<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-28012
LONDON FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Ohio 34-1800830
- -------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 East High Street, London, Ohio 43140
- -------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (614) 852-0787
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
None Common Stock, no par value per share
- ----------------------------------------- ------------------------------------
Name of each exchange on which registered) (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 past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer'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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on The Nasdaq SmallCap Market as of December 11, 1996, was
$5,209,893. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant).
As of December 1, 1996, there were 529,000 of the Registrant's common
shares issued and outstanding.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The following portions of the London Financial Corporation Annual
Report to Shareholders for the fiscal year ended September 30, 1996, are
incorporated by reference into Part II of this Form 10-KSB:
1. Market Price of LFC's Common Shares and Related Shareholder Matters;
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations; and
3. Consolidated Financial Statements.
The following portions of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of London Financial Corporation are incorporated
by reference into Part III of this Form 10-KSB:
1. Voting Securities and Ownership of Certain Beneficial Owners and
Management; and
2. PROPOSAL ONE - ELECTION OF DIRECTORS -- Compensation of Executive
Officers and Directors.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
London Financial Corporation ("LFC") was incorporated under Ohio law in
October 1995 at the direction of The Citizens Loan & Savings Company
("Citizens") for the purpose of purchasing all of the capital stock of Citizens
to be issued in connection with the conversion of Citizens from mutual to stock
form (the "Conversion"). On March 29, 1996, the effective date of the
Conversion, LFC acquired 100 common shares of Citizens. The principal business
of LFC since the effective date of the Conversion has been holding all of the
issued and outstanding shares of Citizens.
Citizens is a savings and loan association which was organized under
Ohio law in 1891. As an Ohio savings and loan association, Citizens is subject
to supervision and regulation by the Office of Thrift Supervision (the "OTS")
and the Ohio Department of Commerce, Division of Financial Institutions (the
"Division"). Citizens is a member of the Federal Home Loan Bank (the "FHLB") of
Cincinnati, and the deposit accounts of Citizens are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC") in the Savings
Association Insurance Fund (the "SAIF").
Citizens conducts business from its office located at 2 East High
Street in London, Ohio. The principal business of Citizens is the origination of
construction and permanent mortgage loans secured by first mortgages on one- to
four-family residential real estate located in Madison County, Ohio, the primary
market area of Citizens. Citizens also originates construction and permanent
mortgage loans secured by multifamily real estate (over four units) and
nonresidential real estate in its market area. In addition to real estate
lending, Citizens originates a limited number of commercial loans and secured
and unsecured consumer loans. For liquidity and interest rate risk management
purposes, Citizens invests in interest-bearing deposits in other financial
institutions, U.S. Government and agency obligations, mortgage-backed securities
and other investments permitted by applicable law. Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC, and principal repayments on loans.
Advances from the FHLB of Cincinnati are utilized from time to time when other
sources of funds are inadequate to fund loan demand.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements, the accuracy of which
is necessarily subject to present and future risks and uncertainties. Economic
circumstances, the operations of Citizens, and LFC's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed in
Exhibit 99.2, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995", which should be read in conjunction with such forward-looking statements.
Without limiting the generality of the foregoing, the following
statements in the referenced sections of this discussion and analysis are
forward-looking and are, therefore, subject to such risks and uncertainties:
1. The discussion of interest rate risk associated with
adjustable-rate mortgage lending as set forth under "Lending
Activities - One- to Four-Family Residences;"
2. The discussion of the risk associated with multifamily mortgage
lending as set forth under "Lending Activities - Loans Secured
by Multifamily Residences;"
3. The discussion of the risk associated with nonresidential
mortgage lending as set forth under "Lending Activities - Loans
Secured by Nonresidential Real Estate;"
4. The discussion of the risk associated with construction lending
as set forth under "Lending Activities - Construction Loans;"
5. The discussion of the risk associated with consumer lending as
set forth under "Lending Activities - Consumer Loans;"
6. The discussion of sales of mortgage loans in the secondary
market as set forth under "Lending Activities - Loan
Originations and Participations;"
7. The discussion of the risk of loss associated with
nonperforming loans as set forth under "Lending Activities -
Delinquent Loans, Nonperforming Assets and Classified Assets;"
8. The discussion of the adequacy of the amount of Citizens'
allowance for loan losses as set forth under "Lending
Activities - Allowance for Loan Losses;"
9. The discussion of the maturity of certificates of deposit at
Citizens as set forth under "Deposits and Borrowings -
Deposits;" and
10. The discussion of the effect of legislation which may be
enacted as set forth under "Regulation - General; and - Federal
Deposit Insurance Corporation - Deposit Insurance and
Assessments."
MARKET AREA
The primary market area of Citizens for lending and deposit activity is
Madison County, Ohio. Madison County is primarily a suburban commuter economy
and has experienced growth in population and households in the 1990s at a higher
rate than the State of Ohio and the United States. There are relatively few
major employers and a lower number of residents employed in the finance,
insurance and real estate industries compared to persons employed in state and
local government, as the London Correctional Facility is the largest employer in
the county. Madison County is characterized by lower unemployment levels than
state or national averages and a median household income level similar to levels
in Ohio and the United States.
Citizens is the only thrift institution based in Madison County and had
a 33.9% share of such county's thrift deposits and a 10.1% share of all deposits
in such county as of June 30, 1995.
LENDING ACTIVITIES
GENERAL. The principal lending activity of Citizens is the origination
of conventional real estate loans, including construction loans, secured by one-
to four-family homes located in Madison County. Loans secured by multifamily
properties and by nonresidential real estate and loans for the construction of
residences and other properties are also offered by Citizens. In addition to
real estate lending, Citizens originates a limited number of commercial loans
and consumer loans, including loans secured by deposit accounts, automobile
loans and a limited number of other secured and unsecured loans.
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LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the loan portfolio of Citizens at
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- --------------- ----------------- ---------------------
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $21,819 75.57% $21,947 74.51% $19,553 71.29% $18,644 71.94% $18,793 73.92%
Multifamily 258 0.90 705 2.39 722 2.63 486 1.88 513 2.02
Nonresidential 4,831 16.73 4,623 15.69 4,558 16.62 4,553 17.57 4,767 18.75
Construction 1,084 3.75 1,351 4.59 1,633 5.95 1,191 4.60 351 1.38
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate 27,992 96.95 28,626 97.18 26,466 96.49 24,874 95.99 24,424 96.07
loans
Commercial loans 190 0.66 151 0.51 221 0.81 275 1.05 227 0.89
Consumer loans:
Automobile loans 152 0.53 164 0.56 258 0.94 279 1.08 260 1.02
Loans on deposits 147 0.51 122 0.41 166 0.61 169 0.65 203 0.80
Other consumer loans 392 1.35 394 1.34 315 1.15 320 1.23 310 1.22
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans 691 2.39 680 2.31 739 2.70 768 2.96 773 3.04
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 28,873 100.0% 29,457 100.00% 27,426 100.00% 25,917 100.00% 25,424 100.00%
====== ======= ======= ======= =======
Less:
Undisbursed portion of
loans in process (1,258) (885) (1,218) (798) (324)
Unearned and deferred (397) (410) (354) (319) (283)
income
Allowance for loan losses (187) (190) (191) (178) (161)
------- ------- ------- ------- -------
Net loans $27,031 $27,972 $25,663 $24,622 $24,656
======= ======= ======= ======= =======
</TABLE>
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LOAN MATURITY. The following table sets forth certain information as of
September 30, 1996, regarding the dollar amount of loans maturing in the
portfolio of Citizens based on their contractual terms to maturity. Demand
loans, home equity loans and other loans having no stated schedule of repayments
or no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-20
September 30, years years years
------------------------------ after after after
1997 1998 1999 9/30/96 9/30/96 9/30/96 Total
------ ------ ------ ------- -------- -------- --------
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $ 706 $ 736 $ 770 $1,746 $5,732 $12,129 $21,819
Multifamily and nonresidential 198 211 235 512 1,792 2,141 5,089
Construction 82 93 100 243 566 - 1,084
Commercial loans 86 96 8 - - - 190
Consumer loans 220 245 226 - - - 691
-------- -------- -------- ----------- ----------- ------------- ----------
Total $1,292 $1,381 $1,339 $2,501 $8,090 $14,270 $28,873
====== ====== ====== ====== ====== ======= =======
</TABLE>
The table below sets forth the dollar amount of all loans due after one
year from September 30, 1996, which have predetermined interest rates and have
floating or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
September 30, 1996
----------------------------
(In thousands)
<S> <C>
Fixed rates of interest $ 1,680
Adjustable rates of interest $25,901
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY RESIDENCES. The principal lending
activity of Citizens is the origination of conventional loans secured by first
mortgages on one- to four-family residences, primarily single-family residences
located within Madison County. At September 30, 1996, one- to four-family
residential loans totaled approximately $21.8 million, or 75.6% of total loans.
Citizens also offers home equity lines of credit secured by second mortgages on
properties on which Citizens holds the first mortgage. Of the total of one- to
four-family residential loans, approximately $21.6 million were secured by first
mortgages and approximately $218,000 were secured by second mortgages at
September 30, 1996.
OTS regulations and Ohio law limit the amount which Citizens may lend
in relationship to the appraised value at the time of loan origination of the
real estate and improvements which will secure the loan (the "LTV"). In
accordance with such regulations and laws, and as a matter of policy established
by the Board of Directors of Citizens, Citizens makes loans secured by one- to
four-family residences for not more than an 80% LTV.
Adjustable-rate mortgage loans ("ARMs") are offered by Citizens for
terms of up to 25 years. The interest rate adjustment periods on ARMs are one
year, and the rates are adjusted in accordance with published changes in the
cost of funds of the Federal Home Loan Bank of San Francisco. The new interest
rate at each change date is determined by adding a margin of 3.00% to the
prevailing index. The maximum allowable adjustment at each adjustment date is 2%
and the maximum allowable adjustment over the term of a loan is 6%. Citizens has
originated no fixed-rate residential real estate loans in approximately the past
10 years.
Although origination of ARMs decreases interest rate risk, such loans
involve other risks. As interest rates rise, for example, the payment by a
borrower increases to the extent permitted by the terms of his loan. Such
increase in the payment may increase the potential for default. Moreover, the
marketability of the underlying property may be adversely affected by a general
increase in interest rates. Citizens believes that such risks have not had a
material adverse effect on Citizens to date.
LOANS SECURED BY MULTIFAMILY RESIDENCES. In addition to loans on one-
to four-family properties, Citizens originates loans secured by multifamily
properties (more than four units). At September 30, 1996, loans secured by
multifamily residences totaled approximately $258,000, or 0.9% of total loans of
Citizens, consisting of one loan account which was performing in
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accordance with its terms. Multifamily loans are offered with adjustable rates
for terms of up to 25 years and have LTVs up to 80%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the property to cover operating
expenses and debt service. The profitability of a property can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Citizens attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the property and by obtaining personal guarantees on loans made to
corporations and partnerships. Citizens requires financial statements to be
submitted annually by borrowers whose outstanding loan balances are considered
by the Board of Directors to be substantial.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Citizens also originates
loans for the purchase of nonresidential real estate. Among the properties
securing the nonresidential real estate loans in the portfolio of Citizens are
office buildings and retail properties located in the primary market area of
Citizens. At September 30, 1996, approximately $4.8 million, or 16.7%, of the
total loans of Citizens were secured by mortgages on nonresidential real estate.
At such date, the largest single loan secured by nonresidential real estate had
a balance of $598,000 and was performing in accordance with its terms. The
nonresidential real estate loans made by Citizens have adjustable rates, terms
of up to 25 years and LTVs of up to 75%. For the last five years, the amount of
nonresidential real estate loans as a percent of total loans has ranged from a
high of 18.8% at September 30, 1992, to a low of 15.7% at September 30, 1995.
Citizens also makes loans for the construction of nonresidential real estate.
Although loans secured by nonresidential real estate have higher
interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Citizens has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the financial condition of the borrower, the
quality and characteristics of the income stream generated by the property and
appraisals supporting the property's valuation.
CONSTRUCTION LOANS. Citizens makes loans for the construction of
single-family houses, multifamily properties and nonresidential real estate
projects. Of the loans made by Citizens for construction of single-family
residences, all are made to owner-occupants or to professional builders. Some of
the homes for which construction loans are made to professional builders have
not been pre-sold and, therefore, involve greater risk to Citizens.
Construction loans are offered with adjustable rates for terms of up to
25 years. At September 30, 1996, the loan portfolio of Citizens included $1.1
million in construction loans, or 3.8% of total loans, including undisbursed
proceeds of approximately $756,000. All of such amount was for construction of
residential properties.
Construction loans, particularly loans involving nonresidential real
estate, generally involve greater underwriting and default risks than do loans
secured by mortgages on existing properties. Loan funds are advanced upon the
security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, it is relatively difficult to
evaluate accurately the LTV and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, Citizens would have to take control of the project and attempt either
to arrange for completion of construction or dispose of the unfinished project.
All of the construction loans in the portfolio of Citizens are secured
by property in Madison County and contiguous counties.
COMMERCIAL LOANS. Citizens occasionally makes commercial loans to
businesses in its primary market area. Such loans are typically secured by a
security interest in equipment, nonresidential real estate or other assets of
the borrower. At September 30, 1996, the commercial loan portfolio of Citizens
totaled $190,000, or 0.7% of total loans.
Commercial lending entails significant risks. Such loans are subject
to greater risk of default during periods of adverse economic conditions.
Because such loans are secured by equipment, inventory, accounts receivable and
other non-real estate assets, the collateral may not be sufficient to ensure
full payment of the loan in the event of a default.
CONSUMER LOANS. Citizens makes various types of consumer loans,
including loans made to depositors on the security of their deposit accounts,
automobile loans, home improvement loans and other secured loans and unsecured
personal loans. Consumer loans are made at varying rates of interest and for
varying terms based on the type of loan. At September 30, 1996, Citizens had
approximately $691,000, or 2.4% of total loans, invested in consumer loans.
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Consumer loans, particularly consumer loans which are unsecured or are
secured by depreciating assets such as automobiles, may entail greater risk than
residential real estate loans. Repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the lending staff of
Citizens and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel at the office of Citizens. Citizens typically obtains a credit report,
verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate which will be given as security for the loan is prepared by an
appraiser approved by the Board of Directors. Upon the completion of the
appraisal and the receipt of information on the credit history of the borrower,
the application for a loan is submitted for review in accordance with the
underwriting guidelines of Citizens. Loans of amounts less than $100,000 may be
approved by the President of Citizens. Loans of amounts between $100,000 and
$150,000 may be approved by the Executive Committee of the Board of Directors.
Loans in excess of $150,000 require approval of the full Board of Directors of
Citizens.
If a mortgage loan application is approved, Citizens typically obtains
an attorney's opinion of title. Citizens obtains title insurance on only
approximately 10% of its loans secured by real estate. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Citizens as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Citizens
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in portions based upon periodic inspections of construction progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
LOAN ORIGINATIONS AND PARTICIPATIONS. Currently, Citizens is
originating only ARMs and has no intention to sell such loans in the secondary
market. Citizens does not service loans for other financial institutions.
The following table presents the loan origination activity of Citizens
for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One- to four-family residential $3,399 $3,164 $3,695 $3,961 $2,441
Multifamily residential - - 270 - -
Nonresidential 1,180 769 1,058 987 625
Construction 1,782 2,231 2,723 1,819 1,057
Commercial 156 79 151 246 204
Consumer 657 520 638 625 658
------- -------- -------- ------- ---------
Total loans originated 7,174 6,763 8,535 7,638 4,985
Principal repayments (8,227) (4,494) (7,567) (7,145) (7,105)
Increase (decrease) in other items, net (1) 112 40 73 (527) 79
------- --------- --------- -------- ----------
Net increase (decrease) $ (941) $2,309 $1,041 $ (34) $(2,041)
====== ====== ====== ======== =======
- -----------------------------
<FN>
(1) Other items consist of deferred loan fees, allowance for loan losses
and the undisbursed portion of construction loans.
</TABLE>
In November 1995, Citizens purchased a $285,000 participation interest
in a $950,000 land development loan on property located in London, Ohio. Before
purchasing the participation interest, Citizens evaluated the creditworthiness
of the
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<PAGE> 8
borrower and the value of the property in accordance with the normal
underwriting standards of Citizens. The loan is currently performing in
accordance with its terms. Citizens has no participation interest in any other
loan.
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital
(collectively, "Lending Limit Capital"). A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying this limit, the regulations require that
loans to certain related or affiliated borrowers be aggregated.
Based on the 15% limit, Citizens was able to lend approximately
$843,600 to one borrower at September 30, 1996. The largest amount Citizens had
outstanding to one borrower and related persons or entities at September 30,
1996, was $634,000, consisting of two loans, the largest of which was $598,000.
Each of such loans is secured by real estate and was performing in accordance
with its terms on September 30, 1996.
LOAN ORIGINATION AND OTHER FEES. Citizens realizes loan origination
fees and other fee income from its lending activities and also realizes income
from late payment charges, application fees and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91 as an adjustment to yield over
the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Payments
on loans made by Citizens are due on the first day of the month with the
interest portion of the payment applicable to interest accrued during the prior
month. When a loan payment has not been made by the fifteenth of the month, a
late notice is sent. If payment is not received by the thirtieth day, a second
notice is sent. Telephone calls are made to the borrower in connection with both
the 15- and 30-day notices. Each of the loans bears a late payment penalty which
is assessed as soon as such loan is more than 15 days delinquent. The late
penalty is the greater of 5% of the payment due or $20.
When a loan secured by real estate becomes more than 90 days
delinquent, the loan is placed in nonaccrual status and a letter is sent to the
borrower by Citizens to inform the borrower that foreclosure proceedings will
begin if the loan is not brought current within 30 days. If the loan has not
been brought current within such 30-day period, the Board of Directors normally
refers the loan to an attorney to commence foreclosure proceedings.
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The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------- ------------------- -------------------- ------------------- --------------------
Percent Percent Percent Percent Percent
of total of total of total of total of total
Number Amount loans Number Amount loans Number Amount loans Number Amount loans Number Amount loans
------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ----- ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 3 $ 51 .18% 3 $ 52 .18% 6 $ 93 .34% 9 $281 1.08% 12 $331 1.30%
60 - 89 days 1 8 .03 2 3 .01 6 148 .54 4 99 .38 1 6 .02
90 days and over 4 261 .90 1 45 .15 3 75 .27 6 66 .25 14 252 .99
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total delinquent loans 8 $320 1.11% 6 $100 .34% 15 $316 1.15% 19 $446 1.71% 27 $589 2.31%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
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<PAGE> 10
Nonperforming assets include nonaccruing loans, real estate acquired by
foreclosure or by deed-in-lieu thereof, in-substance foreclosures and
repossessed assets. Citizens ceases to accrue interest on real estate loans if
the collateral value is not adequate, in the opinion of management, to cover the
outstanding principal and interest. Generally, however, Citizens ceases to
accrue such interest on a loan at any time the loan is 90 days or more
delinquent.
