996 to $9.5
million for the year ended December 31, 1997, whereas the average interest
bearing deposits decreased $3.1 million from $34.2 million for the year ended
December 31, 1996 to $31.1 million for the year ended December 31, 1997. The
Bank has experienced an increase in the interest rate paid on interest bearing
deposits to 4.78% for the year ended December 31, 1997 compared to 4.68% for the
year ended December 31, 1996. The interest rate on average borrowing from the
FHLB decreased from 5.77% for the year ended 1996 to 5.70% for the year ended
December 31, 1997.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
increased $11,000 for the year ended December 31, 1997 compared to no provision
for the year ended 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 ended December 31, 1996 to $131,000 for the year ended December 31,
1997. The decrease was primarily due to no gain on sale of real estate owned for
the year ended December 31, 1997 compared to $12,000 for the year ended December
31, 1996 and no gain on sale of investments for the year ended December 31, 1997
compared to $26,000 for the year ended December 31, 1996, offset by an increase
in service fee income of $16,000, or 13.6%, to $131,000 for the year ended
December 31, 1997 from $115,000 for the year ended 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 ended
December 31, 1997 from $1.28 million for the year ended 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,
- 11 -
<PAGE>
or 22.8%, from $448,000 for the year ended December 31, 1996 to $551,000 for the
year ended 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 ended December 31, 1996 to $185,000 for the
year ended 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 ended
December 31, 1996 to $85,000 for the year ended December 31, 1997. Other
expenses increased $153,000, or 46.9%, 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 the year ended December 31, 1996 to
$21,000 for the year ended 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.
INCOME TAX EXPENSE. The tax expense increased to $38,000, or 46.9%, from
$81,000 for the year ended December 31, 1996 to $119,000 for the year ended
December 31, 1997. The increase in income taxes is due to the increase in net
income before taxes from $267,000 for the year ended December 31, 1996 to
$314,000 for the year ended December 31, 1997. The effective tax rates for the
years ending December 31, 1997 and 1996 were 34% and 30%, 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 source of funds, deposits flows and
mortgage prepayments are greatly influenced by general interest rates, economics
conditions and competition. 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 savings 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 24%,17%, and
21.6%, at December 31, 1998, 1997 and 1996, 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, including CMOs. During the years ended December 31, 1998, 1997, and
1996, the Bank originated mortgage loans in the amounts of $20.5 million $6.5
million, and $9.3 million, respectively, and consumer loans in the amount of
$1.7 million, $2.4 million, and $1.3 million, respectively. In 1998, the Company
increased its investments in CMOs from $4.8 million for the year ended 1997 to
$8.1 million for the year ended 1998.
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
- 12 -
<PAGE>
additional cushion of at least 100 to 200 basis points. At December 31, 1998,
the Bank maintained a leverage ratio of 11.5% and total capital to risk weighted
assets ratio of 24.2%. 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, 199, cash and
short term investments totaled $2.5 million.
At December 31, 1998, the Bank had outstanding loan commitments
(including undisbursed loan proceeds and unused line of credits) of $3.1
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, 1998, totaled
$13.9 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>
[CLARK, SCHAEFER, HACKETT & CO. LETTERHEAD]
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, 1998 and 1997, and the related consolidated statements
of income, comprehensive income, changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
February 2, 1999
- 14 -
<PAGE>
LENOX BANCORP INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
December 31,
----------------------------
1998 1997
Cash and due from banks (including interest
bearing deposits of $1,759,439 and
$245,760 at December 31, 1998 and 1997) $ 2,350,276 $ 663,856
Certificates of deposit 183,091 172,686
Investment securities - available for
sale, at fair value (amortized cost of
$3,303,267 and $4,293,779 at
December 31, 1998 and 1997) 3,300,922 4,291,434
Mortgage-backed securities - available for
for sale, at fair value (amortized cost
of $798,607 and $1,026,034 at
December 31, 1998 and 1997) 805,018 1,030,094
Collateralized mortgage obligations - held to
maturity (fair value of $5,992,275 and
$4,761,235 at December 31, 1998 and 1997) 5,925,580 4,765,592
Collateralized mortgage obligations - available
for sale, at fair value (amortized cost
of $2,166,515 at December 31, 1998) 2,179,132 -
Loans receivable, net 38,308,042 39,002,257
Loans held for sale - at lower of cost or market 220,020 -
Accrued interest receivable:
Loans 161,133 153,435
Mortgage-backed securities 5,009 6,760
Collateralized mortgage obligations 39,666 26,525
Investments and certificates of deposit 63,221 84,098
Property and equipment, net 563,802 598,090
Federal Home Loan Bank stock - at cost 822,200 625,100
Prepaid expenses and other assets 156,666 88,681
Prepaid federal income taxes 5,652 -
------------- ------------
$ 55,089,430 $ 51,508,608
============= ============
See accompanying notes to financial statements.