The following table sets forth information with respect to the accrual
and nonaccrual status of the loans and other nonperforming assets of Citizens at
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------ ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans delinquent 90+ days $ - $ - $ - $ - $ 2
Loans accounted for on a
nonaccrual basis:
Real estate
One- to four-family 237 45 75 66 222
Multifamily - - - - -
Nonresidential 24 - - - 28
Consumer - - - - -
------- ------ ------ ------- ------
Total nonaccrual loans 261 45 75 66 250
----- ------ ------ ------ ------
Total nonperforming loans 261 45 75 66 252
Real estate owned - - - - -
------- ------ ----- ------ ------
Total nonperforming assets $261 $ 45 $ 75 $ 66 $252
==== ===== ===== ===== ====
Allowance for loan losses $187 $190 $191 $178 $161
Nonperforming assets as a percent
of total assets .71% .13% .24% .21% .89%
Nonperforming loans as a percent
of total loans .90% .15% .27% .25% .99%
Allowance for loan losses as a
percent of nonperforming loans 71.65% 422.22% 254.67% 269.70% 63.89%
</TABLE>
The increase in nonperforming loans to $261,000 at September 30, 1996,
from $45,000 at September 30, 1995, was due primarily to one residential loan
account totalling $192,000 which was in the process of foreclosure. Management
of Citizens believes that such loan is adequately collateralized and anticipates
no loss on such loan account.
For the year ended September 30, 1996, gross interest income which
would have been recorded had nonaccruing loans been current in accordance with
their original terms was $15,000. Interest collected on such loans and included
in net earnings was approximately $6,000.
Real estate acquired by Citizens as a result of foreclosure proceedings
is classified as real estate owned ("REO") until it is sold. When property is so
acquired, such property is recorded by Citizens at the lower of cost or the
estimated fair value of the real estate, less estimated selling expenses, at the
date of acquisition and any write-down resulting therefrom is charged to the
allowance for loan losses. All costs incurred in maintaining REO property are
expensed from the date the property is acquired. Costs relating to the
development and improvement of the property are capitalized to the extent of
fair value. At September 30, 1996, Citizens had no REO properties.
Citizens classifies its own assets on a monthly basis in accordance
with federal regulations. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are
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<PAGE> 11
characterized by the distinct possibility that Citizens will sustain some loss
if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of Citizens is not
warranted.
The aggregate amounts of classified assets of Citizens at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994
---- ---- -----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $261 $ 45 $ 75
Doubtful -- -- --
Loss -- -- --
---- ---- ----
Total classified $261 $ 45 $ 75
==== ==== ====
assets
</TABLE>
Citizens establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, Citizens establishes specific allowances for losses in the
amount of 100% of the portion of the asset classified loss. Generally, Citizens
charges off the portion of any real estate loan deemed to be uncollectible.
Citizens analyzes each classified asset on a monthly basis to determine
whether changes in the classifications are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of any
delinquency and the reasons for the delinquency, if any, the use of the real
estate securing the loan, the status of the borrower and the appraised value of
the real estate. As such factors change, the classification of the asset will
change accordingly.
ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the
Board of Directors, reviews on a monthly basis the allowance for loan losses as
it relates to a number of relevant factors, including, but not limited to,
trends in the level of delinquent and nonperforming assets and classified loans,
current and anticipated economic conditions in the primary lending area, past
loss experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single borrowers
and changes in the composition of the loan portfolio. While management believes
that it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the final determination. The amounts in the
provision for loan losses shown in the table below for fiscal years 1992 through
1996 were determined based upon past loan experience, a review of individual
specific problem loans, if any, the estimated value of the underlying collateral
and the prevailing economic conditions. See Exhibit 99.2, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995 - Possible Inadequacy of the
Allowance for Loan Losses."
The following table sets forth an analysis of the allowance for loan
losses of Citizens for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $190 $191 $178 $161 $144
Charge-offs (3) (1) - - (13)
Recoveries - - - - -
---- ---- ---- ---- ----
Net charge-offs (3) (1) - - (13)
---- ---- ---- ---- ----
Provision for loan losses - - 13 17 30
---- ---- ---- ---- ----
Balance at end of year $187 $190 $191 $178 $161
==== ==== ==== ==== ====
Ratio of net charge-offs
to average loans outstanding
during the period .01% -% -% -% -%
Ratio of allowance for loan losses
to total loans .65% .65% .70% .69% .63%
</TABLE>
-11-
<PAGE> 12
The following table sets forth the allocation of the allowance for loan
losses of Citizens by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ------------------- ------------------- ---------------- -------------------
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ------- ------ --------- ------ --------- ------ --------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
year end
applicable to:
Real estate $181 96.95% $152 97.18% $152 96.49% $144 95.99% $133 96.07%
loans
Commercial 1 0.66 7 0.51 9 0.81 9 1.05 6 0.89
loans
Consumer 5 2.39 31 2.31 30 2.70 25 2.96 22 3.04
loans
Unallocated -- -- -- -- -- -- -- -- -- --
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total $187 100.00% $190 100.00% $191 100.00% $178 100.00% $161 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
The allowance for loan losses is based on estimates and is, therefore,
monitored monthly and adjusted as necessary to provide an adequate allowance.
-12-
<PAGE> 13
INVESTMENT ACTIVITIES
OTS regulations require that Citizens maintain a minimum amount of
liquid assets, which may be invested in interest-bearing deposits in other
financial institutions, U.S. Treasury and agency obligations, mortgage-backed
securities and certain other specified investments. The Board of Directors of
Citizens has adopted an investment policy which authorizes management to make
investments in U.S. Government and agency securities, deposits in the FHLB,
certificates of deposit in federally-insured financial institutions and
mortgage-backed securities. John J. Bodle, the President of Citizens, and Joyce
E. Bauerle, its Treasurer, have primary responsibility for implementation of the
investment policy. The investment policy of Citizens is designed primarily to
provide and maintain liquidity within regulatory guidelines, to maintain a
balance of high quality investments to minimize risk and to maximize return
without sacrificing liquidity and safety. Such investment policy currently
provides that all investment securities are held to maturity.
-13-
<PAGE> 14
The following table sets forth the composition of interest-bearing deposits,
investment securities and mortgage-backed securities of Citizens at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- -------------------------------- ------------------------------
Carrying % of Fair % of Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total value total value total
------- ------ ------ ------ ------ ------- ------- ------ ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $1,674 19.52% $1,674 19.74% $1,359 30.08% $1,359 30.32% $1,055 24.04% $1,055 25.01%
Overnight deposits 650 7.58 650 7.67 650 14.39 650 14.50 650 14.82 650 15.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total interest-bearing deposits 2,324 27.10 2,324 27.41 2,009 44.47 2,009 44.82 1,705 38.86 1,705 40.42
Investment securities:
Held to maturity:
U.S. Government and agency
securities 2,000 23.32 1,991 23.48 500 11.07 495 11.05 500 11.40 476 11.29
Available for Sale:
Corporate equity securities 220 2.57 220 2.59 -- -- -- -- -- -- -- --
Mortgage-backed securities
held to maturity 4,032 47.01 3,944 46.52 2,009 44.46 1,978 44.13 2,182 49.74 2,037 48.29
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total investments $8,576 100.00% $8,479 100.00% $4,518 100.00% $4,482 100.00% $4,387 100.00% $4,218 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
-14-
<PAGE> 15
The maturities of the interest-bearing deposits, U.S. Government and
agency obligations and mortgage-backed securities of Citizens at September 30,
1996, are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years Total
------------------ ---------------- ---------------- ----------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Weighted
value yield value yield value yield value yield value value average yield
------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits in other $2,324 5.28% $ - -% $ - -% $ - -% $2,324 $2,324 5.28%
financial
institutions
U.S. Government and
agency obligations 1,000 5.59 1,000 6.56 - - - - 2,000 1,991 6.08
Mortgage-backed
securities 58 6.26 272 6.26 2,906 6.26 796 6.26 4,032 3,944 6.26
------ ---- ------ ---- ------ ---- ---- ---- ------ ------ ----
Total $3,382 5.39% $1,272 6.50% $2,906 6.26% $796 6.26% $8,356 $8,259 5.94%
====== ==== ====== ==== ====== ==== ==== ==== ====== ====== ====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of funds
used by Citizens in lending and other investment activities. In addition to
deposits, Citizens derives funds from interest payments and principal repayments
on loans and income on earning assets. Loan payments are a relatively stable
source of funds, while deposit inflows and outflows fluctuate in response to
general interest rates and money market conditions. Citizens also utilizes FHLB
advances as an alternative source of funds.
DEPOSITS. Deposits are attracted principally from within the market
area of Citizens through the offering of a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, regular passbook savings accounts, term certificate accounts and
Individual Retirement Accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by management of Citizens based on the liquidity
requirements and growth goals of Citizens and interest rates paid by
competitors. Citizens does not use brokers to attract deposits. The amount of
deposits received by Citizens from outside its market area is not significant.
At September 30, 1996, certificates of deposit at Citizens totaled
approximately $19.1 million, or 67.9% of total deposits. Of such amount,
approximately $11.4 million in certificates of deposit mature within one year.
Based on past experience and the prevailing pricing strategies of Citizens,
management believes that a substantial percentage of such certificates will be
renewed with Citizens at maturity. If there is a significant deviation from
historical experience, Citizens can utilize borrowings from the FHLB of
Cincinnati as an alternative source of funds.
-15-
<PAGE> 16
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Citizens at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1996 1995 1994
------------------ --------------------- --------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $2,963 10.51% $ 2,459 8.04% $ 2,608 9.21%
Super NOW accounts (2) 235 0.83 268 0.88 287 1.01
Passbook savings accounts (3) 5,587 19.82 6,184 20.21 7,966 28.12
Money market accounts (4) 278 .98 387 1.26 471 1.67
------- ------- ------- ------ ------- ------
Total transaction accounts 9,063 32.14 9,298 30.39 11,332 40.01
Certificates of deposit:
4.00% or less - - 241 .79 4,620 16.31
4.01 - 6.00% 13,482 47.82 13,159 43.01 10,252 36.20
6.01 - 8.00% 5,650 20.04 7,892 25.80 1,866 6.58
8.01 - 10.00% - - 4 .01 254 .90
------- ------ ------- ------ ------- ------
Total certificates of deposit (5) 19,132 67.86 21,296 69.61 16,992 59.99
------- ------ ------- ------ ------- ------
Total deposits $28,195 100.00% $30,594 100.00% $28,324 100.00%
======= ====== ======= ====== ======= ======
- -----------------------------
<FN>
(1) The weighted average rate on NOW accounts at September 30, 1996, was
2.29%.
(2) The weighted average rate on Super NOW accounts at September 30, 1996,
was 2.49%.
(3) The weighted average rate on passbook savings accounts at September 30,
1996, was 3.00%.
(4) The weighted average rate on money market accounts at September 30,
1996, was 2.74%.
(5) The weighted average rate on all certificates of deposit, including IRA
accounts, at September 30, 1996, was 5.96%.
</TABLE>
Citizens bids on public funds from entities in its primary market area.
The amount of such deposits was approximately $79,000 at September 30, 1996.
The following table shows rate and maturity information for
certificates of deposit at Citizens at September 30, 1996:
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- --------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less $ - $ - $ - $ - $ -
4.01% to 6.00% 8,807 3,651 750 274 13,482
6.01% to 8.00% 2,583 479 89 2,499 5,650
------- ------ ---- ------ -------
Total certificates
of deposit $11,390 $4,130 $839 $2,773 $19,132
======= ====== ==== ====== =======
</TABLE>
-16-
<PAGE> 17
The following table presents the amount of certificates of deposit of
$100,000 or more at Citizens by the time remaining until maturity at September
30, 1996:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ -
Over 3 months to 6 months 311
Over 6 months to 12 months 474
Over 12 months 841
-----
Total $1,626
</TABLE>
The following table sets forth the deposit account balance activity at
Citizens for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $30,594 $ 28,324 $27,792
Deposits 51,564 49,778 65,549
Withdrawals (55,118) (48,875) (66,120)
------- -------- -------
Net deposits before interest
credited 27,040 29,227 27,221
Interest credited 1,155 1,367 1,103
------- -------- -------
Ending balance 28,195 30,594 28,324
------- -------- -------
Net increase (decrease) $(2,399) $ 2,270 $ 532
======= ======== ========
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, Citizens
is authorized to apply for advances from the FHLB of Cincinnati, provided
certain standards of creditworthiness have been met. Under current regulations,
an association must meet certain qualifications to be eligible for FHLB
advances. The extent to which an association is eligible for such advances will
depend upon whether it meets the Qualified Thrift Lender Test (the "QTL test").
If an association meets the QTL test, such association will be eligible for 100%
of the advances it would otherwise be eligible to receive. If an association
does not meet the QTL test, such association will be eligible for such advances
only to the extent it holds specified QTL test assets. At September 30, 1996,
Citizens was in compliance with the QTL test and had $300,000 in advances from
the FHLB, bearing interest at the rate of 9.25% and with a maturity date of June
2001.
COMPETITION
Citizens competes for deposits with other savings and loan
associations, savings banks, commercial banks and credit unions and with issuers
of commercial paper and other securities, including shares in money market
mutual funds. The primary factors in competition for deposits are customer
service and convenience of office location. In making loans, Citizens competes
with other savings banks, savings and loan associations, commercial banks,
mortgage brokers, consumer finance companies, credit unions, leasing companies
and other lenders. Citizens competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is intense and is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable. Citizens does not offer all of the products and
services offered by some of its competitors, particularly commercial banks.
Citizens monitors the product offerings of its competitors and adds new products
when it can do so competitively and cost effectively. See Exhibit 99.2, "Safe
Harbor Under the Private Securities Litigation Reform Act of 1995 -
Competition."
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<PAGE> 18
EMPLOYEES
As of September 30, 1996, Citizens had nine full-time employees and one
part-time employee. Citizens believes that relations with its employees are
excellent. Citizens offers health and disability benefits and a defined benefit
pension plan. None of the employees of Citizens is represented by a collective
bargaining unit.
REGULATION
GENERAL
LFC is a savings and loan holding company within the meaning of the Home
Owners Loan Act, as amended (the "HOLA"). Consequently, LFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. Because
LFC is a corporation organized under Ohio law, LFC is subject to provisions of
the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Citizens is subject to regulation, examination and oversight by the
Superintendent of the Division of Financial Institutions of the Department of
Commerce of the State of Ohio (the "Ohio Superintendent"). Because Citizens'
deposits are insured by the FDIC, Citizens also is subject to regulation and
examination by the OTS and regulatory oversight by the FDIC. Citizens must file
periodic reports with the Ohio Superintendent and the OTS concerning its
activities and financial condition. Examinations are conducted periodically by
these federal and state regulators to determine whether Citizens is in
compliance with various regulatory requirements and is operating in a safe and
sound manner. Citizens is a member of the FHLB and is subject to certain
regulations promulgated by the Board of Governors of the Federal Reserve System
(the "FRB").
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Citizens may be
regulated under federal law as a bank or be required to change its charter. Such
change in regulation or charter would likely change the range of activities in
which Citizens may engage and would probably subject Citizens to more regulation
by the FDIC. In addition, LFC might become subject to a different set of holding
company regulations which may limit the activities in which LFC may engage and
subject LFC to other additional regulatory requirements, including separate
capital requirements. At this time, LFC cannot predict when or whether Congress
may actually pass legislation regarding LFC's and Citizens' regulatory
requirements or charter. Although such legislation may change the activities in
which either LFC and Citizens may engage, it is not anticipated that the current
activities of either LFC or Citizens will be materially affected by those
activity limits. See Exhibit 99.2, "Safe Harbor Under the Private Securities
Litigation Reform Act of 1995 - Legislation and Regulation that may Adversely
Affect LFC's Earnings."
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still
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<PAGE> 19
prohibits for twelve months any business combination that would have been
prohibited but for the adoption of such an opt-out amendment. The statute also
provides that it will continue to apply to any business combination between a
person who became an Interested Shareholder prior to the adoption of such an
amendment as if the amendment had not been adopted. Neither LFC nor Citizens has
opted out of the protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3% or 50% of the outstanding voting securities of an Ohio corporation (a
"Control Share Acquisition") must be approved in advance by the holders of at
least a majority of the outstanding voting shares of such corporation
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting excluding
the voting shares owned by the acquiring shareholder. The Control Share
Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offers of all information material to a decision to
accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the cost of supervision and examination. Ohio law prescribes
the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. See " - Federal
Deposit Insurance Corporation -- State Association Activities." The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically governing
savings and loan associations, Citizens is also governed by Ohio corporate law,
to the extent such law does not conflict with the laws specifically governing
savings and loan associations.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
-19-
<PAGE> 20
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area. Citizens has received a
"satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. Citizens is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Citizens
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Citizens includes a general loan loss allowance of $187,000
at September 30, 1996.
The following table sets forth the amount and percentage level of
regulatory capital of Citizens at September 30, 1996, and the amount by which it
exceeds the minimum requirements:
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Tangible capital $5,437 15.7%
Requirement 521 1.5
-------- -----
Excess $4,916 14.2%
====== ====
Core capital $5,437 15.7%
Requirement 1,042 3.0
------- -----
Excess $4,395 12.7%
====== ====
Risk-based capital $5,624 30.3%
Risk-based requirement 1,487 8.0
------- -----
Excess $4,137 22.3%
====== ====
</TABLE>
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component. Citizens currently qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to
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more restrictive and more numerous mandatory or discretionary regulatory actions
or limits, and the OTS has less flexibility in determining how to resolve the
problems of the institution. The OTS has defined these capital levels as
follows: (1) well-capitalized associations must have total risk-based capital of
at least 10%, core risk-based capital (consisting only of items that qualify for
inclusion in core capital) of at least 6% and core capital of at least 5%; (2)
adequately capitalized associations are those that meet the regulatory minimum
of total risk-based capital of 8%, core risk-based capital of 4% and core
capital of 4% (except for associations receiving the highest examination rating,
in which case the level is 3%) but are not well-capitalized; (3)
undercapitalized associations are those that do not meet regulatory limits, but
that are not significantly undercapitalized; (4) significantly undercapitalized
associations have total risk-based capital of less than 6%, core risk-based
capital of less than 3% or core capital of less than 3%; and (5) critically
undercapitalized associations are those with tangible capital of 2% or less of
total assets. In addition, the OTS generally can downgrade an association's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the association is deemed to be engaging in an unsafe
or unsound practice because it has not corrected deficiencies that resulted in
it receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. All
undercapitalized associations must submit a capital restoration plan to the OTS
within 45 days after becoming undercapitalized. Such associations will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. Citizens' capital
at September 30, 1996, met the standards for a well-capitalized institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.