- 15 -
<PAGE>
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Deposits $ 33,066,738 31,866,533
Advances from Federal Home Loan Bank 14,440,006 12,287,123
Advance payments by borrowers for taxes
and insurance 162,405 134,075
Accrued expenses 161,474 117,669
Accrued federal income taxes - 40,000
Deferred federal income taxes 112,172 98,583
------------- ------------
47,942,795 44,543,983
------------- ------------
Commitments - -
Stockholders' equity:
Common stock-authorized 2,000,000 shares no par value, 425,677 issued and
404,413 and 407,942 outstanding at December 31, 1998
and 1997 - -
Additional paid in capital 3,743,279 3,712,823
Retained earnings - substantially restricted 4,216,005 4,072,811
Unearned ESOP shares (240,463) (281,723)
Shares acquired for Stock Incentive Plan (235,469) (255,293)
Less 21,264 and 17,735 shares held in treasury
at December 31, 1998 and 1997 (347,728) (285,125)
Accumulated other comprehensive income:
Unrealized gain on available for sale
securities, net of income taxes 11,011 1,132
------------- ------------
7,146,635 6,964,625
------------- ------------
$ 55,089,430 $ 51,508,608
============= ============
</TABLE>
- 16 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Income
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 2,960,490 2,976,736 2,710,337
Mortgage-backed securities 62,257 78,082 79,968
Collateralized mortgage obligations 474,868 9,915 -
Investments and interest bearing deposits 315,449 441,694 516,614
Federal Home Loan Bank 55,664 36,354 29,235
------------ --------- ---------
3,868,728 3,542,781 3,336,154
------------ --------- ---------
Interest expense:
Deposits 1,555,783 1,487,274 1,603,571
Borrowed money and capitalized leases 811,897 541,184 342,828
------------ --------- ---------
2,367,680 2,028,458 1,946,399
------------ --------- ---------
Net interest income before provision
for loan losses 1,501,048 1,514,323 1,389,755
Provision for loan losses 17,500 10,500 -
------------ --------- ---------
Net interest income after provision
for loan losses 1,483,548 1,503,823 1,389,755
------------ --------- ---------
Other income:
Service fee and other income 149,566 130,988 115,343
Gain on sale of real estate owned 6,357 - 12,295
Gain on sale of investments 11,648 - 25,917
Gain on sale of loans 123,942 - -
------------ --------- ---------
291,513 130,988 153,555
------------ --------- ---------
General, administrative and other expenses:
Compensation and employee benefits 654,730 550,460 448,229
Occupancy and equipment 211,689 185,002 166,833
Federal deposit insurance premiums 19,397 21,288 282,673
Franchise taxes 85,426 84,495 52,221
Other operating expenses 469,370 479,258 326,247
------------ --------- ---------
1,440,612 1,320,503 1,276,203
------------ --------- ---------
Income before provision for
income taxes 334,449 314,308 267,107
Provision for income taxes 120,190 119,019 81,000
------------ --------- ---------
Net income $ 214,259 195,289 186,107
============ ========= =========
Basic earnings per share (since July 1, 1996) $ 0.59 0.51 0.13
============ ========= =========
Diluted earnings per share (since July 1, 1996) $ 0.57 0.51 0.13
============ ========= =========
</TABLE>
See accompanying notes to financial statements.
- 17 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Comprehensive Income
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 214,259 195,289 186,107
Other comprehensive income, net of tax
Unrealized gains (losses) on available for
sale sercurities:
Unrealized holding gains (losses)
during the year 17,566 69,744 (132,018)
Reclassification adjustments for gains
included in net income (7,687) - (17,105)
----------- ------- ------
Net gain (loss) recognized in other
comprehensive income 9,879 69,744 (149,123)
----------- ------- ------
Comprehensive income $ 224,138 265,033 36,984
=========== ======= ======
</TABLE>
- 18 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional Unearned Stock on Available
Common Paid in Retained ESOP Incentive Treasury for Sale
Stock Capital Earnings Shares Plan Stock Securities Total
----- ------- -------- ------ ---- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - - 3,767,619 - - - 80,511 3,848,130
Reorganization to a stock company
with the issuance of common
stock - 3,708,196 - (340,540) - - - 3,367,656
Net income for the year ended
December 31, 1996 - - 186,107 - - - - 186,107
Change in net unrealized loss on
available-for-sale securities net of
deferred tax of $72,374 - - - - - - (149,123) (149,123)
ESOP shares committed to be
allocated at average market price - 2,567 - 14,460 - - - 17,027
---- --------- --------- -------- ------ ------- ------- ---------
Balance at December 31, 1996 $ - 3,710,763 3,953,726 (326,080) - - (68,612) 7,269,797
---- --------- --------- -------- ------ ------- ------- ---------
</TABLE>
See accompanying notes to financial statements.
- 19 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional Unearned Stock on Available
Common Paid in Retained ESOP Incentive Treasury for Sale
Stock Capital Earnings Shares Plan Stock Securities Total
----- ------- -------- ------ ---- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - 3,710,763 3,953,726 (326,080) - - (68,612) 7,269,797
Net income for the year ended
December 31, 1997 - - 195,289 - - - - 195,289
ESOP shares committed to be
allocated at average market price - 11,610 - 44,357 - - - 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 - (9,550) - - 9,550 - - -
Amortization of Stock Incentive Plan - - - - 9,268 - - 9,268
Change in net unrealized gain on
available-for-sale securities net of
deferred tax of $35,933 - - - - - - 69,744 69,744
Cash dividends of $.20 per share - - (76,204) - - - - (76,204)
------ --------- --------- -------- -------- -------- ----- ---------
Balance at December 31, 1997 $ - 3,712,823 4,072,811 (281,723) (255,293) (285,125) 1,132 6,964,625
------ --------- --------- -------- -------- -------- ----- ---------
</TABLE>
See accompanying notes to financial statements.
- 20 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statement of Changes in Stockholders' Equity
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional Unearned Stock on Available
Common Paid in Retained ESOP Incentive Treasury for Sale
Stock Capital Earnings Shares Plan Stock Securities Total
----- ------- -------- ------ ---- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ - 3,712,823 4,072,811 (281,723) (255,293) (285,125) 1,132 6,964,625
Net income for the year ended
December 31, 1998 - - 214,259 - - - - 214,259
ESOP shares committed to be
allocated at average market price - 28,197 - 41,260 - - - 69,457
Shares acquired to be held in treasury - - - - - (62,603) - (62,603)
Stock Incentive Plan awards - 2,259 - - (2,259) - - -
Amortization of Stock Incentive Plan - - - - 22,083 - - 22,083
Change in net unrealized gain on
available-for-sale securities net of
deferred tax of $5,089 - - - - - - 9,879 9,879
Cash dividends of $.20 per share - - (71,065) - - - - (71,065)
----- --------- --------- -------- -------- -------- ------ ---------
Balance at December 31, 1998 $ - 3,743,279 4,216,005 (240,463) (235,469) (347,728) 11,011 7,146,635
===== ========= ========= ======== ======== ======== ====== =========
</TABLE>
See accompanying notes to financial statements.
- 21 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Interest and dividends received $ 3,797,577 3,517,133 3,239,825
Interest paid (2,341,148) (1,975,424) (1,937,876)
Loans disbursed for sale in the secondary market (8,398,600) - -
Proceeds from sale of loans in the secondary market 8,214,110 - -
Loan origination fees received 16,563 27,322 27,841
Other fees 148,214 130,647 108,856
Cash paid to suppliers and employees (1,242,194) (1,155,544) (1,306,003)
Income taxes paid (157,342) (119,322) -
--------- --------- ---------
Net cash provided by operating activities 37,180 424,812 132,643
------- -------- -------
Cash flows from investing activities:
Property and equipment additions (36,551) (392,852) (28,183)
Proceeds from sale of equipment 1,750 - 11,500
Purchase of mortgage-backed securities -
available for sale - - (953,053)
Repayments of mortgage-backed securities 218,806 118,546 221,316
Proceeds from sale of mortgage-backed securities -
available for sale - - 636,303
Purchase of collateralized mortgage obligations -
held to maturity (1,857,798) (4,765,592) -
Purchase of collateralized mortgage obligations -
available for sale (2,166,515) - -
Repayments of collateralized mortgage obligations 698,683 - -
Purchase of certificates of deposit (10,405) (10,406) (10,406)
Purchase of Federal Home Loan Bank stock (141,600) (152,900) -
Loan disbursements (13,972,581) (8,884,327) (10,578,760)
Loans purchased (2,468,313) (798,000) (884,168)
Loan principal repayments 17,118,607 8,154,305 7,313,477
Purchase of investment securities - available for sale (2,703,500) - (6,886,789)
Maturity of investments - available for sale 3,100,000 1,900,000 1,820,000
Proceeds from sale of investments - available for sale 608,813 - 4,893,785
Proceeds from sale of real estate acquired through
foreclosure 40,424 - 52,204
------- -------- ------
Net cash used by investing activities (1,570,180) (4,831,226) (4,392,774)
----------- ----------- -----------
Net cash flows used by operating and investing
activities (subtotal carried forward) (1,533,000) (4,406,414) (4,260,131)
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
- 22 -
<PAGE>
LENOX BANCORP INC.
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net cash flows used by operating and investing
activities (subtotal brought forward) (1,533,000) (4,406,414) (4,260,131)
Cash flows from financing activities:
Net increase (decrease) in deposits 1,200,205 (684,722) (1,117,683)
Borrowings from Federal Home Loan Bank 2,780,000 5,825,000 2,075,000
Repayment of Federal Home Loan Bank loans (627,117) (544,580) (395,779)
Payments on capitalized lease obligations - (4,867) (11,395)
Purchase of shares for future Stock Incentive Plan
awards - (274,111) -
Purchase of shares to be held in treasury (62,603) (285,125) -
Proceeds from sale of stock upon conversion - - 3,575,549
Dividends paid on common stock (71,065) (76,204) -
-------- -------- ---------
Net cash provided by financing activities 3,219,420 3,955,391 4,125,692
---------- ---------- ---------
Increase (decrease) in cash and cash equivalents 1,686,420 (451,023) (134,439)
Cash and due from banks at beginning of period 663,856 1,114,879 1,249,318
-------- ---------- ---------
Cash and due from banks at end of period $ 2,350,276 663,856 1,114,879
============ ======== =========
</TABLE>
- 23 -
<PAGE>
LENOX BANCORP INC.
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.
The Bancorp's business consists of attracting deposits from the
general public and applying those funds in the origination of
residential and consumer loans.
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.