LIQUIDITY. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each association to maintain an average daily
balance of short-term liquid assets of not less than 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Citizens at September 30,
1996, was approximately $2.8 million, or 9.6%, and exceeded the then applicable
5.0% liquidity requirement by approximately $1.4 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, there was only one QTL test. Such
test required savings associations to maintain a specified level of investments
in assets that are designated as qualifying thrift investments ("QTI"), which
are generally related to domestic residential real estate and manufactured
housing and include credit card, student and small business loans, stock issued
by any FHLB, the FHLMC or the FNMA. Under such test, 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles, property
used to conduct business and 20% of liquid assets) must consist of QTI on a
monthly average basis in 9 out of every 12 months. Congress created a second QTL
test, effective September 30, 1996, pursuant to which a savings association may
also qualify under the Internal Revenue Code of 1986, as amended (the "Code"),
for thrift institution status. According to the test under the Code, at least
60% of the institution's assets (on a tax basis) must consist of specified
assets (generally loans secured by residential real estate or deposits,
educational loans, cash and certain governmental obligations). The OTS may grant
exceptions to the QTL test under certain circumstances. If a savings association
fails to meet the QTL test, the association and its holding company become
subject to certain operating and regulatory restrictions. A savings association
that fails to meet the QTL test will not be eligible for new FHLB advances. At
September 30, 1996, Citizens met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount that
a savings association can lend to one borrower to an amount equal to 15% of the
association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral."
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Certain types of loans are not subject to the lending limit. In applying the
limit on loans to one borrower the regulations require that loans to certain
related borrowers be aggregated. A general exception to the 15% limit provides
that an association may lend to one borrower up to $500,000, for any purpose. At
September 30, 1996, Citizens was in compliance with this lending limit. See
"Lending Activities - Federal Lending Limit."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program, and loans to executive officers are subject
to additional limitations. Citizens was in compliance with such restrictions at
September 30, 1996.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. LFC is an
affiliate of Citizens. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Citizens was in
compliance with these requirements and restrictions at September 30, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association is prohibited from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the net worth of the association would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion. OTS regulations also establish a system
limiting capital distributions according to ratings of associations based on
their capital level and supervisory condition.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed distribution, meet their fully phased-in capital
requirements. Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net income, current
year-to-date, plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a Tier 2 association. A Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association. Citizens meets the requirements
for a Tier 1 association and has not been notified of any need for more than
normal supervision.
The second category, Tier 2, consists of associations that before and
after the proposed distribution meet their current minimum, but not fully
phased-in, capital requirements. Associations in this category may make capital
distributions of up to 75% of net income over the most recent four quarters.
Tier 3 associations do not meet current minimum capital requirements and must
obtain OTS approval of any capital distribution. Tier 2 associations that
propose to make a capital distribution in excess of the noted safe harbor level
must also obtain OTS approval. Tier 2 associations proposed to make a capital
distribution within the safe harbor provisions and Tier 1 associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution.
As a subsidiary of LFC, Citizens is required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
Citizens paid no dividends to LFC during fiscal 1996.
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In December 1995, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, associations which are not owned by a
holding company and which have a CAMEL examination rating of 1 or 2 could make a
capital distribution without notice to the OTS, if they remain adequately
capitalized, as described above, after the distribution is made. Any other
association seeking to make a capital distribution that would not cause the
association to fall below the capital levels to qualify as adequately
capitalized or better would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distribution would be
permitted if it caused the association to become undercapitalized or worse.
HOLDING COMPANY REGULATION. LFC is a savings and loan holding company
within the meaning of the HOLA. As such, LFC has registered with the OTS and
will be subject to OTS regulations, examination, supervision and reporting
requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
As a unitary savings and loan holding company, LFC is generally subject
to no restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit LFC's ability to engage in these activities and cannot predict
if and in what form these proposals might become law. However, such limits would
not impact LFC's current activities, which consist solely of holding stock of
Citizens. The broad latitude to engage in activities under current law can be
restricted. If the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings association, the OTS may impose such restrictions as
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings association, (ii) transactions between the savings
association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At September 30, 1996, Citizens met both those
tests.
If LFC acquired control of another savings institution, other than
through a merger or other business combination with Citizens, LFC would become a
multiple savings and loan holding company. Unless the acquisition was an
emergency thrift acquisition and each subsidiary savings association met the QTL
test, the activities of LFC and any of its subsidiaries (other than Citizens or
other subsidiary savings associations) would thereafter be subject to activity
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof that is not a savings institution
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by federal
regulation as of March 5, 1987, to be engaged in by multiple holding companies,
or (vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the OTS prior to being engaged in by a multiple holding
company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located
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(or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF LFC AND CITIZENS. In
addition to the Ohio law limitations on the merger and acquisition of Citizens
and LFC, federal limitations generally require regulatory approval of
acquisitions at specified levels. Under pertinent federal law and regulations,
no person, directly or indirectly, or acting in concert with others, may acquire
control of Citizens or LFC without 60 days prior notice to the OTS. "Control" is
generally defined as having more than 25% ownership or voting power; however,
ownership or voting power of more than 10% may be deemed "control" if certain
factors are in place. If the acquisition of control is by a company, the
acquiror must obtain approval, rather than give notice, of the acquisition as a
savings and loan holding company.
In addition, any merger of Citizens must be approved by the OTS as well
as the Superintendent. Further, any merger of LFC in which LFC is not the
resulting company must also be approved by both the OTS and the Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness of
the banking and thrift industries. The FDIC administers two separate insurance
funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings
banks and the SAIF for savings associations. The FDIC is required to maintain
designated levels of reserves in each fund. Prior to October 1, 1996, the
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund have been and are being used to
pay the cost of prior thrift failures, while the reserves of the BIF met the
level required by law in May 1995. As a result, there was a significant
disparity between BIF and SAIF assessments during 1996.
Citizens is a member of the SAIF and its deposit accounts are insured by
the FDIC up to the prescribed limits. The FDIC has examination authority over
all insured depository institutions, including Citizens, and has authority to
initiate enforcement actions against federally insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the BIF and members of the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on Citizens and other
institutions in the SAIF.
Federal legislation, which was effective September 30, 1996, provided
for the recapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks holding SAIF deposits are
required to pay the same special assessment on 80% of deposits at March 31,
1995. In addition, the cost of prior thrift failures will be shared by both the
SAIF and the BIF. As a result of such cost sharing, BIF assessments for healthy
banks in 1997 will be $.013 per $100 in deposits, and SAIF assessments for
healthy institutions in 1997 will be $.064 per $100 in deposits.
Citizens had $30.6 million in deposits at March 31, 1995. Citizens paid
a special assessment of $193,000 in November 1996, which was accounted for and
recorded as of September 30, 1996. This assessment is tax-deductible, but has
reduced earnings for the year ended, and capital at, September 30, 1996.
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STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of Citizens'
activities and investments at September 30, 1996, were permissible for a federal
association.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $52.0
million of such accounts (subject to an exemption of up to $4.3 million), and of
10% of net transaction accounts in excess of $52.0 million. At September 30,
1996, Citizens was in compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks provide credit to their members in the form
of advances. Citizens is a member of the FHLB and must maintain an investment in
the capital stock of the FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of Citizens' residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
or 5% of its advances from the FHLB. Citizens is in compliance with this
requirement with an investment in stock of the FHLB of $261,000 at September 30,
1996.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance. The FHLB has established an "Affordable Housing
Program" to subsidize the interest rate of advances to member associations
engaged in lending for long-term, low- and moderate-income, owner-occupied and
affordable rental housing at subsidized rates. The FHLB reviews and accepts
proposals for subsidies under that program twice a year. Citizens has
participated in this program.
TAXATION
FEDERAL TAXATION
LFC and Citizens are both subject to the federal tax laws and
regulations which apply to corporations generally. Prior to the enactment of the
Small Business Jobs Protection Act (the "Act"), which was signed into law on
August 21, 1996, certain thrift institutions, such as Citizens, were allowed
deductions for bad debts under methods more favorable than those granted to
other taxpayers. Qualified thrift institutions could compute deductions for bad
debts using either the specific charge-off method of Section 166 of the Code or
the reserve method of Section 593 of the Code.
Under Section 593 of the Code, a thrift institution annually could
elect to deduct bad debts under either (i) the "percentage of taxable income"
method applicable only to thrift institutions, or (ii) the "experience" method
that also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an addition
to its bad debt reserve equal to 8% of its taxable income (determined without
regard to this deduction and with additional adjustments). Under the "experience
method", a thrift institution was generally allowed a deduction for an addition
to its bad debt reserve equal to the greater of (i) an amount based on its
actual average experience for losses in the current and five preceding taxable
years, or (ii) an amount necessary to restore the reserve to its balance as of
the close of the base year. A thrift institution could elect annually to compute
its allowable addition to bad debt reserves for qualifying loans
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either under the experience method or the percentage of taxable income method.
For tax years 1994, 1993 and 1992, Citizens used the percentage of taxable
income method because such method provided a higher bad debt deduction than the
experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Citizens, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Citizens to LFC is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of Citizens for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of September 30, 1996, the pre-1988 reserves of Citizens
for tax purposes totaled approximately $340,000. Citizens believes it had
approximately $2.9 million of accumulated earnings and profits for tax purposes
as of September 30, 1996, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
No representation can be made as to whether Citizens will have current or
accumulated earnings and profits in subsequent years.
In addition to the regular income tax, LFC and Citizens are subject to
a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable
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income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. In addition,
for taxable years after 1986 and before 1996, LFC and Citizens are also subject
to an environmental tax equal to 0.12% of the excess of alternative minimum
taxable income for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2.0 million.
The tax returns of Citizens have been audited or closed without audit
through fiscal year 1992. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Citizens.
OHIO TAXATION
LFC is subject to the Ohio corporation franchise tax, which, as applied
to LFC, 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, LFC may exclude 100%
of its investment in the capital stock of Citizens after the Conversion, as
reflected on the balance sheet of LFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of
Citizens. 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, LFC 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
LFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Citizens 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 book net worth
of Citizens determined in accordance with generally accepted accounting
principles. As a "financial institution," Citizens is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
1996, regarding the office facilities of Citizens:
<TABLE>
<CAPTION>
Owned or Date Net book
Location leased acquired value
-------- ------ -------- -----
<S> <C> <C> <C>
2 East High Street, London, Ohio Owned 1977 $336,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Neither LFC nor Citizens is presently involved in any material legal
proceedings. From time to time, Citizens is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Citizens.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-27-
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the 1996 Annual Report to Shareholders
(the "Annual Report") under the caption "Common Stock and Related Information"
is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements appearing in the Annual Report and
the report of Grant Thornton LLP ("Grant Thornton") dated November 22, 1996, are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 11, 1996, LFC, with the approval of its Board of Directors,
dismissed KPMG Peat Marwick ("KPMG") as LFC's independent auditor and engaged
Grant Thornton to act in such capacity. The reports of KPMG on the consolidated
financial statements of Citizens for the fiscal years ended September 30, 1994
and 1995, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles, except for a separate paragraph stating that Citizens changed its
method of accounting for investments in 1995. During the fiscal years ended
September 30, 1994 and 1995, and the interim period through July 11, 1996, there
were no disagreements between LFC or Citizens and KPMG on any matter of
accounting principles or practices, consolidated financial statement disclosure
or audit scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of LFC (the "Proxy Statement"), a copy of which
is attached as Exhibit 28 hereto, under the caption "PROPOSAL ONE - ELECTION OF
DIRECTORS -- Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"PROPOSAL ONE - ELECTION OF DIRECTORS -- Compensation of Executive Officers and
Directors" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"PROPOSAL ONE - ELECTION OF DIRECTORS -- Voting Securities and Ownership of
Certain Beneficial Owners and Management" is incorporated herein by reference.
-28-
<PAGE> 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"PROPOSAL ONE - ELECTION OF DIRECTORS -- Certain Transactions" is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C> <C>
3(a) Articles of Incorporation Incorporated by reference to the Registration Statement
on Form S-1 filed by LFC on December 8, 1995, and
amended on January 31 and February 8, 1996 (the "Form
S-1"), Exhibit 3.1
3(b) Certificate of Amendment to
Articles of Incorporation
3(c) Code of Regulations Incorporated by reference to the Form S-1, Exhibit 3.2
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
28 Proxy Statement
99.1 Revised Report of KPMG Peat Marwick LLP
99.2 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995
</TABLE>
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on July 19, 1996, and an amendment to
such Form 8-K was filed on July 27, 1996, to report the change in the
Registrant's independent accountant.
-29-
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
LONDON FINANCIAL CORPORATION
By:John J. Bodle
--------------------------------
John J. Bodle, President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
John I. Andrix Rodney A. Bell
----------------------- ---------------------
John I. Andrix Rodney A. Bell
Director Director
Date: December 19, 1996 Date: December 19, 1996
John J. Bodle Donald E. Forrest
----------------------- ---------------------
John J. Bodle Donald E. Forrest
Chief Executive Officer, Principal Director
Financial Officer, Principal Accounting
Officer and Director
Date: December 19, 1996 Date: December 19, 1996
Edward D. Goodyear Kennison A. Sims
----------------------- ---------------------
Edward D. Goodyear Kennison A. Sims
Director Director
Date: December 19, 1996 Date: December 19, 1996
-30-
<PAGE> 1
EXHIBIT 3(b)
CERTIFICATE OF AMENDMENT
BY SHAREHOLDERS TO THE ARTICLES OF INCORPORATION OF
LONDON FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name Of Corporation)
John J. Bodle, who is:
[ ] Chairman of the Board [X] President [ ] Vice President (Check one)
and
Rebecca A. Lohr, who is:
[X] Secretary [ ] Assistant Secretary (Check one)
of the above named Ohio corporation for profit do hereby certify that: (check
the appropriate box and complete the appropriate statements)
[ ] a meeting of the shareholders was duly called for the purpose of
adopting this amendment and held on __________________, 19___ at which
meeting a quorum of the shareholders was present in person or by proxy,
and by the affirmative vote of the holders of shares entitling them to
exercise ___________% of the voting power of the corporation.
[X] in a writing signed by all of the shareholders who would be entitled to
notice of a meeting held for that purpose, the following resolution to
amend the articles was adopted:
[ ] RESOLVED, that the Amended Articles of Incorporation of the
Corporation, a copy of which is attached hereto as Exhibit A (the
"Amended Articles"), be, and they hereby are, adopted; and
FURTHER RESOLVED, that the Amended Articles shall supersede and replace
the existing Articles of Incorporation of the Corporation.
IN WITNESS WHEREOF, the above named officers, acting for and on the behalf
of the corporation, have hereto subscribed their names this 7th day of February,
1996.
By John J. Bodle
-----------------------------
President
By Rebecca A. Lohr
-----------------------------
Secretary
NOTE: Ohio law does not permit one officer to sign in two capacities, Two
separate signatures are required, even if this necessitates the election of a
second officer before the filing can be made.
<PAGE> 2
EXHIBIT A
AMENDED ARTICLES OF INCORPORATION
OF
LONDON FINANCIAL CORPORATION
FIRST: The name of the corporation shall be London Financial
Corporation.
SECOND: The place in Ohio where the principal office of the
corporation is to be located is the City of London, County of Madison.
THIRD: The purpose for which the corporation is formed is to
engage in any lawful act or activity for which corporations may be formed under
Section 1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: The authorized shares of the corporation shall be five
million (5,000,000) common shares, each without par value. The directors of the
corporation may adopt an amendment to the Articles of Incorporation of the
corporation in respect of any unissued or treasury shares of any class and
thereby fix or change: the division of such shares into series and the
designation and authorized number of each series; the dividend rate; the dates
of payment of dividends and the dates from which they are cumulative; the
liquidation price; the redemption rights and price; the sinking fund
requirements; the conversion rights; and the restrictions on the issuance of
shares of any class or series.
FIFTH: (A) The board of directors of the corporation shall
have the power to cause the corporation from time to time and at any time to
purchase, hold, sell, transfer or otherwise deal with (i) shares of any class or
series issued by it, (ii) any security or other obligation of the corporation
which may confer upon the holder thereof the right to convert the same into
shares of any class or series authorized by the articles of the corporation, and
(iii) any security or other obligation which may confer upon the holder thereof
the right to purchase shares of any class or series authorized by the Articles
of Incorporation of the corporation.
(B) The corporation shall have the right to repurchase, if and
when any shareholder desires to sell, or on the happening of any event is
required to sell, shares of any class or series issued by the corporation.
(C) The authority granted in this Article Fifth shall not
limit the plenary authority of the directors to purchase, hold, sell, transfer
or otherwise deal with shares of any class or series, securities or other
obligations issued by the corporation or authorized by the Articles of
Incorporation of the corporation.
SIXTH: Notwithstanding any provision of the Ohio Revised Code
requiring for any purpose the vote, consent, waiver or release of the holders of
shares of the corporation entitling them to exercise any proportion of the
voting power of the corporation or of any class or classes thereof, such action,
unless expressly otherwise provided by statute, may be taken by the vote,
consent, waiver or release of the holders of shares entitling them to exercise
not less than a majority of the voting power of the corporation or of such class
or classes; provided, however, that if the board of directors of the corporation
shall recommend against the approval of any of the following matters, the
affirmative vote of the holders of shares entitling them to exercise not less
than seventy-five percent (75%) of the voting power of any class or classes of
shares of the corporation which entitle the holders thereof to vote in respect
of any such matter as a class shall be required to adopt:
(A) A proposed amendment to the Articles of Incorporation
of the corporation;
(B) A proposed amendment to the Code of Regulations of
the corporation;
(C) A proposal to change the number of directors by
action of the shareholders;
(D) An agreement of merger or consolidation providing for
the proposed merger or consolidation of the
corporation with or into one or more other
corporations;
(E) A proposed combination or majority share acquisition
involving the issuance of shares of the corporation
and requiring shareholder approval;
<PAGE> 3
(F) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets,
with or without the goodwill, of the corporation; or
(G) A proposed dissolution of the corporation.