- 24 -
<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 in debt and equity securities
Investments in debt and equity securities are classified upon
acquisition into one of 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.
Gains or losses on the sale 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.
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.
- 25 -
<PAGE>
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan.
In 1998, the Bancorp began selling all eligible fixed rate,
single-family loans originated in the secondary market. Loans held
for sale are carried at the lower of cost or market, determined in
the aggregate. In computing cost, deferred loan origination fees and
costs are aggregated with the principal balances of the related
loans.
The Bancorp retains the servicing on loans sold and agrees to remit
to the investor loan principal and interest at agreed-upon rates.
These rates can differ from the loan's contractual interest rate due
to servicing fees retained.
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.
Loans, including impaired loans, are generally classified as
non-accrual if they are past due as to maturity or payment of
principal or interest for a period of more than 90 days, unless such
loans are well-secured and in the process of collection. Loans that
are on a current payment status or past due less than 90 days may
also be classified as non-accrual if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are
reasonably assured of repayment within an acceptable period of time,
and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and
principal. While a loan is classified as non-accrual, interest income
is generally recognized on a cash basis.
- 26 -
<PAGE>
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.
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.
- 27 -
<PAGE>
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.
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.
- 28 -
<PAGE>
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.
Recent accounting pronouncements
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. This standard was adopted for the year ended
December 31, 1998.
- 29 -
<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131
significantly changes the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
SFAS No. 131 uses "management approach" to disclose financial and
descriptive information about an enterprise's reportable operating
segments which s based on reporting information the way that
management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being
reported. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this
standard for the year ended December 31, 1998 did not have an impact
on the Bancorp's financial statements.
Earnings per share
Weighted average shares for December 31, 1998, 1997 and 1996 have
been restated for the adoption of SFAS No. 128 "Earnings Per Share".
Earnings per common share have been computed on the basis of the
weighted average number of common shares outstanding, and, when
applicable, those stock options that are dilutive. Earnings per
common share does not include shares purchased for the stock
incentive plan that have not been awarded.
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, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and
agencies securities $ 3,303,267 3,945 6,290 3,300,922
Mortgage-backed
securities 798,607 8,558 2,147 805,018
----------- ------ ----- ---------
$ 4,101,874 12,503 8,437 4,105,940
=========== ====== ===== =========
</TABLE>
- 30 -
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <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
========= ====== ====== =========
</TABLE>
The amortized cost and estimated market values of investments and
mortgage-backed securities at December 31, 1998 and 1997 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, 1998 December 31, 1997
----------------- -----------------
Estimated Estimated
Market Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in five to ten years $ 703,246 705,362 2,096,458 2,102,670
Due in over ten years 2,600,021 2,595,560 2,197,321 2,188,764
Mortgage-backed
securities 798,607 805,018 1,026,034 1,030,094
---------- ---------- --------- ---------
$ 4,101,874 4,105,940 5,319,813 5,321,528
========= ========= ========= =========
</TABLE>
The amortized cost and market values of investment securities by call date
at December 31, 1998 are as follows:
Amortized Market
Cost Value
---- -----
Callable in one year or less $ 2,600,021 2,595,560
Callable in one to three years 703,246 705,362
---------- ----------
$ 3,303,267 3,300,922
========= =========
- 31 -
<PAGE>
Proceeds and resulting gains and losses realized from sale of investments
and mortgage-backed securities for years ended December 31, 1998, 1997, and
1996 were as follows:
Net
Realized
Gross Gross Gross Gain
Proceeds Gains Losses (Loss)
-------- ----- ------ ------
Year ended December 31, 1998 $ 608,813 11,648 - 11,648
Year ended December 31, 1997 - - - -
Year ended December 31, 1996 5,530,089 37,294 11,377 25,917
The amortized cost and estimated fair values of collateralized mortgage
obligations held to maturity are as follows:
December 31, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Collateralized
mortgage obligations $ 5,925,580 68,405 1,710 5,992,275
========= ====== ===== =========
December 31, 1997
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Collateralized
mortgage obligations $ 4,765,592 22,585 26,942 4,761,235
========= ====== ====== =========
- 32 -
<PAGE>
The amortized cost and estimated market values of collateralized mortgage
obligations held to maturity at December 31, 1998 and 1997 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.
December 31, 1998 December 31, 1997
----------------- -----------------
Estimated Estimated
Market Market
Cost Value Cost Value
---- ----- ---- -----
Due in five to ten years $1,473,563 1,476,281 - -
Due in over twenty years 4,452,017 4,515,994 4,765,592 4,761,235
--------- --------- --------- ---------
$5,925,580 5,992,275 4,765,592 4,761,235
========= ========= ========= =========
The amortized cost and estimated fair values of collateralized mortgage
obligations available for sale are as follows:
December 31, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Collateralized
mortgage obligations $ 2,166,515 30,000 17,383 2,179,132
========= ====== ====== =========
At December 31, 1998, all collateralized mortgage obligations available for
sale are due after twenty years. Expected maturities will differ from
contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
- 33 -
<PAGE>
3. Loans Receivable:
Loans receivable, including loans held for sale, are summarized as follows:
1998 1997
---- ----
Mortgage loans secured by one to
four family residences $ 34,345,002 35,380,451
Multi-family residential real estate 1,560,682 798,000
Home equity line of credit 1,175,446 997,660
Consumer 1,719,060 1,974,352
Unsecured consumer line of credit 121,278 99,825
Passbook loans 43,348 15,739
------------ ------------
38,964,816 39,266,027
------------ ------------
Less:
Loans in process 352,635 144,717
Allowance for loan loss 66,472 66,341
Deferred loan fees 17,647 52,712
------------ ------------
436,754 263,770
------------ ------------
$ 38,528,062 39,002,257
========== ==========
At December 31, 1998 and 1997, adjustable rate loans approximated
$18,489,000 and $16,424,000.
As discussed previously, the Bancorp has sold certain whole loans in the
secondary market, retaining servicing on the loans sold. Loans sold and
serviced for others totaled approximately $7,695,000 at December 31, 1998.
All of the loans held for sale at December 31, 1998 will be sold with the
servicing retained by the Bancorp.
Mortgage servicing rights of $92,009 were capitalized in 1998. The fair
value of mortgage servicing rights approximates the current book value as of
December 31, 1998. Amortization of mortgage servicing rights was $9,974 for
the year 1998.
- 34 -
<PAGE>
Activity in the allowance for loan losses are as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Beginning balance $ 66,341 57,770 60,050
Provision for loan
losses 17,500 10,500 -
Charge off of loans (21,195) (2,963) (4,330)
Recoveries of prior
charge-offs 3,826 1,034 2,050
------- ------- -------
$ 66,472 66,341 57,770
====== ====== ======
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 $817,840 and $828,879 as of December
31, 1998 and 1997, respectively. An analysis of loan activity for the years
ended December 31, 1998 and 1997 follows:
1998 1997
---- ----
Outstanding balance, beginning $ 828,879 575,451
New loans issued 156,000 358,480
Repayments (167,039) (105,052)
------- -------
Outstanding balance, ending $ 817,840 828,879
======= =======
- 35 -
<PAGE>
4. Property and Equipment:
Property and equipment at December 31, 1998 and 1997 is summarized by major
classification as follows:
1998 1997
---- ----
Land and building $ 324,828 321,311
Furniture and equipment 338,424 319,205
Leasehold improvements 244,466 244,466
------- -------
907,718 884,982
Accumulated depreciation 343,916 286,892
------- -------
$ 563,802 598,090
======= =======
In 1993, the Bancorp constructed an addition with a cost of $126,938 to
the building that it is currently leasing as its main office. 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. The net book
value of the addition and related leasehold improvements at December
31, 1998 was $172,423. The amount that the Bancorp will receive if the
lease is not renewed on December 31, 1999 is $33,000.
Effective July 1, 1995, the Bancorp entered into a lease with Procter
and Gamble for its main office facilities that expires December 31,
1999. Rent expense for the years ended December 31, 1998, 1997 and 1996
was $22,986, $22,977 and $22,975 respectively. Future minimum lease
payments on the lease at December 31, 1998 are $35,660 for 1999.
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, who is presently evaluating the situation.
The Bancorp previously leased its facilities on a year to year basis
from the Procter and Gamble Company at a nominal annual amount. There
is a reasonable possibility that the Bancorp, in the near term, may be
required to obtain an alternate site for its main office. The effect
this could have on business operations is not known.
The Bancorp has 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. During 1998, 1997 and 1996 sub-lease income
recognized by the Bancorp was $2,216, $15,084 and $1,034 respectively.
- 36 -
<PAGE>
5. Deposits
Deposit amounts are summarized as follows:
December 31,
1998 1997
---------------------- ------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
Statement savings $ 4,593,450 2.49% 5,071,176 2.73%
NOW and money market accounts 5,283,359 2.47 5,120,059 2.86
Other 49,165 1.99 53,521 2.38
----------- ----------
9,925,974 10,244,756
--------- ----------
Certificates:
Three months 158,175 4.04 2,111,988 6.57
Six months 1,418,436 4.94 1,251,007 5.52
Nine months 812,418 5.18 609,155 5.71
One year 7,103,414 5.52 4,285,331 5.80
Fifteen months 610,084 5.14 196,597 5.84
Eighteen months 1,604,948 5.57 1,972,124 5.85
Two years 3,058,632 5.76 2,169,232 5.62
Three years 627,840 5.76 588,161 6.08
Four years 484,584 7.04 617,310 6.86
Five years 7,262,233 6.26 7,820,872 6.30
----------- ---- ---------- ----
23,140,764 5.76 21,621,777 6.06
---------- ---- ---------- ----
$ 33,066,738 4.78% 31,866,533 5.01%
========== ==== ========== ====
Scheduled maturities of certificate accounts are as follows:
1998 1997
---- ----
Within one year $ 13,938,759 12,086,611
1 - 2 years 5,484,191 4,796,963
2 - 3 years 1,559,468 2,299,911
Over 3 years 2,158,346 2,438,292
----------- -----------
$ 23,140,764 21,621,777
========== ==========
- 37 -
<PAGE>
Interest expense on deposits is summarized as follows:
December 31,
-------------------
1998 1997 1996
---- ---- ----
Statement savings $ 120,336 130,228 142,814
NOW and Money Market 142,188 144,080 143,361
Certificates of Deposit 1,293,259 1,212,966 1,317,396
--------- --------- ---------
$ 1,555,783 1,487,274 1,603,571
========= ========= =========
The aggregate amount of certificates of deposit in denominations of $100,000
or more was $4,224,476 and $3,998,557 at December 31, 1998 and 1997.