SEVENTH: Until the expiration of five years from the date of
the acquisition by the corporation of the capital stock of The Citizens Loan &
Savings Company ("Citizens") to be issued in connection with the conversion of
Citizens from mutual to stock form, no Person (hereinafter defined) shall
directly or indirectly Offer (hereinafter defined) to Acquire (hereinafter
defined) or Acquire the Beneficial Ownership (hereinafter defined) of more than
10% of any class of any equity security of the corporation; provided, however,
that such prohibition shall not apply to the purchase of shares by underwriters
in connection with a public offering or the power of trustees to vote shares of
the corporation held by an employee stock ownership plan for the benefit of
employees of Citizens or the corporation. In the event that any shares of the
corporation are Acquired in violation of this Article Seventh, all shares
Beneficially Owned by any Person in excess of 10% of any class of equity
security of the corporation shall not be counted as shares entitled to vote,
shall not be voted by any Person and shall not be counted as voting shares in
connection with any matter submitted to the shareholders for a vote. For
purposes of this Article Seventh, the following terms shall have the meanings
set forth below:
(A) "Person" includes an individual, a group acting in
concert, a corporation, a partnership, an
association, a joint stock company, a trust, an
unincorporated organization or similar company, a
syndicate or any other group formed for the purpose
of acquiring or disposing of the equity securities of
the corporation, but does not include an employee
stock ownership plan for the benefit of employees of
Citizens or the corporation.
(B) "Offer" includes every offer to buy or otherwise
acquire, solicitations or an offer to sell, tender
offer for, or request or invitation for tenders of, a
security or interest in a security for value.
(C) "Acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or
otherwise.
(D) "Acting in concert" means (i) participation in a
joint activity or conscious parallel action towards a
common goal, whether or not pursuant to an express
agreement, or (ii) a combination or pooling of voting
or other interests in the securities of an issuer for
a common purpose pursuant to any contracts,
understanding, relationship, agreement or other
arrangement, whether written or otherwise.
(E) "Beneficial Ownership" shall include, without
limitation, (i) all shares directly or indirectly
owned by a Person, by an Affiliate (hereinafter
defined) of such Person or by an Associate
(hereinafter defined) of such Person or such
Affiliate, (ii) all shares which such Person,
Affiliate or Associate has the right to acquire
through the exercise of any option, warrant or right
(whether or not currently exercisable), through the
conversion of a security, pursuant to the power to
revoke a trust, discretionary account or similar
arrangement, or pursuant to the automatic termination
of a trust, discretionary account or similar
arrangement, and (iii) all shares as to which such
Person, Affiliate or Associate directly or indirectly
through any contract, arrangement, understanding,
relationship or otherwise (including, without
limitation, any written or unwritten agreement to act
in concert) has or shares voting power (which
includes the power to dispose or to direct the
disposition of such shares) or both.
(F) "Affiliate" shall mean a Person that directly or
indirectly, through one or more intermediaries,
controls or is controlled by, or is under common
control with, another Person.
(G) "Associate" of a Person shall mean (i) any
corporation or organization (other than the
corporation or a subsidiary of the corporation) of
which the Person is an officer or partner or is,
directly or indirectly, the beneficial owner of ten
percent or more of any class of equity securities,
(ii) any trust or other estate in which the Person
has a substantial beneficial interest or as to which
the Person serves as trustee or in a
<PAGE> 4
similar fiduciary capacity, except a tax-qualified
employee stock benefit plan in which the Person has a
substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity or a
tax-qualified employee stock benefit plan, and (iii)
any relative or spouse of the Person, or any relative
of such spouse, who has the same home as the Person
or is a director or officer of the corporation or any
of its parents or subsidiaries.
EIGHTH: No shareholder of the corporation shall have, as a
matter of right, the pre-emptive right to purchase or subscribe for shares of
any class, now or hereafter authorized, or to purchase or subscribe for
securities or other obligations convertible into or exchangeable for such shares
or which by warrants or otherwise entitle the holders thereof to subscribe for
or purchase any such shares.
NINTH: No shareholder of the corporation shall have the right
to vote his or her shares cumulatively in the election of directors of the
corporation.
TENTH: These articles of incorporation shall supersede and
replace the existing articles of incorporation of the corporation.
<PAGE> 1
EXHIBIT 13
Dear Shareholders:
It is with great pleasure that I present the first Annual Report to
Shareholders of London Financial Corporation for the fiscal year ended September
30, 1996.
The year 1996 has been an eventful year for our company. As you are
aware, The Citizens Loan & Savings Company successfully completed its conversion
from the mutual form of organization to the permanent stock form of ownership on
March 29, 1996. A total of 529,000 common shares of London Financial Corporation
were issued in connection with the conversion, resulting in net capital proceeds
of approximately $4.5 million.
On the legislative front, we witnessed one of the most important events
to occur in the thrift industry in years, as legislation was enacted at the end
of September 1996 to recapitalize the Savings Association Insurance Fund
("SAIF"), through which deposits at Citizens are insured. Because the Bank
Insurance Fund, the fund which insures bank deposits, was fully capitalized,
most commercial banks were paying deposit insurance premiums that were very low
in comparison to thrifts, such as Citizens. As a result, thrifts were at a
competitive disadvantage with banks. The new legislation will significantly
lower deposit insurance premiums in the future for Citizens. In order to
accomplish the SAIF recapitalization, however, a one-time assessment was levied
on most thrifts. Citizens, therefore, paid an assessment of approximately
$200,000 in the fourth quarter of fiscal 1996.
Net earnings for fiscal 1996 totaled $224,000, an $81,000, or 57%,
increase over the $143,000 in net earnings recorded during fiscal 1995. Assets
grew by $2.7 million, or 7.8%, during fiscal 1996, as a direct result of the
conversion. Although the $200,000 assessment adversely affected our earnings,
the Board of Directors of London Financial Corporation believes that the
recapitalization of the SAIF will be in London Financial's long-term interest as
we strive toward our goal of continuing to serve the mortgage lending needs of
the residents of our communities.
On behalf of the Board of Directors, management and employees of London
Financial Corporation, I would like to thank you for your confidence and
investment in our company. We can assure you that we are all committed to
maximizing the return on your investment in our common shares.
Sincerely,
John J. Bodle
President
<PAGE> 2
BUSINESS OF LONDON FINANCIAL CORPORATION
================================================================================
London Financial Corporation ("LFC" or the "Company"), a unitary savings and
loan holding company incorporated under the laws of the State of Ohio, owns all
of the issued and outstanding common shares of The Citizens Loan & Savings
Company ("Citizens"), a savings and loan association chartered under the laws of
the State of Ohio. In March 1996, LFC acquired all of the common shares issued
by Citizens upon its conversion from a mutual savings and loan association to a
stock savings and loan association (the "Conversion"). Since its formation,
LFC's activities have been limited primarily to holding the common shares of
Citizens.
As a savings and loan holding company, LFC is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the United States
Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of Ohio, Citizens is subject to regulation,
supervision and examination by the OTS and the Ohio Department of Commerce,
Division of Financial Institutions (the "Division"). Citizens is also a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF LFC'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
===============================================================================
There were 529,000 common shares of LFC outstanding on September 30, 1996, and
held of record by approximately 499 shareholders. Price information with respect
to LFC's common shares is quoted on The Nasdaq SmallCap Market ("Nasdaq"). The
high and low sales prices for the common shares of LFC for the periods
indicated, as quoted by Nasdaq, were as follows:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
June 30, 1996 September 30, 1996
------------- ------------------
<S> <C> <C>
High $11.37 $11.25
Low $ 9.75 $10.00
</TABLE>
One cash dividend was declared during fiscal 1996 in the fourth quarter in the
amount of $0.06 per common share of LFC.
The income of LFC consists of dividends which may periodically be declared and
paid by the Board of Directors of Citizens on the common shares of Citizens held
by LFC and earnings on the approximately $2.46 million in net proceeds retained
by LFC from the sale of LFC's common shares in connection with the Conversion.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, Citizens is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Citizens, in the event of a complete liquidation, to those members
of Citizens before the Conversion who maintain a savings account at Citizens
after the Conversion) or applicable regulatory capital requirements prescribed
by the OTS.
OTS regulations applicable to all savings associations provide that a savings
association which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital (as
1
<PAGE> 3
defined by OTS regulations) that is equal to or greater than the amount of its
capital requirements is generally permitted without OTS approval (but subsequent
to 30 days' prior notice to the OTS) to make capital distributions, including
dividends, during a calendar year in an amount not to exceed the greater of (1)
100% of such association's net earnings to date during the calendar year, plus
an amount equal to one-half the amount by which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations which have total capital in excess of the capital
requirements, but which have been notified by the OTS that they are in need of
more than normal supervision, will be subject to restrictions on dividends. A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
Citizens currently meets all of its regulatory capital requirements and, unless
the OTS determines that Citizens is an institution requiring more than normal
supervision, Citizens may pay dividends in accordance with the foregoing
provisions of the OTS regulations.
2
<PAGE> 4
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding LFC at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
SELECTED FINANCIAL CONDITION 1996 1995 1994 1993 1992
AND OTHER DATA: -------- -------- -------- -------- -------
(Dollars in thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $36,817 $34,152 $31,737 $30,961 $28,414
Cash and due from banks 319 835 851 531 373
Interest-bearing time deposits
in other financial institutions 2,324 2,009 1,705 3,007 2,587
Investment securities (1) 2,220 500 500 502 -
Mortgage-backed securities 4,032 2,009 2,182 1,492 -
Loans receivable - net 27,031 27,972 25,663 24,622 24,656
Deposits 28,195 30,594 28,324 27,792 25,340
FHLB advances 300 300 300 300 500
Shareholders' equity (2) 7,907 3,224 3,080 2,835 2,489
Number of full-service offices 1 1 1 1 1
Year ended September 30,
-------------------------------------------------------------------
SUMMARY OF EARNINGS: 1996 1995 1994 1993 1992
-------- -------- --------- -------- ------
(In thousands)
Interest income $2,769 $2,334 $2,164 $2,339 $2,781
Interest expense 1,505 1,396 1,131 1,195 1,565
------ ------ ------ ------ ------
Net interest income 1,264 938 1,033 1,144 1,216
Provision for loan losses - - 13 18 29
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 1,264 938 1,020 1,126 1,187
Other income 71 74 70 66 68
General, administrative and other
expense 1,014 792 722 678 647
------ ------- ------- ------- -------
Earnings before income taxes 321 220 368 514 608
Federal income taxes 97 77 122 168 200
------ ------- ------- ------- -------
Net earnings $ 224 $ 143 $ 246 $ 346 $ 408
====== ======= ======= ======= =======
- ----------------------
<FN>
(1) Includes securities designated as available for sale.
(2) Consisted solely of retained earnings at September 30, 1992 through
1995, inclusive.
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS: At September 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 0.62% 0.44% 0.79% 1.18% 1.40%
Return on average equity 4.36 4.51 8.24 12.79 18.93
Interest rate spread 3.06 2.62 3.19 3.80 4.03
Net interest margin 3.67 2.95 3.44 4.06 4.31
General, administrative and other
expense to average assets 2.80 2.42 2.31 2.31 2.22
Average equity to average assets 14.21 9.68 9.56 9.22 7.41
Asset quality ratios:
Nonperforming assets to total assets 0.71 0.13 0.24 0.21 0.89
Nonperforming loans to total loans 0.90 0.15 0.27 0.25 0.99
Allowance for loan losses to total 0.65 0.65 0.70 0.69 0.63
loans
Allowance for loan losses to
nonperforming loans 71.65 422.22 254.67 269.70 63.89
Net (charge-offs) recoveries to
average loans 0.01 - - - (0.05)
Average interest-earning assets to
average interest-bearing liabilities 113.83 107.52 106.54 106.06 104.96
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of LFC and Citizens should be read in conjunction with and with
reference to the consolidated financial statements, and the notes thereto,
presented in this Annual Report.
LFC was incorporated for the purpose of owning all of the outstanding common
shares of Citizens following the Conversion. As a result, the discussion and
analysis that follows pertains primarily to the financial condition of LFC on a
consolidated basis and to the results of operations of Citizens.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Citizens, and LFC's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein, but also include changes in the
economy and changes in interest rates in the nation and LFC's primary market
area.
Without limiting the generality of the foregoing, some of the statements in the
referenced sections of this discussion and analysis are forward looking and are,
therefore, subject to such risks and uncertainties:
1. Management's determination of the amount of the
allowance for loan losses as set forth under
"Financial Condition," "Comparison of Results of
Operation for the Years Ended September 30, 1996 and
1995" and "Comparison of Results of Operations for
the Years Ended September 30, 1995 and 1994;"
2. Management's analysis of the interest rate risk of
Citizens as set forth under "Asset and Liability
Management;"
3. Management's discussion of the liquidity of Citizens'
assets and the regulatory capital of Citizens as set
forth under "Liquidity and Capital Resources;" and
4. The discussion of the anticipated effect of
legislation which may be enacted as set forth under
"Charter Unification Legislation."
FINANCIAL CONDITION
- -------------------------------------------------------------------------------
The Company's consolidated total assets amounted to $36.8 million at September
30, 1996, an increase of $2.7 million, or 7.8%, over the $34.1 million in total
assets at September 30, 1995. Such increase in assets was funded primarily by
the $4.5 million in net proceeds from the Company's offering of common shares in
connection with the Conversion, and undistributed net earnings of $192,000,
which were partially offset by a $2.4 million decline in deposits.
5
<PAGE> 7
Cash and cash equivalents and investment securities totaled $4.9 million at
September 30, 1996, an increase of $1.5 million, or 45.4%, over September 30,
1995, levels. During the fiscal year ended September 30, 1996, $1.7 million of
investment securities were purchased, which consisted primarily of
intermediate-term U.S. Government and agency obligations totaling $1.5 million
and corporate equity securities totaling $214,000.
Mortgage-backed securities totaled $4.0 million at September 30, 1996, an
increase of $2.0 million over September 30, 1995, levels. Such increase resulted
from purchases totaling $2.3 million, which were partially offset by principal
repayments of $266,000. Such purchases were funded primarily with proceeds from
the Company's offering of common shares and consisted of adjustable-rate
mortgage-backed securities bearing interest at rates ranging from 6.13% to
6.50%.
Loans receivable totaled $27.0 million at September 30, 1996, a decline of
$941,000, or 3.4%, from the $28.0 million total at September 30, 1995. During
fiscal 1996, loan disbursements amounted to $7.2 million. Such disbursements
were offset by principal repayments of $8.2 million.
Citizens' allowance for loan losses totaled $187,000 at September 30, 1996,
which represented 0.65% of total loans and 71.65% of nonperforming loans. At
September 30, 1995, the allowance for loan losses totaled $190,000, which
represented 0.65% of total loans and 422.22% of nonperforming loans.
Nonperforming loans amounted to $261,000 and $45,000 at September 30, 1996 and
1995, respectively, and represented 0.7% and 0.1% of total assets at such dates.
The increase in fiscal 1996 was due primarily to one residential loan account
totaling $192,000 which was in the process of foreclosure. Management
anticipates no loss on such loan account. Although management believes that its
allowance for loan losses at September 30, 1996, was adequate based on facts and
circumstances available to it, there can be no assurance that additions to such
allowance will not be necessary in future periods, which could adversely affect
the Company's results of operations.
Deposits totaled $28.2 million at September 30, 1996, a decrease of $2.4
million, or 7.8%, from $30.6 million at September 30, 1995. The decline in
deposits is attributable in part to customers using funds on deposit to purchase
common shares of LFC in the Conversion. Citizens has generally not engaged in
sporadic increases or decreases in interest rates paid or offered the highest
rates available in its deposit market.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
GENERAL. Net earnings for the fiscal year ended September 30, 1996, amounted to
$224,000, an increase of $81,000, or 56.6%, over the $143,000 in net earnings
recorded in fiscal 1995. The increase in net earnings resulted primarily from a
$326,000 increase in net interest income, which was partially offset by a $3,000
decrease in other income, a $222,000 increase in general, administrative and
other expense and a $20,000 increase in the provision for federal income taxes.
NET INTEREST INCOME. Net interest income totaled $1.3 million for the fiscal
year ended September 30, 1996, an increase of $326,000, or 34.8%, over the
$938,000 recorded in fiscal 1995. Interest income on loans increased by
$284,000, or 13.6%, during fiscal 1996, due primarily to a 90 basis point (100
basis points equals one percent) increase in yield, from 7.72% in fiscal 1995 to
8.62% in fiscal 1996, coupled with a $473,000 increase in the weighted-average
balance of loans outstanding. Interest income on mortgage-backed securities
increased by $38,000, or 38.4%, due primarily to a $527,000, or 25.2%, increase
in the weighted-average balance of mortgage-backed securities outstanding,
coupled with an increase in the weighted-average yield year to year, from 4.73%
in fiscal 1995 to 5.23% in fiscal 1996. Interest income on investment securities
and interest-bearing deposits increased by $113,000, or 79.6%, for the fiscal
year ended September 30, 1996, compared to fiscal 1995, as the weighted-average
balance increased by $1.7 million year to year and the related yield increased
by 46 basis points to 6.01% in fiscal 1996.
6
<PAGE> 8
Interest expense on deposits increased by $109,000, or 8.0%, during fiscal 1996,
due primarily to an increase of 25 basis points in the weighted-average cost of
deposits, from 4.68% in fiscal 1995 to 4.93% in fiscal 1996, coupled with a
$720,000 increase in the weighted-average balance of deposits outstanding year
to year. Although deposits were $2.4 million less at September 30, 1996, than at
September 30, 1995, the weighted-average balance of deposits outstanding
increased by $720,000 due to increases in deposit balances at the time of and in
connection with the Conversion.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $326,000, or 34.8%, during fiscal 1996, as
compared to fiscal 1995. The interest rate spread increased by 44 basis points,
to 3.06% for fiscal 1996, as compared to 2.62% for fiscal 1995, while the net
interest margin increased by 72 basis points, to 3.67% for the fiscal year ended
September 30, 1996. The overall increase in net interest income reflects
management's deployment of the net proceeds of the Conversion.
PROVISION FOR LOAN LOSSES. Citizens maintains an allowance for loan losses in an
amount which, in management's judgment, is adequate to absorb reasonably
foreseeable losses inherent in the loan portfolio. The provision for loan losses
is determined by management as the amount to be added to the allowance for loan
losses, after net charge-offs have been deducted, to bring the allowance to a
level which is considered adequate to absorb losses inherent in the loan
portfolio in accordance with generally accepted accounting principles ("GAAP").
The amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
generally prevailing economic conditions, changes in the size and composition of
the loan portfolio and considerations relating to specific loans, including the
ability of the borrower to repay the loan and the estimated value of the
underlying collateral. Although management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon
a variety of factors, including the performance of Citizens' loan portfolio, the
economy, changes in real estate values and interest rates and regulatory
requirements regarding asset classifications. As a result of its analysis,
management concluded that the allowance was adequate as of September 30, 1996,
and therefore a provision for loan losses was not deemed necessary. There can be
no assurance that the allowance will be adequate to cover future losses on
nonperforming assets.
OTHER INCOME. Other income totaled $71,000 for the fiscal year ended September
30, 1996, a decrease of $3,000, or 4.1%, from the $74,000 recorded in fiscal
1995. The decrease resulted primarily from a decline in service fees and charges
on deposits and loan accounts.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased by $222,000, or 28.0%, to a total of $1.0 million for the
fiscal year ended September 30, 1996, as compared to fiscal 1995. The increase
resulted primarily from a $193,000 charge recorded as a result of legislation
enacted to recapitalize the Savings Association Insurance Fund, coupled with a
$21,000, or 5.2%, increase in employee compensation and benefits and a $16,000,
or 10.4%, increase in other operating expenses. The increase in employee
compensation and benefits resulted primarily from costs associated with the
London Financial Corporation Employee Stock Ownership Plan and normal merit
increases for existing employees. The increase in other operating expense was
due primarily to professional fees, printing and other expenses related to the
reporting requirements of public companies.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $97,000 for
the fiscal year ended September 30, 1996, an increase of $20,000, or 26.0%, over
the $77,000 provision recorded in fiscal 1995. The increase resulted primarily
from an increase of $101,000, or 45.9%, in pretax earnings year to year.
Citizens' effective tax rates were 30.2% and 34.9% for the fiscal years ended
September 30, 1996 and 1995, respectively.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
- --------------------------------------------------------------------------------
GENERAL. Citizens had net earnings of $143,000 for the fiscal year
ended September 30, 1995, compared to $246,000 in fiscal 1994. The decrease in
net earnings was primarily attributable to a decrease of $95,000 in net
7
<PAGE> 9
interest income and an increase of $70,000 in general, administrative and other
expense. The decrease in net interest income occurred due to a decrease in the
interest rate spread from 3.19% to 2.62%. The decrease in the interest rate
spread was primarily due to a shift in deposits from short-term passbook
accounts to longer-term certificate of deposit accounts. The related increase in
the average maturity of deposits resulted in an increase in the weighted-average
rate paid on deposits from 3.95% for the fiscal year ended September 30, 1994 to
4.68% in fiscal 1995. At the same time, the weighted-average yield on
interest-earning assets increased only from 7.20% in fiscal 1994 to 7.35% in
fiscal 1995, due to the composition of the assets of Citizens, which generally
reprice at a slower pace than the deposits at Citizens. The majority of
interest-earning assets of Citizens are adjustable-rate mortgage loans, which
reprice annually.
The decrease in net interest income and the increase in general,
administrative and other expense were partially offset by a decrease of $45,000
in the federal income tax expense and a decrease of $13,000 in the provision for
loan losses.
NET INTEREST INCOME. The net interest income of Citizens decreased
$95,000 for the fiscal year ended September 30, 1995, compared to 1994. Such
decrease was primarily attributable to rates paid on deposits increasing at a
faster rate than yields earned on loans in fiscal 1995 compared to fiscal 1994.
Total interest income increased $170,000, or 7.9%, in fiscal 1995
compared to fiscal 1994, due primarily to an increase of $1.5 million, or 5.9%,
in the weighted-average loan balance. The weighted-average yield earned on loans
was 7.72% in fiscal 1995 and 1994. Citizens' loan portfolio is composed almost
entirely of cost of funds indexed adjustable-rate loans which reprice annually
upon their anniversary. Thus, Citizens' overall loan yield generally lags behind
the current market interest rates. In 1995, Citizens had many loans which
repriced at higher rates due to the general increase in market interest rates
during the period from March 1994 through February 1995. New loans closed in the
second half of fiscal 1995, however, were made at slightly discounted rates so
that Citizens could remain competitive with other financial institutions in its
market area. In addition to the increase in interest income from loans,
Citizens' interest income on interest-bearing deposits, investment securities,
and mortgage-backed securities increased by $52,000, or 27.5%, in fiscal 1995
compared to fiscal 1994. Such increase is a result of higher short-term interest
rates earned on interest-bearing deposits as well as an increase of $144,000, or
8.6%, in the average balance of interest-bearing deposits in fiscal 1995.
Total interest expense increased $265,000, or 23.4%, for fiscal 1995
compared to fiscal 1994. Such increase in interest expense was primarily
attributable to a $1.3 million increase in average interest bearing deposits
compared to fiscal 1994, while the weighted average interest rate also increased
to 4.68% in fiscal 1995 from 3.95% in fiscal 1994. The increase in the weighted
average rate can be attributed to an increase in the certificate account rates
to 5.61% from 4.80% in fiscal 1995 compared to fiscal 1994, as a result of
competitive rates offered throughout 1995 and special certificate rates offered
to obtain funds for loans.
PROVISION FOR LOAN LOSSES. The provision for loan losses declined by
$13,000 for the fiscal year ended September 30, 1995. The ratio of nonperforming
loans to total loans decreased from .27% in fiscal 1994 to .15% in fiscal 1995.
At September 30, 1995 and 1994, Citizens had a ratio of allowance for loan
losses to total loans of .65% and .70%, respectively, and a ratio of allowance
for loan losses to nonperforming loans of 422.22% and 254.67%, respectively. As
a result of the decrease in nonperforming loans to total loans, low historical
charge-offs, and an improving delinquency history, management determined that a
provision for loan losses was not necessary for the fiscal year ended September
30, 1995.
OTHER INCOME. Other income totaled $74,000 and $70,000 for the fiscal
years ended September 30, 1995 and 1994, respectively. The majority of other
income consisted of service charges on customer accounts of $63,000 and $61,000
in fiscal 1995 and fiscal 1994, respectively. The gradual increase was a result
of an increase in deposit activity.
8
<PAGE> 10
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased by $70,000, or 9.7%, in fiscal 1995 compared to fiscal
1994. Employee compensation and benefits increased $26,000, or 7.9%, for 1995
compared to 1994, as a result of normal merit raises ranging from 5% to 10%.
Federal deposit insurance premiums increased $42,000, to $81,000, for the fiscal
year ended September 30, 1995, compared to fiscal 1994, as a result of an
underaccrual in 1994 which was adjusted in 1995.
FEDERAL INCOME TAXES. Federal income tax expense decreased $45,000, or
37.0%, for 1995 compared to the fiscal year ended September 30, 1994, due to a
decrease of $148,000, or 40.2%, in income before federal income taxes. The
effective tax rate of Citizens increased to 34.9% in fiscal 1995 from 33.2% in
fiscal 1994.
9
<PAGE> 11
The following table sets forth certain average balance sheet information,
including the average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the years indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. Average balances are derived from monthly balances, which
include nonaccruing loans in the loan portfolio.
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------
1996 1995
------------------------------ ------------------------------
Weighted Average Interest Average Average Interest Average
average yield at outstanding earned/ yield/ outstanding earned/ yield/
September 30, 1996 balance paid rate balance paid rate
------------------ ----------- -------- --------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
in other financial
institutions 5.28% $ 3,278 $ 202 6.16% $ 1,827 $ 99 5.42%
Investment securities 6.08 962 53 5.51 730 43 5.89
Mortgage-backed securities 6.26 2,620 137 5.23 2,093 99 4.73
Loans receivable(1) 8.28 27,567 2,377 8.62 27,094 2,093 7.72
------- ------ ------ ------- ------ ----
Total interest-earning 7.71 34,427 2,769 8.04 31,744 2,334 7.35
assets
Non-interest-earning assets 1,732 980
------- -------
Total assets $36,159 $32,724
======= =======
Interest-bearing liabilities:
NOW accounts 2.29 $ 3,045 61 2.00 $ 2,713 56 2.06
Money market accounts 2.74 333 9 2.70 425 12 2.82
Passbook savings accounts 3.00 6,297 188 2.99 6,594 206 3.12
Certificates of deposit 5.96 20,268 1,219 6.01 19,491 1,094 5.61
------- ------ ------ ------- ------ ------
Total deposits 4.93 29,943 1,477 4.93 29,223 1,368 4.68
FHLB advances 9.25 300 28 9.25 300 28 9.25
------- ------ ------ ------- -------- ------
Total interest-bearing 4.97 30,243 1,505 4.98 29,523 1,396 4.73
liabilities ------ ------ ------ ------
Non-interest-bearing 778 33
liabilities ------- -------
Total liabilities 31,021 29,556
Shareholders' equity(2) 5,138 3,168
------- -------
Total liabilities and
shareholders' equity $36,159 $32,724
======= =======
Net interest income $1,264 $ 938
====== ======
Interest rate spread 3.06% 2.62%
====== ======
Net interest margin (net
interest income as a
percentage of average 3.67% 2.95%
interest-earning assets) ====== ======
Average interest-earning
assets to average 113.83% 107.52%
interest-bearing ====== ======
liabilities
<CAPTION>
1994
-------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
---------- ------- -------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits
in other financial
institutions $ 1,683 $ 67 3.99%
Investment securities 708 36 5.08
Mortgage-backed securities 2,077 86 4.14
Loans receivable(1) 25,587 1,975 7.72
------- ------ ----
Total interest-earning 30,055 2,164 7.20
assets
Non-interest-earning assets 1,172
-------
Total assets $31,227
=======
Interest-bearing liabilities:
NOW accounts 2,785 51 1.83
Money market accounts 502 14 2.79
Passbook savings accounts 9,185 297 3.23
Certificates of deposit 15,437 741 4.80
------- ------ ------
Total deposits 27,909 1,103 3.95
FHLB advances 300 28 .25
------- ------ ------
Total interest-bearing 28,209 1,131 4.01
liabilities ------ ------
Non-interest-bearing 34
liabilities -------
Total liabilities 28,243
Shareholders' equity(2) 2,984
-------
Total liabilities and
shareholders' equity $31,227
=======
Net interest income $1,033
======
Interest rate spread 3.19%
======
Net interest margin (net
interest income as a
percentage of average 3.44%
interest-earning assets) ======
Average interest-earning
assets to average 106.54%
interest-bearing ======
liabilities
- -----------------------------------
<FN>
(1) Net of deferred loan fees, loan discounts, the allowance for loan
losses and loans in process. Loan fees included in interest income
totaled $112, $54 and $91 for the fiscal years ended September 30,
1996, 1995 and 1994, respectively.
(2) Consisted solely of retained earnings for the fiscal years ended
September 30, 1995 and 1994.
</TABLE>
10
<PAGE> 12
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the interest income and interest expense of Citizens during the
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided for changes attributable
to (i) increases and decreases in volume (change in volume multiplied by prior
year rate), (ii) increases and decreases in rate (change in rate multiplied by
prior year volume) and (iii) total increases and decreases in rate and volume.
The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------- ---------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
------------------- increase ----------------- increase
Volume Rate (decrease) Volume Rate (decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 85 $ 18 $103 $ 6 $ 26 $ 32
Investment securities 12 (2) 10 1 6 7
Mortgage-backed securities 27 11 38 1 12 13
Loans receivable 38 246 284 116 2 118
---- ---- ---- ---- ------- ----
Total interest income 162 273 435 124 46 170
Interest expense attributable to:
NOW accounts 7 (2) 5 (1) 6 5
Money market accounts (2) (1) (3) (2) 0 (2)
Passbook savings accounts (9) (9) (18) (81) (10) (91)
Certificates of deposit 45 80 125 214 139 353
----- ----- ---- ---- ----- ----
Total deposits 41 68 109 130 135 265
Advances from FHLB - - - - - -
------- ------- ------- ------- ------- -------
Total interest expense 41 68 109 130 135 265
----- ----- ---- ---- ---- ----
Increase (decrease) in net
interest income $121 $205 $326 $ (6) $ (89) $ (95)
==== ==== ==== ====== ====== ======
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
As a part of its effort to monitor its interest rate risk, Citizens reviews the
reports of the OTS which set forth the application of the "net portfolio value"
("NPV") methodology, adopted by the OTS as part of its capital regulations, to
the assets and liabilities of Citizens. Implementation of the NPV regulations
has been delayed by the OTS. Although Citizens would not be subject to the NPV
regulation because it has less than $300 million in assets and risk-based
capital in excess of 12%, the application of the NPV methodology assists
Citizens in monitoring its level of interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk as the change in the NPV which would result from a
theoretical 200 basis point (100 basis point equals 1%) change in market
interest rates. Both a 200 basis point increase in market interest rates
11
<PAGE> 13
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution would
have to deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital, if the regulations were in
effect. Even before the regulation is in effect, OTS could increase Citizens'
risk-based capital requirement on an individualized basis to address excess
interest rate risk.
At September 30, 1996, 2% of the present value of Citizens' assets was
approximately $716,000. Because the interest rate risk of a 200 basis point
decrease in market interest rates (which was greater than the interest rate risk
of a 200 basis point increase) was $291,000 at September 30, 1996, Citizens
would not have been required to deduct any amount from its capital in
determining whether Citizens met its risk-based capital requirement if the
regulation had been in effect for Citizens at such date.
The following table presents, as of September 30, 1996 and 1995, an analysis of
the interest rate risk of Citizens as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis point increments in
market interest rates. The first column of the table consists of hypothetical
incremental changes in such interest rates. The second column contains the
policy limits set by the Board of Directors of Citizens as the maximum change in
NPV that the Board of Directors deems advisable in the event of various changes
in interest rates. Such limits have been established with consideration of the
dollar impact of various rate changes and the strong capital position of
Citizens. The third and fourth columns and the remaining two columns set forth,
as of September 30, 1996, and September 30, 1995, respectively, the effect that
a particular change in market interest rates would have on the NPV of Citizens.
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
---------------------- ---------------------
Change in interest rate Board limit $ change % change $ change % change
(basis points) % change in NPV in NPV in NPV in NPV
----------------------- ----------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 (80)% $(316) (5)% $295 8%
+300 (60) (81) (1) 367 10
+200 (40) 63 1 334 9
+100 (20) 92 2 202 5
0 - - - - -
-100 (20) (150) (2) (187) (5)
-200 (40) (291) (5) (262) (7)
-300 (60) (275) (5) (274) (7)
-400 (80) (162) (3) (260) (7)
</TABLE>
As illustrated by the table, the NPV of Citizens is nearly equally sensitive to
rising and declining rates. Such similarity in sensitivity occurs principally as
a result of the maintenance by Citizens of a loan portfolio consisting primarily
of adjustable-rate residential real estate loans ("ARMs"). Both the amount of
interest Citizens would receive on its loans and the interest Citizens would pay
on its deposits would either increase or decrease depending on the direction of
a change in the market interest rate. The relatively slight differences in
sensitivity between rising and falling rates are generally attributable to the
annual repricing of ARMs compared to the shorter period to repricing of
deposits. Assumptions used in calculating the amounts in the foregoing table are
OTS assumptions.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates 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. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
12
<PAGE> 14
A decrease or a significant increase in interest rates from the recent levels
could be expected to affect negatively the net interest income of Citizens.
Moreover, rising interest rates could negatively affect the earnings of Citizens
due to diminished loan demand. Citizens attempts to mitigate interest rate risk
by originating adjustable-rate loans.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The liquidity of Citizens, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized in the following table for the years ended September
30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
For the year ended September 30,
-------------------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net earnings $ 224 $ 143 $ 246
Adjustments to reconcile net earnings to
net cash from operating activities 216 (15) (88)
------ ------ ------
Net cash from operating activities 440 128 158
Net cash from investing activities (2,697) (2,111) (1,672)
Net cash from financing activities 2,056 2,271 532
------ ------ ------
Net change in cash and cash equivalents (201) 288 (982)
Cash and cash equivalents at beginning of
year 2,844 2,556 3,538
------ ------ ------
Cash and cash equivalents at end of year $2,643 $2,844 $2,556
====== ====== ======
</TABLE>
The principal sources of funds for Citizens are deposits, loan and
mortgage-backed security repayments, maturities of investment securities and
funds generated through operations. Citizens also has the ability to borrow from
the FHLB of Cincinnati. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and loan prepayments are heavily
influenced by interest rates, general economic conditions and competition.
Citizens maintains a level of investment in liquid assets which is based upon
management's assessment of (i) the need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets and (iv) the objectives
of the asset and liability management program of Citizens.
OTS regulations presently require Citizens to maintain an average daily balance
of liquid assets, which may include, but are not limited to, investments in U.
S. Treasury and federal agency obligations and other investments having
maturities of five years or less, in an amount equal to 5% of the sum of
Citizens' average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement, which may be
changed from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds upon which Citizens may
rely if necessary to fund deposit withdrawals or other short-term funding needs.
At September 30, 1996, Citizens liquid assets totaled approximately $2.8
million, which exceeded the OTS minimum requirements by $1.4 million. At such
date, Citizens had commitments to originate loans and
13
<PAGE> 15
loans in process totaling $1.5 million and no commitments to purchase or sell
loans. Citizens considers its liquidity and capital reserves sufficient to meet
its outstanding short-term and long-term needs.
Citizens is required by OTS regulations to meet certain minimum capital
requirements. The tangible capital requirement requires savings associations to
maintain "tangible capital" of not less than 1.5% of the association's adjusted
total assets. Tangible capital is defined in OTS regulations as core capital
minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including retained
earnings), noncumulative preferred stock and related surplus, minority interests
in consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits of mutual associations. OTS regulations require savings associations to
maintain core capital of at least 3% of the association's total assets. The OTS
has proposed to increase such requirement to 4% to 5%, except for those
associations with the highest examination rating and acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based capital"
in an amount not less than 8% of risk-weighted assets. Risk-based capital is
defined as core capital plus certain additional items of capital, which in the
case of Citizens includes a general loan loss allowance of $187,000 at September
30, 1996.