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 $34,875 and $48,691
less accumulated depreciation of $33,838 and $44,779 at December 31, 1998
and 1997 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:
1999 $ 2,351,344
2000 2,882,567
2001 1,581,695
2002 5,081,063
2003 79,969
Subsequent years 2,463,368
-----------
$ 14,440,006
============
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 $21.7 million for future advances.
- 38 -
<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 was signed into law and was
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 $61,000 of tax reserves accumulated after 1987,
resulting in addition tax payments of $21,000. 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 earnings at December 31, 1998
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.
An analysis of the provision for federal income taxes is as follows:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Current $ 111,690 108,019 63,000
Deferred 8,500 11,000 18,000
--------- -------- ------
$ 120,190 119,019 81,000
======= ======= ======
- 39 -
<PAGE>
At December 31, 1998 and 1997, the deferred components of the Bancorp's
income tax liabilities, as included in the statements of financial condition
are summarized as follows:
1998 1997
---- ----
Deferred tax liabilities:
FHLB stock dividends $ 120,100 101,200
Bad debt reserve - 4,000
Net unrealized gains on available
for sale securities 5,672 583
Depreciation 3,000 11,400
--------- --------
Gross deferred tax liabilities 128,772 117,183
--------- --------
Deferred tax assets:
Bad debt reserve 2,000 -
Deferred loan fees 4,300 8,400
Amortization of stock awards 3,500 3,200
ESOP expense 4,800 2,600
Other 2,000 4,400
--------- --------
Gross deferred tax assets 16,600 18,600
--------- --------
Valuation allowance - -
--------- --------
Net deferred tax liability $ 112,172 98,583
======= ========
The Bancorp's income tax expense differed from the statutory federal rate of
34% as follows:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Tax expense at statutory rate $ 113,713 106,864 90,816
Sur - tax exemption - - (6,678)
Increase in deferred tax rate - 6,907 -
Permanent book/tax differences 10,396 - -
Other (3,919) 5,248 (3,138)
-------- --------- -------
$ 120,190 119,019 81,000
======= ======= ======
Effective tax rate 35.9% 37.9% 30.3%
==== ==== ====
- 40 -
<PAGE>
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.
December 31, 1998
--------------------------------------------------------------
Required Actual Required
Amount Amount Excess Rate Rate
------ ------ ------ ---- ----
Tier I $ 6,364,000 2,206,000 4,158,000 11.5 4.0
Tier II 6,430,000 2,129,000 4,301,000 24.2 8.0
December 31, 1997
--------------------------------------------------------------
Required Actual Required
Amount Amount Excess Rate Rate
------ ------ ------ ---- ----
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
- 41 -
<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.
- 42 -
<PAGE>
11. Retirement Plans:
401(k) Savings Plan
The Bancorp has a 401(k) savings plan that 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 matches the employee contribution to the plan up to 6%
of employee compensation. Total contributions by the Bancorp for the years
ended December 31, 1998, 1997 and 1996 were $4,386, $7,574, and $9,400
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 that
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 a ten-year period from the establishment of the plan. Expense for
shares committed to be allocated during 1998, 1997 and 1996 was $69,457,
$63,270 and $17,027. Shares committed to be allocated as of December 31,
1998, 1997 and 1996 totaled 4,043, 4,262, and 1,703 respectively. Remaining
unearned shares at December 31, 1998 were 24,046.
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.
Shares awarded to employees and non-employee directors under the plan
totaled 9,524 and 9,353 at December 31, 1998 and 1997 respectively. A
recipient earns plan share awards over a 5-year period. The Bancorp
recognized $22,083 and $9,268 amortization expense relating to these stock
awards during 1998 and 1997, respectively.
- 43 -
<PAGE>
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.
Set forth below is activity under the plan.