The following table sets forth the amount and percentage level of regulatory
capital of Citizens at September 30, 1996, and the amount by which it exceeds
the minimum requirements:
<TABLE>
<CAPTION>
At September 30, 1996
---------------------------------------
Amount Percent of assets
------ -----------------
(In thousands)
<S> <C> <C>
Capital under GAAP before adjustments $5,437 15.7%
====== ====
Tangible capital:
Capital level $5,437 15.7%
Requirement 521 1.5
------ ----
Excess $4,916 14.2%
====== ====
Core capital:
Capital level $5,437 15.7%
Requirement 1,042 3.0
------ ----
Excess $4,395 12.7%
====== ====
Risk-based capital:
Capital level $5,624 30.3%
Requirement 1,487 8.0
------ ----
Excess $4,137 22.3%
====== ====
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------------------------------------------
In December 1991, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Values of Financial Instruments," which requires the disclosure of the fair
values of financial instruments. SFAS No. 107 became effective for LFC in its
fiscal year ended September 30, 1996. Fair values for the majority of balance
sheet accounts have been disclosed in the accompanying consolidated financial
statements, as a significant portion of the assets and liabilities of LFC, meet
the definition of a financial instrument.
14
<PAGE> 16
In October 1994, the FASB issued SFAS No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments," which is
effective for years ending after December 15, 1995. SFAS No. 119 expands the
disclosure requirements for derivative financial instruments, which are defined
to include futures, forwards, swaps or options contracts or other instruments
with similar characteristics. It excludes all such instruments whose financial
effects are recorded on the balance sheet. SFAS No. 119 also makes certain
modifications to SFAS No. 107. At September 30, 1996, and for the period then
ended, LFC had no financial instruments which would require disclosure under
SFAS No. 119.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the asset.
SFAS No. 121 is effective for financial statements for fiscal years beginning
after December 15, 1995, but earlier application is encouraged. Restatement of
previously issued financial statements is not permitted. SFAS No. 121 will be
applicable to LFC for the fiscal year ending September 30, 1997. LFC does not
anticipate that its impact will be material.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," to require a mortgage banking enterprise to recognize as
separate assets the rights to service mortgage loans for others regardless of
how those servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and subsequently sells or securitizes those loans with servicing
rights retained should allocate the total cost of the mortgage loans between the
mortgage servicing rights and the loans themselves, based on their relative fair
values, provided it is practicable to estimate those values. When it is not
practicable to estimate those values, then the entire cost of purchasing or
originating the loans should be allocated to the mortgage loans, with no cost
allocated to the mortgage servicing rights. SFAS No. 122 requires a mortgage
banking enterprise to assess its capitalized mortgage servicing rights for
impairment based on the fair value of such rights. A mortgage banking enterprise
should stratify its capitalized mortgage servicing rights upon adoption of SFAS
No. 122 based on one or more of the primary risk characteristics of the
underlying loans. Impairment should be recognized through a valuation allowance
for each category of impaired loans. SFAS No. 122 is to be applied prospectively
in fiscal years beginning after December 15, 1995, to transactions in which an
entity sells or securitizes mortgage loans with servicing rights retained and to
impairment evaluations of all amounts capitalized as mortgage servicing rights,
including those purchased before the adoption of this statement. Earlier
application is encouraged. Retroactive capitalization of mortgage servicing
rights retained in transactions incurred before the adoption of SFAS No. 122 is
prohibited. LFC adopted SFAS No. 122 effective October 1, 1996, as required,
without material effect on consolidated financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that LFC will continue to account for stock-
15
<PAGE> 17
based compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore the disclosure provisions of SFAS No. 123 will have no effect on its
consolidated financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance for transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, known as the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse. An entity that undertakes an obligation to service
financial assets recognizes either a servicing asset or liability for the
servicing contract (unless related to a securitization of assets, and all the
securitized assets are retained and classified as held-to-maturity). A servicing
asset or liability that is purchased or assumed is initially recognized at its
fair value. Servicing assets and liabilities are amortized in proportion to and
over the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value. SFAS No.
125 provides that a liability is removed from the balance sheet only if the
debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. SFAS No. 125
supersedes SFAS No. 122. Management does not believe that adoption of SFAS No.
125 will have a material adverse effect on LFC's consolidated financial position
or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
- -------------------------------------------------------------------------------
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with GAAP, which requires LFC to measure financial
position and operating results in terms of historical dollars, with the
exception of investment securities available-for-sale, which are carried at fair
value. Changes in the relative value of money due to inflation or recession are
generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather, interest rate volatility is based on changes
in the expected rate of inflation, as well as changes in monetary and fiscal
policies.
16
<PAGE> 18
CHARTER UNIFICATION LEGISLATION
- --------------------------------------------------------------------------------
The deposit accounts of Citizens and other savings associations are insured up
to applicable limits by the FDIC in the Savings Association Insurance Fund
("SAIF"). Legislation to recapitalize the SAIF was enacted on September 30,
1996. The legislation provided that the SAIF will be merged into the Bank
Insurance Fund if there are no more savings associations. It also requires the
Department of Treasury to submit a report to Congress on the development of a
common charter for all financial institutions. In addition, in September, 1996,
a bill was introduced to address this charter unification by eliminating the
federal thrift charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
Citizens may be regulated under the federal law as a bank or be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which Citizens may engage and would probably subject
Citizens to more regulation by the FDIC. In addition, LFC might become subject
to a different scheme of holding company which may limit the activities in which
LFC may engage, and subject LFC to other additional regulatory requirements,
including separate capital requirements. At this time, LFC cannot predict when
or whether Congress may actually pass legislation regarding LFC's and Citizens'
regulatory requirements or charter. Although such legislation may change the
activities in which either LFC and Citizens may engage, it is not anticipated
that the current activities of both LFC and Citizens will be materially affected
by those activity limits.
17
<PAGE> 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
London Financial Corporation
We have audited the accompanying consolidated statement of financial condition
of London Financial Corporation as of September 30, 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements as of September 30, 1995, and for the years ended September
30, 1995 and 1994, were audited by other auditors, whose report thereon dated
October 27, 1995, expressed an unqualified opinion on those statements and
included an explanatory paragraph relative to a change in the method of
accounting for certain debt and equity securities.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of London Financial
Corporation as of September 30, 1996, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Cincinnati, Ohio
November 22, 1996
18
<PAGE> 20
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 319 $ 835
Interest-bearing deposits in other financial institutions 2,324 2,009
-------- --------
Cash and cash equivalents 2,643 2,844
Investment securities designated as available
for sale - at market 220 -
Investment securities - at cost, approximate
market value of $1,991 and $495 as of
September 30, 1996 and 1995 2,000 500
Mortgage-backed securities - at amortized
cost, approximate market value of $3,944 and
$1,978 as of September 30, 1996 and 1995 4,032 2,009
Loans receivable - net 27,031 27,972
Office premises and equipment - at depreciated cost 354 372
Stock in Federal Home Loan Bank - at cost 261 244
Accrued interest receivable 178 139
Prepaid expenses and other assets 21 34
Prepaid federal income taxes - 5
Deferred federal income taxes 77 33
------- -------
Total assets $36,817 $34,152
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $28,195 $30,594
Advances from the Federal Home Loan Bank 300 300
Other liabilities 279 34
Accrued federal income taxes 136 -
------- -------
Total liabilities 28,910 30,928
Commitments - -
Shareholders' equity
Common shares- authorized 5,000,000 shares without par
value; 529,000 shares issued and outstanding in 1996 - -
Additional paid-in capital 4,910 -
Retained earnings - substantially restricted 3,416 3,224
Unrealized gain on securities designated as available
for sale, net of related tax effects 4 -
Shares acquired by employee stock ownership plan (423) -
------- -------
Total shareholders' equity 7,907 3,224
------- -------
Total liabilities and shareholders' equity $36,817 $34,152
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 21
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans $ 2,377 $ 2,093 $ 1,975
Mortgage-backed securities 137 99 86
Investment securities 53 26 26
Interest-bearing deposits and other 202 116 77
------- ------- -------
Total interest income 2,769 2,334 2,164
Interest expense
Deposits 1,477 1,368 1,103
Borrowings 28 28 28
------- ------- -------
Total interest expense 1,505 1,396 1,131
------- ------- -------
Net interest income before provision
for loan losses 1,264 938 1,033
Provision for loan losses -- -- 13
------- ------- -------
Net interest income after provision
for loan losses 1,264 938 1,020
Other operating income 71 74 70
General, administrative and other expense
Employee compensation and benefits 425 404 378
Occupancy and equipment 55 54 50
Franchise taxes 45 44 38
Federal deposit insurance premiums 262 81 39
Data processing 57 55 54
Other operating 170 154 163
------- ------- -------
Total general, administrative and other expense 1,014 792 722
------- ------- -------
Earnings before income taxes 321 220 368
Federal income taxes
Current 143 52 120
Deferred (46) 25 2
------- ------- -------
Total federal income taxes 97 77 122
------- ------- -------
NET EARNINGS $ 224 $ 143 $ 246
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 22
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1996, 1995 and 1994
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES UNREALIZED
ACQUIRED BY GAIN ON
EMPLOYEE SECURITIES
ADDITIONAL STOCK DESIGNATED
COMMON PAID-IN OWNERSHIP AS AVAILABLE RETAINED
STOCK CAPITAL PLAN FOR SALE EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1993 $ -- $ -- $ -- $ -- $ 2,835 $ 2,835
Net earnings for the year ended September 30, 1994 -- -- -- -- 246 246
------------ ------- ------- ------- ------- -------
Balance at September 30, 1994 -- -- -- -- 3,081 3,081
Net earnings for the year ended September 30, 1995 -- -- -- -- 143 143
------------ ------- ------- ------- ------- -------
Balance at September 30, 1995 -- -- -- -- 3,224 3,224
Reorganization to common stock form and issuance
of shares in connection therewith - net -- 4,910 (423) -- -- 4,487
Net earnings for the year ended September 30, 1996 -- -- -- -- 224 224
Dividends of $.06 per share -- -- -- -- (32) (32)
Unrealized gain on securities designated as available
for sale, net of related tax effects -- -- -- 4 -- 4
------------ ------- ------- ------- ------- -------
Balance at September 30, 1996 $ -- $ 4,910 $ (423) $ 4 $ 3,416 $ 7,907
============ ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 23
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 224 $ 143 $ 246
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts
on investments and mortgage-backed securities - net 6 6 10
Amortization of deferred loan origination fees (112) (54) (91)
Depreciation and amortization 25 24 22
Provision for loan losses -- -- 13
Federal Home Loan Bank stock dividends (17) (15) (11)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (39) (31) 1
Prepaid expenses and other assets 13 7 (29)
Other liabilities 245 1 1
Federal income taxes
Current 141 22 (6)
Deferred (46) 25 2
------- ------- -------
Net cash provided by operating activities 440 128 158
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities (2,295) -- (981)
Principal repayments on mortgage-backed securities 266 167 283
Purchase of investment securities designated as available
for sale (214) -- --
Purchase of investment securities designated as
held to maturity (1,500) -- --
Loan principal repayments 8,227 4,494 7,567
Loan disbursements (7,174) (6,763) (8,535)
Purchase of office premises and equipment (7) (9) (6)
------- ------- -------
Net cash used in investing activities (2,697) (2,111) (1,672)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (2,399) 2,271 532
Net proceeds from issuance of common stock 4,487 -- --
Dividends on common stock (32) -- --
------- ------- -------
Net cash provided by financing activities 2,056 2,271 532
------- ------- -------
Net increase (decrease) in cash and cash equivalents (201) 288 (982)
Cash and cash equivalents at beginning of year 2,844 2,556 3,538
------- ------- -------
Cash and cash equivalents at end of year $ 2,643 $ 2,844 $ 2,556
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 55 $ 20 $ 126
======= ======= =======
Interest on deposits and borrowings $ 1,495 $ 1,393 $ 1,131
======= ======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gain on securities designated as
available for sale, net of applicable tax effects $ 4 $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 24
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In October 1995, the Board of Directors of The Citizens Loan and Savings
Company (the "Company") adopted a Plan of Conversion (the "Plan") whereby
the Company would convert to the stock form of ownership, followed by the
issuance of all of the Company's outstanding stock to a newly formed holding
company, London Financial Corporation (the "Corporation"). Pursuant to the
Plan, the Corporation offered common shares for sale to certain depositors
of the Company and members of the community. The conversion was completed on
March 29, 1996, and resulted in the issuance of 529,000 common shares of the
Corporation which, after consideration of offering expenses totaling
approximately $380,000, and $423,000 in shares purchased by the ESOP,
resulted in net capital proceeds of $4.5 million. Condensed financial
statements of the Corporation are presented in Note L. Future references are
made either to the Corporation or the Company as applicable.
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Company. The Company conducts
a general banking business in central Ohio which consists of attracting
deposits from the general public and applying those funds to the origination
of loans for residential, consumer and nonresidential purposes. The
Company's profitability is significantly dependent on net interest income
which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Company can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
A summary of significant accounting policies which, with the exception of
the policy described in Note A-2, have been consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and the Company. All intercompany balances and transactions have
been eliminated in the accompanying consolidated financial statements.
23
<PAGE> 25
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
Prior to October 1, 1994, investment securities and mortgage-backed
securities were carried at cost, adjusted for amortization of premiums and
accretion of discounts. The investment and mortgage-backed securities were
carried at cost, as it was management's intent and the Corporation had the
ability to hold the securities until maturity. Investment securities and
mortgage-backed securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held for sale at the point of purchase and carried at the lower of cost
or market.
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
that investments be categorized as held-to-maturity, trading, or available
for sale. Securities classified as held-to-maturity are carried at cost only
if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains
or losses recorded to operations or shareholders' equity, respectively. The
Corporation adopted SFAS No. 115 effective October 1, 1994, by designating
all investment and mortgage-backed securities as held to maturity. During
fiscal 1996, the Corporation purchased certain corporate equity securities
which are designated as available for sale, and at September 30, 1996, the
Corporation's shareholders' equity reflected a net unrealized gain on such
securities totaling $4,000.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
----------------
Loans receivable are stated at the principal balance outstanding, reduced by
deferred loan origination fees and the allowance for loan losses. Interest
is accrued as earned unless the collectibility of the loan is in doubt.
Interest on loans that are contractually past due is charged off, or an
allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status. If
the ultimate collectibility of the loan is in doubt, in whole or in part,
all payments received on nonaccrual loans are applied to reduce principal
until such doubt is eliminated.
24
<PAGE> 26
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
---------------------
The Company accounts for loan origination fees in accordance with SFAS No.
91 "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of
certain direct origination costs, are deferred and amortized to interest
income using the level-yield method, giving effect to actual loan
prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a
loan, i.e., principally actual personnel costs. Fees received for loan
commitments that are expected to be drawn upon, based on the Company's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. Allowance for Loan Losses
-------------------------
It is the Company's policy to provide valuation allowances for estimated
loan losses based on past loan loss experience, changes in the composition
of the loan portfolio, trends in the level of delinquent and problem loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the Company's primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Company
records a charge-off equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. Major loans and
major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement, which was amended by SFAS No. 118 as
to certain income recognition and financial statement disclosure provisions,
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loan's observable market price or fair value
of the collateral if the loan is collateral dependent. The Company adopted
SFAS No. 114 effective October 1, 1995, without material effect on
consolidated financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company considers
its investment in one- to four-family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Company's
investment in impaired nonresidential and multi-family residential real
estate loans, such loans are generally collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value.
25
<PAGE> 27
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
-------------------------
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At September 30, 1996, the Company had no loans that would be defined as
impaired under SFAS No. 114.
6. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line method over
the useful lives of the assets, estimated to be thirty years for the
building, ten to thirty years for building improvements and five to ten
years for furniture and equipment. An accelerated method is used for tax
reporting purposes.
8. Income Taxes
------------
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 established financial accounting
and reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. In
accordance with SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or
liability and its reported amount in the consolidated financial statements
that will result in net taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
26
<PAGE> 28
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Income Taxes (continued)
------------
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the cash method of
accounting used to prepare the federal income tax return and from the
different methods of accounting for deferred loan origination fees, Federal
Home Loan Bank stock dividends, general loan loss allowances, percentage of
earnings bad debt deductions and the SAIF recapitalization assessment.
Additional temporary differences result from depreciation computed using
accelerated methods for federal income tax purposes.
9. Retirement Plans
----------------
The Company has a defined contribution simplified employee plan ("SEP")
covering substantially all employees who have attained 21 years of age and
have completed one full year of service. Annual contributions are made to
the SEP at the discretion of the Board of Directors. The Company's provision
for expense under the SEP was $32,000, $20,000 and $26,000 for the years
ended September 30, 1996, 1995 and 1994, respectively.
In conjunction with its reorganization to stock form, the Corporation
implemented an Employee Stock Ownership Plan ("ESOP"). The ESOP provides
retirement benefits for substantially all employees who have completed one
year of service and have attained the age of 21. The Corporation accounts
for the ESOP in accordance with Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". SOP 93-6
requires the measure of compensation expense recorded by employers to equal
the fair value of ESOP shares allocated to participants during a fiscal
year. Expense recognized related to the ESOP totaled approximately $21,000
for the year ended September 30, 1996.
10. Earnings Per Share
------------------
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share", is not applicable for the fiscal years ended September 30, 1996,
1995 and 1994, as the Corporation completed its conversion to the stock form
of ownership in March 1996.
11. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits in other financial
institutions with original terms to maturity of less than ninety days.
27
<PAGE> 29
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September
30, 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statement of financial condition for cash and
cash equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts and consumer and
other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the consolidated statement of financial condition is deemed to
approximate fair value.
DEPOSITS: The fair value of NOW accounts, passbook accounts,
and money market deposits is deemed to approximate the amount
payable on demand. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow
calculation using the interest rates currently offered for
deposits of similar remaining maturities.