1997 12/31/98 Option
Options Options Options Options Price
Date of Grant Granted Exercised Forfeited Outstanding Per Share
------------- ------- --------- --------- ----------- ---------
July 21, 1997 30,735 - 3,193 27,542 $ 14.75
July 21, 1998 2,342 - - 2,342 $ 17.25
December 21, 1998 1,277 - - 1,277 $ 17.00
------- ------ -------- -------
34,354 - 3,193 31,161
====== ====== ===== ======
Exercisable in 1998 4,596
=====
Shares available for
future grants at
December 31, 1998 11,406
======
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:
1998 1997
---- ----
Net income:
As reported $ 214,259 195,289
Additional compensation expense 29,863 8,554
Pro forma 184,396 186,735
Basic earnings per share:
As reported $ 0.59 0.51
Pro forma 0.51 0.49
- 44 -
<PAGE>
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 5.64%
Expected life Life of the options which is ten years
Expected volatility 0.32% based on the 12-month history of prices
Expected dividends $0.20 per share
12. Other Expenses:
Included in other operating expenses are the following expenses that exceed
1% of interest income and other income:
1998 1997 1996
---- ---- ----
Legal and litigation $ 64,018 68,402 28,589
Other professional fees 73,281 68,463 51,899
Payroll taxes 45,230 30,050 31,280
ATM expense 43,846 55,228 40,765
Advertising 43,119 45,573 15,986
13. Fair Value of Financial Instruments:
The estimated fair values of the Bancorp's financial instruments at December
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and certificates of
deposit $ 2,533,367 2,533,367 836,542 836,542
Investments and mortgage-
backed securities 4,105,940 4,105,940 5,321,528 5,321,528
Collateralized mortgage
obligations 8,104,712 8,171,407 4,765,592 4,761,235
Loans receivable, net 38,528,062 38,954,000 39,002,257 38,956,000
Accrued interest receivable 269,029 269,029 270,818 270,818
</TABLE>
- 45 -
<PAGE>
Financial liabilities:
Deposits:
Demand accounts 9,925,974 9,925,974 10,244,756 10,244,756
Certificates 23,140,764 23,406,000 21,621,777 21,638,000
FHLB advances 14,440,006 14,392,000 12,287,123 12,298,000
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, 1998 and 1997, and the
results of its operations for the year then ended.
LENOX BANCORP INC.
Statements of Financial Condition
---------------------------------
1998 1997
---- ----
Assets:
Cash $ 707,314 820,237
Investment in Lenox Savings Bank 2,375,573 2,131,448
Accounts receivable and prepaid expenses 64,917 56,217
--------- ---------
$ 3,147,804 3,007,902
========= =========
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and
accrued expenses $ 5,757 9,789
Stockholders' equity:
Common stock - -
Additional paid in capital 3,700,905 3,698,646
Retained earnings 264,802 121,608
Less unearned ESOP shares (240,463) (281,723)
Shares acquired for Stock Plan (111,687) (128,689)
Less 28,767 and 25,409 shares
held in treasury (471,510) (411,729)
--------- ---------
$ 3,147,804 3,007,902
========= =========
- 46 -
<PAGE>
Statements of Operations
Interest income $ 32,277 27,902
Equity in earnings of Lenox Savings 244,125 245,352
Professional fees (57,926) (75,655)
Other operating expenses (14,491) (19,389)
Franchise taxes (5,126) (8,921)
Income tax benefit (expense) 15,400 26,000
------- -------
Net income $ 214,259 195,289
======= =======
15. Commitments and Contingencies:
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, 1998 and 1997.
Loan Unused
Commitments Lines of Credit
----------- ---------------
1998 $ 1,209,200 1,864,610
1997 399,600 1,080,415
In the opinion of management, the loan commitments equaled or exceeded
prevalent market interest rates as of December 31, 1998, and all commitments
will be funded via cash flow from operations and existing excess liquidity.
Of the total loan commitments, at December 31, 1998, $70,000 were fixed rate
residential loans. Management expects no losses as a result of these
transactions.
- 47 -
<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 0 to 31 cents per $100 of deposits (as compared
to the previous range of 23 to 31 cents per $100 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
would 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 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
1996. 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 that
applies to the Savings Bank is the lowest risk category of $2,000 per year.
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.
- 48 -
<PAGE>
17. Earnings Per Share:
Earnings per share for the years ended December 31, 1998, 1997 and 1996 is
calculated as follows:
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common
stockholders $ 214,259 362,430 $0.59
====
Effect of Dilutive Securities:
Stock plan awards - 8,563
Stock options - 3,899
---------- ---------
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 214,259 374,892 $0.57
======= ======= ====
For the Year Ended December 31, 1997
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
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
======= ======= =====
- 49 -
<PAGE>
For the Year Ended December 31, 1996
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
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
====== ======= =====
18. Selected Quarterly Financial Data (unaudited):
Summarized quarterly financial information (in thousands) for 1998 and 1997
is as follows:
1998
----------------------------------------
Quarter Ended
-------------
3/31/98 6/30/98 9/30/98 12/31/98
------- ------- ------- --------
Interest income $ 968 971 961 969
Interest expense 568 601 602 597
--- --- --- ---
Net interest income 400 370 359 372
Provision for loan losses - 5 5 7
----- ----- ----- -----
Net interest income after
provision for loan losses 400 365 354 365
Other income 63 61 70 97
Other expenses 364 346 357 374
--- --- --- ---
Income before provision
for income taxes 99 80 67 88
Provision for income taxes 34 27 23 36
---- ---- ---- ----
Net income $ 65 53 44 52
==== ==== ==== ====
Basic earnings per share $ 0.18 0.15 0.12 0.14
==== ==== ==== ====
Diluted earnings per share $ 0.17 0.14 0.12 0.14
==== ==== ==== ====
Earnings per share for the first three quarters of 1998 has been adjusted
for the effect of unallocated ESOP shares and unearned stock award shares.
- 50 -
<PAGE>
1997
---------------------------------------
Quarter Ended
-------------
3/31/97 6/30/97 9/30/97 12/31/97
------- ------- ------- --------
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 before provision
for income taxes 114 92 106 2
Provision 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)
==== ==== ==== ===
Earnings per share for all quarters has been restated to reflect the
adoption of SFAS No. 128.