28
<PAGE> 30
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
-----------------------------------
ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value of these
advances is estimated using the rates currently offered for
similar advances of similar remaining maturities or, when
available, quoted market prices.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
September 30, 1996 was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30, 1996 are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
(In thousands)
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 2,643 $ 2,643
Investment securities 2,220 2,211
Mortgage-backed securities 4,032 3,944
Loans receivable 27,031 27,774
Federal Home Loan Bank stock 261 261
------- -------
$36,187 $36,833
======= =======
Financial liabilities
Deposits $28,195 $28,331
Advances from the Federal Home Loan Bank 300 326
------- -------
$28,495 $28,657
======= =======
</TABLE>
13. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
29
<PAGE> 31
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at September 30, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government and agency obligations $2,000 $1 $ 10 $1,991
AVAILABLE FOR SALE:
Corporate equity securities 214 6 - 220
------ - ----- ------
Total investment securities $2,214 $7 $ 10 $2,211
====== == ===== ======
SEPTEMBER 30, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
U.S. Government agency
obligations $500 $ - $ 5 $495
==== ====== ===== ====
</TABLE>
The amortized cost and estimated fair value of U. S. Government and agency
obligations at September 30, 1996, by term to maturity are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
<S> <C> <C>
Due in one year or less $1,000 $ 996
Due after one year through three years 1,000 995
------ ------
$2,000 $1,991
====== ======
</TABLE>
30
<PAGE> 32
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1996 and
1995, are shown below:
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage
Corporation participation certificates $1,853 $ - $57 $1,796
Government National Mortgage
Association participation certificates 1,388 8 5 1,391
Federal National Mortgage
Association participation certificates 791 - 34 757
------ ------- --- -------
Total mortgage-backed securities $4,032 $ 8 $96 $3,944
====== ====== === ======
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Federal Home Loan Mortgage
Corporation participation certificates $ 740 $ - $ 9 $ 731
Government National Mortgage
Association participation certificates 927 - 11 916
Federal National Mortgage
Association participation certificates 342 - 11 331
------ ------- --- ------
Total mortgage-backed securities $2,009 $ - $31 $1,978
====== ======= === ======
</TABLE>
31
<PAGE> 33
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities by contractual term to
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST
(In thousands)
<S> <C>
Due within one year $ 58
Due after one through five years 272
Due after five years 3,702
------
$4,032
======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $21,819 $21,947
Multi-family 258 705
Construction 1,084 1,351
Nonresidential real estate 4,831 4,623
Consumer and other loans 881 831
------- -------
28,873 29,457
Less:
Undisbursed portion of loans in process 1,258 885
Deferred loan origination fees 397 410
Allowance for loan losses 187 190
------- -------
$27,031 $27,972
======= =======
</TABLE>
The Company's lending efforts have historically focused on one- to
four-family and multi-family residential real estate loans, which comprise
approximately $21.3 million, or 79%, of the total loan portfolio at
September 30, 1996, and approximately $22.5 million, or 81%, at September
30, 1995. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the
Company with adequate collateral coverage in the event of default.
Nevertheless, the Company, as with any lending institution, is subject to
the risk that real estate values could deteriorate in its primary lending
area of central Ohio, thereby impairing collateral values. However,
management is of the belief that real estate values in the Company's primary
lending area are presently stable.
32
<PAGE> 34
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE (continued)
In the ordinary course of business, the Company has made loans to some of
its directors, and officers and their related business interests. In the
opinion of management, such loans are consistent with sound lending
practices and are within applicable regulatory lending limitations. The
balance of such loans totaled approximately $473,000 and $679,000 at
September 30, 1996 and 1995, respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Beginning balance $190 $191 $178
Provision for loan losses - - 13
Loan charge-offs (3) (1) -
---- ---- ----
Ending balance $187 $190 $191
==== ==== ====
</TABLE>
As of September 30, 1996, the Company's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
Nonperforming and nonaccrual loans at September 30, 1996, 1995 and 1994,
totaled $261,000, $45,000 and $75,000, respectively. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $15,000, $3,000 and $8,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Land and improvements $ 85 $ 85
Building 471 471
Furniture and equipment 186 179
---- ----
742 735
Less accumulated depreciation and
amortization 388 363
---- ----
$354 $372
==== ====
</TABLE>
33
<PAGE> 35
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1996 1995
AMOUNT % AMOUNT %
(In thousands)
<S> <C> <C> <C> <C>
NOW accounts
1996 - 2.29% $ 3,198 11.3%
1995 - 2.29% $2,727 8.9%
Passbook
1996 - 3.00% 5,587 19.8
1995 - 3.00% 6,184 20.2
Money market investment accounts
1996 - 2.74% 278 1.0
1995 - 2.74% 387 1.3
------- ----- ----- -------
Total demand, transaction and
passbook deposits 9,063 32.1 9,298 30.4
Certificates of deposit
Original maturities of:
One year or less
1996 - 5.14% 5,669 20.1
1995 - 5.88% 7,571 24.7
12 months to 36 months
1996 - 6.09% 7,968 28.3
1995 - 5.87% 8,276 27.1
Greater than 36 months
1996 - 6.62% 5,495 19.5
1995 - 4.56% 5,449 17.8
------- ----- ------ ------
Total certificates of deposit 19,132 67.9 21,296 69.6
------- ----- ------- ------
Total deposit accounts $28,195 100.0% $30,594 100.0%
======= ===== ======= =====
</TABLE>
Interest expense on deposits at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Passbook $ 188 $ 206 $ 297
NOW accounts 61 56 51
Money market investment accounts 9 12 14
Certificates of deposit 1,219 1,094 741
------ ------ ------
$1,477 $1,368 $1,103
====== ====== ======
</TABLE>
34
<PAGE> 36
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Less than one year $11,390 $11,254
One year to two years 4,130 4,625
Two years to three years 3,612 5,417
------- -------
$19,132 $21,296
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1996 by a pledge of certain residential mortgage loans totaling $450,000 and
the Company's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
INTEREST MATURING IN YEAR
RATE ENDING SEPTEMBER 30, 1996 1995
(In thousands)
<S> <C> <C> <C>
9.25% 2001 $300 $300
==== ====
</TABLE>
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate at September 30 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $109 $75 $125
Increase (decrease) in taxes resulting from:
Other (primarily surtax exemptions in 1996) (12) 2 (3)
----- ---- ----
Federal income taxes per consolidated
financial statements $ 97 $77 $122
===== === ====
Effective tax rate 30.2% 34.9% 33.2%
==== ==== ====
</TABLE>
35
<PAGE> 37
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax asset at September 30
is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1996 1995
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 103 $ 113
SAIF recapitalization assessment 66 --
General loan loss allowance 64 65
----- -----
Deferred tax assets 233 178
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (43) (38)
Difference between book and tax depreciation (3) (4)
Percentage of earnings bad debt deduction (64) (65)
Accrual vs. cash basis of accounting (44) (38)
Unrealized gains on securities designated
as available for sale (2) --
----- -----
Deferred tax liabilities (156) (145)
----- -----
Net deferred tax asset $ 77 $ 33
===== =====
</TABLE>
The Company was allowed a special bad debt deduction generally limited to 8%
of otherwise taxable income and subject to certain limitations based on
aggregate loans and deposit account balances at the end of the year. If the
amounts that qualify as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. Retained earnings at September
30, 1996, include approximately $525,000 for which federal income taxes have
not been provided. The approximate amount of unrecognized deferred tax
liability relating to the cumulative bad debt deduction was approximately
$115,000 at September 30, 1996. See Note K for additional information
regarding future percentage of earnings bad debt deductions.
36
<PAGE> 38
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE I - LOAN COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
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 consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Company's involvement in such financial instruments.
The Company'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
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At September 30, 1996, the Company had outstanding commitments of
approximately $200,000 to originate loans. In the opinion of management, all
loan commitments equaled or exceeded prevalent market interest rates as of
September 30, 1996, and will be funded from normal cash flow from
operations.
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision ("OTS"). The minimum capital standards
generally require the maintenance of regulatory capital sufficient to meet
each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as shareholders' equity less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4.0% to 5.0% of adjusted total
assets for substantially all savings associations. In the opinion of
management, the proposed revision to the capital requirement will have no
material effect on the Company's excess regulatory capital position. The
risk-based capital requirement provides for the maintenance of core capital
plus general loss allowances equal to 8.0% of risk-weighted assets. In
computing risk-weighted assets, the Company multiplies the value of each
asset on its statement of financial condition by a defined risk-weighting
factor, e.g., one-to-four family residential loans carry a risk-weighted
factor of 50%.
37
<PAGE> 39
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
As of September 30, 1996, the Company's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL % CAPITAL % CAPITAL %
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $5,437 $5,437 $5,437
General valuation allowances - - 187
------ ------ ------
Regulatory capital computed 5,437 15.7 5,437 15.7 5,624 30.3
Minimum capital requirement 521 1.5 1,042 3.0 1,487 8.0
------ ---- ------ ---- ----- ----
Regulatory capital - excess $4,916 14.2 $4,395 12.7 $4,137 22.3
====== ==== ====== ==== ====== ====
</TABLE>
The Company met the regulatory requirements of a "well-capitalized"
institution; i.e., a risk-based capital ratio of 10.0% or greater, and a
core capital ratio of 5.0% or greater. The Company's regulatory capital
exceeded these requirements at September 30, 1996 by $3.8 million and $3.7
million, respectively.
NOTE K - RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Company and of other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective reserve
levels of the funds, deposit insurance assessments paid by healthy savings
associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments
are required for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Company
had $29.7 million in deposits at March 31, 1995, resulting in an assessment
of approximately $193,000, or $127,000 after-tax.
38
<PAGE> 40
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE K - RECENT LEGISLATIVE DEVELOPMENTS (continued)
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1999. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Company would be regulated as a bank under
Federal laws which would subject it to the more restrictive activity limits
imposed on national banks. Under separate legislation related to the
recapitalization plan, the Company is required to recapture as taxable
income approximately $190,000 of its bad debt reserve, which represents the
post-1987 additions to the reserve, and will be unable to utilize the
percentage of earnings method to compute its reserve in the future. The
Company has provided deferred taxes for this amount and will be permitted to
amortize the recapture of its bad debt reserve over six years.
NOTE L - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of London Financial Corporation as of September 30, 1996, and the
results of its operations for the six month period ended September 30, 1996.
<TABLE>
<CAPTION>
LONDON FINANCIAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
September 30, 1996
(In thousands)
ASSETS
<S> <C>
Cash and due from banks $ 345
Investment securities designated as available for sale - at market 220
Investment securities 1,500
Loan receivable from ESOP 423
Investment in The Citizens Loan and Savings Company 5,437
Accrued interest receivable 31
------
Total assets $7,956
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 49
Shareholders' equity
Common stock -
Additional paid-in capital 7,832
Unrealized gain on securities designated as available
for sale, net of related tax effects 4
Retained earnings 71
Total shareholders' equity 7,907
-----
-----
Total liabilities and shareholders' equity $7,956
======
</TABLE>
39
<PAGE> 41
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE L - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
(continued)
LONDON FINANCIAL CORPORATION
STATEMENT OF EARNINGS
Six month period ended September 30, 1996
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Revenue
Interest income $ 68
Equity in earnings of subsidiary 60
----
Total revenue 128
General and administrative expenses 10
----
Earnings before income taxes 118
Federal income taxes 15
----
NET EARNINGS $103
====
</TABLE>
NOTE M - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
In October 1995, the Company's Board of Directors adopted a Plan of
Conversion whereby the Company would convert to the stock form of ownership,
followed by the issuance of all of the Company's outstanding common stock to
a newly formed holding company, London Financial Corporation.
On March 29, 1996, the Company completed its conversion to the stock form of
ownership, and issued all of the Company's outstanding common shares to the
Corporation.
In connection with the conversion, the Corporation sold 529,000 shares at a
price of $10.00 per share which, after consideration of offering expenses
totaling approximately $380,000, and shares purchased by employee benefit
plans totaling $423,000, resulted in net cash proceeds of approximately $4.5
million.
At the date of the conversion, the Company established a liquidation account
in an amount equal to retained earnings reflected in the statement of
financial condition used in the conversion offering circular. The
liquidation account will be maintained for the benefit of eligible savings
account holders who maintained deposit accounts in the Company after
conversion.
40
<PAGE> 42
LONDON FINANCIAL CORPORATION
AND
THE CITIZENS LOAN & SAVINGS COMPANY
DIRECTORS AND OFFICERS
================================================================================
John J. Bodle President
President
The Citizens Loan & Savings Company
John I. Andrix Director
President
Andrix Insurance Agency
Rodney A. Bell Director
Salesman
Buckeye Ford
Donald E. Forrest Director
Owner-Operator
Forest Trucking Company
Edward D. Goodyear Director
Certified Public Accountant
Kennison A. Sims Director
Owner-Operator
The Sims Construction Company
Joyce E. Bauerle Vice President and Treasurer
Vice President
The Citizens Loan & Savings Company
Rebecca A. Lohr Secretary
Secretary
The Citizens Loan & Savings Company
41
<PAGE> 43
SHAREHOLDER SERVICES
================================================================================
The Fifth Third Bank serves as transfer agent and dividend distributing agent
for LFC's shares. Communications regarding change of address, transfer of
shares, lost certificates and dividends should be sent to:
The Fifth Third Bank
Fifth Third Center
Attention: Melissa J. Meyer
Cincinnati, Ohio 45202
(513) 579-5405
ANNUAL MEETING
================================================================================
The 1997 Annual Meeting of Shareholders of London Financial Corporation (the
"Annual Meeting") will be held on January 23, 1997, at 10:00 a.m., Eastern Time,
at the office of Citizens, 2 East High Street, London, Ohio 43140. Shareholders
are cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
================================================================================
A copy of LFC's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon request
to:
London Financial Corporation
2 East High Street
London, Ohio 43140
Attention: John J. Bodle, President
CHANGE IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
================================================================================
On July 11, 1996, LFC, with the approval of its Board of Directors, dismissed
KPMG Peat Marwick ("KPMG") as LFC's independent certified public accountants and
engaged Grant Thornton LLP ("Grant Thornton") to act in such capacity. The
reports of KPMG on the consolidated financial statements of Citizens for the
fiscal years ended September 30, 1994 and 1995, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years ended
September 30, 1994 and 1995, and the interim period through July 11, 1996, there
were no disagreements between LFC or Citizens and KPMG on any matter of
accounting principles or practices, consolidated financial statement disclosure
or audit scope or procedure.
The Board of Directors has selected Grant Thornton as the independent certified
public accountants of LFC and Citizens for the current fiscal year and
recommends that the shareholders ratify the selection. Management expects that a
representative of Grant Thornton will be present at the Annual Meeting, will
have the opportunity to make a statement if e or she so desires and will be
available to respond to appropriate questions.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Citizens Loan & Savings Company
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 319
<INT-BEARING-DEPOSITS> 2,324
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 220
<INVESTMENTS-CARRYING> 6,032
<INVESTMENTS-MARKET> 5,935
<LOANS> 27,031
<ALLOWANCE> 181
<TOTAL-ASSETS> 36,817
<DEPOSITS> 28,195
<SHORT-TERM> 0
<LIABILITIES-OTHER> 415
<LONG-TERM> 300
<COMMON> 0
0
0
<OTHER-SE> 7,907
<TOTAL-LIABILITIES-AND-EQUITY> 36,817
<INTEREST-LOAN> 2,377
<INTEREST-INVEST> 190
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 2,769
<INTEREST-DEPOSIT> 1,477
<INTEREST-EXPENSE> 1,505
<INTEREST-INCOME-NET> 1,264
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,014
<INCOME-PRETAX> 321
<INCOME-PRE-EXTRAORDINARY> 224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.67
<LOANS-NON> 261
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 190
<CHARGE-OFFS> 3
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 187
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 187
</TABLE>
<PAGE> 1
EXHIBIT 28
LONDON FINANCIAL CORPORATION
2 EAST HIGH STREET
LONDON, OHIO 43140
(614) 852-0787
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1997 Annual Meeting of Shareholders of
London Financial Corporation ("LFC") will be held at the office of The Citizens
Loan & Savings Company, 2 East High Street, London, Ohio 43140, on January 23,
1997, at 10:00 a.m., Eastern Time (the "Annual Meeting"), for the following
purposes, all of which are more completely set forth in the accompanying Proxy
Statement:
1. To elect three directors of LFC for terms
expiring in 1999;
2. To approve the London Financial Corporation 1997
Stock Option and Incentive Plan, a copy of which
is attached hereto as Exhibit A;
3. To approve The Citizens Loan & Savings Company
Management Recognition Plan and Trust, a copy of
which is attached hereto as Exhibit B;
4. To ratify the selection of Grant Thornton LLP as
the auditors of LFC for the current fiscal year;
and
5. To transact such other business as may properly
come before the Annual Meeting or any
adjournments thereof.
Only shareholders of LFC of record at the close of business on December
5, 1996, will be entitled to receive notice of and to vote at the Annual Meeting
and at any adjournments thereof. Whether or not you expect to attend the Annual
Meeting, we urge you to consider the accompanying Proxy Statement carefully and
to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR SHARES MAY BE
VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM MAY BE ASSURED
AT THE ANNUAL MEETING. The giving of a proxy does not affect your right to vote
in person in the event you attend the Annual Meeting.
By Order of the Board of Directors
John J. Bodle, President
London, Ohio
December 12, 1996
<PAGE> 2
LONDON FINANCIAL CORPORATION
2 EAST HIGH STREET
LONDON, OHIO 43140
(614) 852-0787
PROXY STATEMENT
PROXIES
The enclosed Proxy is being solicited by the Board of Directors of
London Financial Corporation, an Ohio corporation ("LFC"), for use at the 1997
Annual Meeting of Shareholders of LFC to be held at the office of The Citizens
Loan & Savings Company ("Citizens"), 2 East High Street, London, Ohio 43140, on
January 23, 1997, at 10:00 a.m., Eastern Time, and at any adjournments thereof
(the "Annual Meeting"). Without affecting any vote previously taken, the Proxy
may be revoked by a shareholder by execution of a later dated proxy which is
received by LFC before the Proxy is exercised or by giving notice of revocation
to LFC in writing or in open meeting before the Proxy is exercised. Attendance
at the Annual Meeting will not, of itself, revoke a proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the election of Donald E. Forrest, Edward D. Goodyear and
Kennison A. Sims as directors of LFC for terms expiring in
1999;
FOR the approval of the London Financial Corporation 1997
Stock Option and Incentive Plan (the "Stock Option Plan"), a
copy of which is attached hereto as Exhibit A;
FOR the approval of The Citizens Loan & Savings Company
Management Recognition Plan and Trust (the "MRP"), a copy of
which is attached hereto as Exhibit B; and
FOR the ratification of the selection of Grant Thornton LLP
("Grant Thornton") as the auditors of LFC for the current
fiscal year.
Proxies may be solicited by the directors, officers and other employees of LFC
and Citizens, in person or by telephone, telegraph or mail only for use at the
Annual Meeting. Such proxies will not be used for any other meeting. The cost of
soliciting proxies will be borne by LFC.
Only shareholders of record as of the close of business on December 5,
1996 (the "Voting Record Date"), are entitled to vote at the Annual Meeting.
Each such shareholder will be entitled to cast one vote for each share owned.