- 51 -
<PAGE>
OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
<S> <C>
OFFICERS DIRECTORS
VIRGINIA M. DEISCH RICHARD C. HARMEYER CURTIS L. JACKSON
President and Chief Executive Officer Chair of the Board Director
DIANE P. HUNT HENRY E. BROWN ROBERT R. KELLER
Vice President, Chief Operating Officer and Secretary Vice-Chair of the Board Director
MICHAEL P. COOPER GAIL R. BEHYMER JOHN C. LAME
Chief Financial Officer and Treasurer Director Director
VIRGINIA M. DEISCH REBA ST. CLAIR
Director Director
All above directors are members of the board of
Lenox Bancorp, Inc. and Lenox Savings Bank.
CORPORATE INFORMATION
STOCK PRICE INFORMATION ANNUAL MEETING OF SHAREHOLDERS
Lenox Bancorp, Inc.'s common stock trades over the The Annual Meeting of the Shareholders of
counter through the National Daily Quotation Service "Pink Lenox Bancorp, Inc. will be held at 3:00 p.m.,
Sheet " published by the National Quotation Bureau, Inc. May 7, 1999 at:
under the symbol: LNXC. The table below shows the
reported high and low sales prices of the common stock LENOX SAVINGS BANK
during the periods indicated in 1997 and 1998. 5255 BEECH STREET
ST. BERNARD, OHIO 45217
All Shareholders are cordially invited to attend.
High Low STOCK TRANSFER AGENT AND REGISTRAR
Fourth Quarter, 1998 $17.75 $14.00 Inquiries regarding stock transfer, registration,
Third Quarter, 1998 $18.25 $13.00 lost certificates or changes in name and address
Second Quarter, 1998 $19.50 $17.25 should be directed to the stock transfer agent and
First Quarter, 1998 $21.00 $16.25 registrar by writing:
- -------------------- ------ ------
Fourth Quarter, 1997 $16.75 $16.25
Third Quarter, 1997 $16.63 $14.75 FIFTH THIRD BANK
Second Quarter, 1997 $15.00 $14.00 30 FOUNTAIN SQUARE PLAZA
First Quarter, 1997 $14.50 $13.50 CINCINNATI, OHIO 45263
ATTENTION: SHAREHOLDER SERVICES
Lenox Bancorp, Inc. had approximately 222 shareholders at
December 31, 1998 based upon shareholders of record and CORPORATE COUNSEL
an estimate of shares held in nominee names.
MULDOON, MURPHY & FAUCETTE LLP
INVESTOR INFORMATION: 5101 WISCONSIN AVENUE, N.W.
A COPY OF LENOX BANCORP, INC.'S ANNUAL REPORT ON FORM WASHINGTON, D.C. 20016
10-KSB, TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, IS AVAILABLE WITHOUT CHARGE BY WRITING OUR INDEPENDENT AUDITORS
CORPORATE OFFICE:
CLARK, SCHAEFER, HACKETT & CO.
VIRGINIA M. DEISCH 105 EAST FOURTH STREET, SUITE 1600
PRESIDENT AND CHIEF EXECUTIVE OFFICER CINCINNATI, OHIO 45202
5255 BEECH STREET
ST. BERNARD, OHIO 45217
(513) 242-6900
</TABLE>
Shareholders, investors, and analysts interested in additional
information may contact the above.
- 52 -
EXHIBIT 23.0 CONSENT OF CLARK, SCHAEFER, HACKETT & CO.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(No. 333-59605) on Form S-8 of Lenox Bancorp, Inc. pertaining to the 1997
Incentive Plan of our report dated February 2, 1999, relating to the
consolidated balance sheets of Lenox Bancorp, Inc. as of December 31, 1998 and
1997 and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998, which report appears in the Annual Report
on Form 10KSB for the year ended December 31, 1998.
/s/ CLARK, SCHAEFER, HACKETT & CO.
- ----------------------------------
CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The Schedule contains summary financial information extracted from the Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,350
<INT-BEARING-DEPOSITS> 183
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,285
<INVESTMENTS-CARRYING> 5,926
<INVESTMENTS-MARKET> 5,993
<LOANS> 38,594
<ALLOWANCE> 66
<TOTAL-ASSETS> 55,089
<DEPOSITS> 33,067
<SHORT-TERM> 179
<LIABILITIES-OTHER> 436
<LONG-TERM> 14,261
0
0
<COMMON> 0
<OTHER-SE> 7,147
<TOTAL-LIABILITIES-AND-EQUITY> 55,089
<INTEREST-LOAN> 2,960
<INTEREST-INVEST> 853
<INTEREST-OTHER> 56
<INTEREST-TOTAL> 3,869
<INTEREST-DEPOSIT> 1,556
<INTEREST-EXPENSE> 812
<INTEREST-INCOME-NET> 2,368
<LOAN-LOSSES> 18
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 1,441
<INCOME-PRETAX> 334
<INCOME-PRE-EXTRAORDINARY> 334
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 7.31
<LOANS-NON> 0
<LOANS-PAST> 54
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2
<ALLOWANCE-OPEN> 66
<CHARGE-OFFS> 21
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 66
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 66
</TABLE>