LFC's records disclose that, as of the Voting Record Date, there were 529,000
votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of LFC on or
about December 20, 1996.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and LFC's Code of Regulations (the "Regulations"), the
three nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified in the enclosed Proxy. If the enclosed Proxy is signed and
dated by the shareholder, but no vote is specified thereon, the shares held by
such shareholder will be voted FOR the re-election of the three nominees.
-1-
<PAGE> 3
APPROVAL OF THE STOCK OPTION PLAN AND THE MRP
The affirmative vote of the holders of at least a majority of the
outstanding shares of LFC is necessary to approve the Stock Option Plan and the
MRP. Generally, shares which are held by a nominee for a beneficial owner and
which are represented in person or by proxy at the Annual Meeting, but not voted
with respect to such proposals ("Non-votes"), will have the same effect as a
vote against the approval of the Stock Option Plan and the MRP. If, however,
shares are represented at the Annual Meeting by a shareholder who signed and
dated a proxy in the form of the enclosed Proxy, but who did not vote on the
approval of the Stock Option Plan or the MRP by marking the appropriate block on
the Proxy, such shares will be voted FOR the adoption of the Stock Option Plan
and the MRP and will not be considered Non-votes.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares of LFC
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of LFC for the current fiscal
year. Non-votes will have the same effect as a vote against the approval of such
ratification, as will abstentions. If, however, shares are represented at the
Annual Meeting by a shareholder who signed and dated a proxy in the form of the
enclosed Proxy, but who did not vote on the ratification of the selection of
Grant Thornton by marking the appropriate block on the Proxy, such shares will
be voted FOR the ratification of the selection of Grant Thornton and will not be
considered Non-votes.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only person known to LFC to own beneficially more than five percent of the
outstanding common shares of LFC, as of December 11, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
---------------- -------------------- ------------------
<S> <C> <C>
First Bankers Trust, N.A.
1201 Broadway 42,320 (1) 8.0%
Quincy, Illinois 62301
- ----------------------------
<FN>
(1) Consists of shares held by First Bankers Trust, N.A., as the trustee
for the London Financial Corporation Employee Stock Ownership Plan.
</TABLE>
-2-
<PAGE> 4
The following table sets forth certain information with respect to the
number of common shares of LFC beneficially owned by each director of LFC and by
all directors and executive officers of LFC as a group, as of December 11, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership (2) Shares Outstanding
- -------------------- ------------------------ ------------------
<S> <C> <C>
John I. Andrix 19,786 (3) 3.74%
Rodney A. Bell 20,286 (4) 3.83%
John J. Bodle 20,187 (5) 3.82%
Donald E. Forrest 19,786 3.74%
Edward D. Goodyear 19,786 (6) 3.74%
Kennison A. Sims 20,000 (7) 3.78%
All directors and executive officers
as a group (8 people) 100,762 19.05%
- -----------------------------
<FN>
(1) Each of the persons listed on this table may be contacted at the
address of LFC.
(2) The beneficial owner has sole voting and investment power unless
otherwise indicated.
(3) Includes 6,561 shares held by Andrix & Company, of which Mr. Andrix is
the owner.
(4) Includes 500 shares held by Mr. Bell's son. The remainder of such
shares are held by Mr. Bell jointly with his spouse.
(5) Includes 10,895 shares held by Mr. Bodle jointly with his spouse and
811 shares held by Mr. Bodle's spouse individually.
(6) Includes 10,832 shares held by Mr. Goodyear jointly with his spouse.
(7) Includes 6,675 shares held by Mr. Sims jointly with his spouse.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, each director and executive officer
of LFC is required to file a Form 3 to report his beneficial ownership of common
shares of LFC to the Securities and Exchange Commission within 10 days after the
date on which he becomes a director or executive officer. LFC must disclose in
its Proxy Statements any failure to file a Form 3 timely. At the time of his
appointment to the Board of Directors of LFC in May 1996, Mr. Kennison A. Sims
did not file a Form 3 as required within 10 days following such appointment. See
"PROPOSAL ONE - ELECTION OF DIRECTORS."
PROPOSAL ONE - ELECTION OF DIRECTORS
------------------------------------
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of seven
persons divided into two classes. In accordance with Section 2.02 of the
Regulations, nominees for election as directors may be proposed only by the
directors or by a shareholder entitled to vote for directors if such shareholder
has submitted a written nomination to the Secretary of LFC by the later of the
December 1st immediately preceding the annual meeting of shareholders or the
sixtieth day before the first anniversary of the most recent annual meeting of
shareholders held for the election of directors. Each such written nomination
must state the name, age, business or residence address of the nominee, the
-3-
<PAGE> 5
principal occupation or employment of the nominee, the number of common shares
of LFC owned either beneficially or of record by each such nominee and the
length of time such shares have been so owned.
The Board of Directors proposes the reelection of the following persons
to serve until the Annual Meeting of Shareholders in 1999 and until their
successors are duly elected and qualified or until their earlier resignation,
removal from office or death:
<TABLE>
<CAPTION>
Director
of LFC
Name Age (1) Position(s) Held Since (2)
- ---- ------- ---------------- ---------
<S> <C> <C> <C>
Donald E. Forrest 75 Director 1996
Edward D. Goodyear 49 Director 1996
Kennison A. Sims 44 Director 1996
- -----------------------------
<FN>
(1) As of December 1996.
(2) Mr. Forrest and Mr. Goodyear became directors of LFC in connection with
the conversion of Citizens from mutual to stock form (the "Conversion")
and the formation of LFC as the holding company for Citizens. Mr. Sims
was appointed in May 1996 by the Board of Directors to fill a vacancy
on the Board of Directors.
</TABLE>
If any nominee is unable to stand for election, any proxies granting authority
to vote for such nominee will be voted for such substitute as the Board of
Directors recommends.
The following directors will continue to serve as directors of LFC
after the Annual Meeting for the terms indicated:
<TABLE>
<CAPTION>
Director of
Name (1) Age (2) Positions Held LFC Since (3) Term Expires
-------- ------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
John I. Andrix 49 Director 1996 1998
Rodney A. Bell 77 Director 1996 1998
John J. Bodle 49 Director and President 1996 1998
- ------------------------------
<FN>
(1) There is currently one vacancy in the class of directors the term of
which expires in 1998. The Board of Directors is currently considering
the manner in which such vacancy should be filled.
(2) As of December 1996.
(3) Each director became a director in connection with the Conversion.
</TABLE>
MR. JOHN I. ANDRIX. Mr. Andrix has been the President and owner of
Andrix & Company, a general insurance agency located in Madison County, Ohio
since 1974.
MR. RODNEY A. BELL. From 1958 to 1986, Mr. Bell owned and operated
Rod-Bell Ford, an automobile dealership in London, Ohio. Mr. Bell sold the
dealership to Buckeye Ford in 1986. Since 1986, Mr. Bell has been a salesman at
Buckeye Ford.
MR. JOHN J. BODLE. Mr. Bodle has been the President of LFC since 1995
and the President of Citizens since 1991. Mr. Bodle has been an employee of
Citizens since 1986.
-4-
<PAGE> 6
MR. DONALD E. FORREST. For the past 48 years, Mr. Forrest has been the
owner-operator of Forrest Trucking Company, West Jefferson and London, Ohio.
MR. EDWARD D. GOODYEAR. Mr. Goodyear is a Certified Public Accountant
who has practiced in London, Ohio, since 1971. Since 1974, Mr. Goodyear has been
the Assistant Treasurer of The Dispatch Printing Company, publisher of THE
COLUMBUS DISPATCH newspaper.
MR. KENNISON A. SIMS. Mr. Sims has been the owner-operator of The Sims
Construction Company, located in London, Ohio, since 1976.
MEETINGS OF DIRECTORS
LFC was incorporated in October 1995. The Board of Directors of LFC met
seven times for regularly scheduled and special meetings during the fiscal year
ended September 30, 1996. Each director attended at least 75% of the aggregate
of such meetings.
Each director of LFC is also a director of Citizens. The Board of
Directors of Citizens met 16 times for regularly scheduled and special meetings
during the fiscal year ended September 30, 1996. Each director attended at least
75% of the aggregate of such meetings and all meetings of committees of the
Board of Directors of which such director was a member.
COMMITTEES OF DIRECTORS
The Board of Directors of LFC has a Stock Option Plan Committee and an
MRP Committee.
The members of the Stock Option Plan Committee are Messrs. Andrix,
Goodyear and Sims. The Stock Option Plan Committee administers the Stock Option
Plan and determines the number of shares to be covered by options granted to the
officers and employees of LFC and Citizens pursuant to the Stock Option Plan.
The members of the MRP Committee are Messrs. Andrix, Goodyear and Sims.
The MRP Committee administers the MRP and determines the number of shares to be
awarded to officers and employees of LFC and Citizens pursuant to the Stock
Option Plan.
The Board of Directors of Citizens has an Executive Committee, an Audit
Committee and a Classification and Fixed Asset Committee, but no separate
nominating or compensation committees.
The members of the Executive Committee are Messrs. Andrix, Goodyear and
Bodle. With authority to approve individual loans in amounts less than $150,000,
the Executive Committee also sets compensation for the executive officers of
Citizens, subject to approval by the full Board of Directors, and is authorized
to act on behalf of the Board of Directors between regular meetings of the Board
of Directors. The Executive Committee met 12 times during the fiscal year ended
September 30, 1996.
The members of the Audit Committee are Messrs. Bell, Forrest and
Goodyear. The Audit Committee is responsible for auditing teller boxes,
reviewing and reporting to the full Board of Directors on the independent audits
of LFC and reviewing loan files for regulatory compliance and adherence to the
lending policies of Citizens. The Audit Committee met six times during the
fiscal year ended September 30, 1996.
The members of the Classification and Fixed Asset Committee are Messrs.
Andrix, Bell and Bodle. The function of the Classification and Fixed Asset
Committee is to review delinquent loans, non-performing assets and real estate
acquired through foreclosure proceedings and to report and recommend action to
the full Board of Directors with regard thereto. The Classification and Fixed
Asset Committee met four times during the fiscal year ended September 30, 1996.
-5-
<PAGE> 7
EXECUTIVE OFFICERS
In addition to Mr. Bodle, the President of both LFC and Citizens, the
following persons are executive officers of LFC and Citizens and hold the
designated positions:
<TABLE>
<CAPTION>
Name Age (1) Position(s) Held
- ---- ------- ----------------
<S> <C> <C>
Joyce E. 44 Vice President and Treasurer of
Bauerle Citizens and Treasurer of LFC
Rebecca 39 Secretary of LFC and Citizens
A. Lohr
- -----------------------------
<FN>
(1) As of December 1996.
</TABLE>
MS. JOYCE E. BAUERLE. Ms. Bauerle has served as a Vice President of
Citizens since January 1996 and has served as the Treasurer of Citizens since
1981 and as Treasurer of LFC since LFC's incorporation in October 1995.
MS. REBECCA A. LOHR. Ms. Lohr has served as the Secretary of Citizens
for the past five years and as the Secretary of LFC since October 1995.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
No executive officer of LFC or Citizens received compensation in excess
of $100,000 in fiscal 1996. The following table sets forth the compensation paid
to John J. Bodle, the President of LFC and Citizens, for the fiscal years ended
September 30, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal All Other
Position Year Salary ($) Bonus ($) Compensation (1)
- -------- ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
John J. Bodle 1996 $55,530 $10,725 $8,400
President 1995 53,560 11,962 7,100
- ----------------------------
<FN>
(1) Consists of directors' fees. Does not include amounts attributable to
miscellaneous benefits received by Mr. Bodle, the cost of which was
less than 10% of his annual salary and bonus.
</TABLE>
DIRECTOR COMPENSATION
LFC pays no director's fees. Each director of Citizens currently
receives a fee of $500 for each meeting of the Board of Directors attended. In
addition, each member of the Executive Committee, the Audit Committee and the
Classification and Fixed Asset Committee receives, respectively, $300, $100 and
$100 for each committee meeting attended.
EMPLOYMENT AGREEMENTS
On March 29, 1996, Citizens entered into an employment agreement with
Mr. Bodle (the "Employment Agreement"). Citizens has not entered into an
employment agreement with any other officer.
-6-
<PAGE> 8
The Employment Agreement provides for a term of three years, a salary
of not less than $53,560 and performance review by the Board of Directors not
less often than annually. The Employment Agreement also provides for the
inclusion of Mr. Bodle in any formally established employee benefit, bonus,
pension and profit-sharing plans for which senior management personnel are
eligible.
The Employment Agreement is terminable by Citizens at any time. In the
event of termination by Citizens for "just cause," as defined in the Employment
Agreement, Mr. Bodle will have no right to receive any compensation or other
benefits for any period after such termination. In the event of termination by
Citizens other than for just cause, at the end of the term of the Employment
Agreement or in connection with a "change of control," as defined in the
Employment Agreement, Mr. Bodle will be entitled to a continuation of salary
payments for a period of time equal to the term of the Employment Agreement and
a continuation of benefits substantially equal to those being provided at the
date of termination of employment until the earliest to occur of the end of the
term of the Employment Agreement or the date on which Mr. Bodle becomes employed
full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence of the following within one year of a "change of control": (1) the
termination of employment of Mr. Bodle for any reason other than just cause,
retirement or termination at the end of the term of the Employment Agreement and
(2) a constructive termination resulting from a change in the capacity or
circumstances in which Mr. Bodle is employed or from a material reduction in his
responsibilities, authority, compensation or other benefits provided under the
Employment Agreement without Mr. Bodle's written consent. In the event of any
such occurrence, Mr. Bodle will be entitled to receive an amount equal to three
times his average annual compensation for the three taxable years immediately
preceding the termination of employment. In addition, Mr. Bodle will be entitled
to continued coverage under all benefit plans until the earliest of the end of
the term of the Employment Agreement or the date on which he is included in
another employer's benefit plans as a full-time employee. The maximum which Mr.
Bodle may receive under such provisions, however, is limited to an amount which
will not result in the imposition of a penalty tax pursuant to Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code").
"Control," as defined in the Employment Agreement, generally refers to the
acquisition by any person or entity of the ownership or power to vote 10% or
more of the voting stock of Citizens or LFC, the control of the election of a
majority of the directors of Citizens or LFC or the exercise of a controlling
influence over the management or policies of Citizens or LFC.
CERTAIN TRANSACTIONS
Citizens has followed a policy of granting consumer loans and loans
secured by the borrower's personal residence to officers, directors and
employees. As required by federal law, all such loans to executive officers and
directors are made in the ordinary course of business, on the same terms and
conditions as those of comparable transactions prevailing at the time and in
accordance with Citizens' underwriting guidelines. In addition, such loans do
not involve more than the normal risk of collectibility or present other
unfavorable features. Loans to all officers and directors and their related
interests totaled $472,844 at September 30, 1996.
PROPOSAL TWO - APPROVAL OF THE LONDON FINANCIAL CORPORATION
-----------------------------------------------------------
1996 STOCK OPTION AND INCENTIVE PLAN
------------------------------------
GENERAL
On November 21, 1996, the Board of Directors of LFC adopted the Stock
Option Plan. In accordance with the terms of the Stock Option Plan and
regulations of the Office of Thrift Supervision (the "OTS"), the Stock Option
Plan must also be approved by the holders of a majority of the outstanding
shares of LFC. The provisions of the Stock Option Plan comply with OTS
regulations. The OTS in no way endorses or approves the Stock Option Plan. THE
BOARD OF DIRECTORS OF LFC RECOMMENDS THAT THE SHAREHOLDERS OF LFC APPROVE THE
STOCK OPTION PLAN.
The following is a summary of the terms of the Stock Option Plan and is
qualified in its entirety by reference to the full text of the Stock Option
Plan, a copy of which is attached hereto as Exhibit A.
-7-
<PAGE> 9
PURPOSE, ADMINISTRATION AND ELIGIBILITY
The purposes of the Stock Option Plan include retaining and providing
incentives to the directors, officers and employees of LFC and its subsidiaries
by facilitating their purchase of a stock interest in LFC. Pursuant to the Stock
Option Plan, 52,900 common shares have been reserved for issuance by LFC upon
the exercise of options to be granted to certain directors, officers and
employees of Citizens and LFC from time to time under the Stock Option Plan. If
options in respect of all shares reserved for issuance under the Stock Option
Plan are granted and exercised, the voting power of existing shareholders will
be diluted by approximately 10% and the influence of directors and officers of
LFC over the outcome of the vote on any matters submitted to LFC shareholders,
including changes of control, will increase.
The Stock Option Plan will be administered by a committee of directors
composed of at least three directors of LFC who are not employees of LFC (the
"Stock Option Committee"). The Stock Option Committee may grant options under
the Stock Option Plan at such times as they deem most beneficial to Citizens and
LFC on the basis of the individual participant's responsibility, tenure and
future potential to Citizens and LFC. Grants must be made in accordance with OTS
regulations which provide that no individual may receive options to purchase
more than 25% of the shares which are reserved for issuance under the Stock
Option Plan and that no director who is not an employee of LFC or Citizens may
receive options to purchase more than 5% of such shares individually or 30% in
the aggregate.
Without further approval of the shareholders, the Board of Directors
may at any time terminate the Stock Option Plan or may amend it from time to
time in such respects as the Board of Directors may deem advisable, except that
the Board of Directors may not, without the approval of the shareholders, make
any amendment which would (a) increase the aggregate number of common shares
which may be issued under the Stock Option Plan (except for adjustments to
reflect certain changes in the capitalization of LFC), (b) materially modify the
requirements as to eligibility for participation in the Stock Option Plan, or
(c) materially increase the benefits accruing to participants under the Stock
Option Plan. Notwithstanding the foregoing, the Board of Directors may amend the
Stock Option Plan to take into account changes in applicable securities, federal
income tax and other applicable laws.
OPTION TERMS
Options granted under the Stock Option Plan may be "incentive stock
options" within the meaning of Section 422 of the Code ("ISOs") or may not be
ISOs ("Non-qualified Options"). The option exercise price for ISOs and
Non-qualified Options will be determined by the Stock Option Committee at the
time of grant, but must not be less than 100% of the fair market value of the
shares on the date of the grant. No stock option will be exercisable after the
expiration of ten years from the date of grant. In the case of an ISO granted to
an employee who owns more than 10% of LFC's outstanding common shares at the
time an ISO is granted under the Stock Option Plan, however, the exercise price
of the ISO may not be less than 110% of the fair market value of the shares on
the date of the grant and the ISO may not be exercisable after the expiration of
five years from the date of grant.
An option recipient will not be permitted to transfer or assign an
option other than by will, in accordance with the laws of descent and
distribution or pursuant to a domestic relations order issued by a court of
competent jurisdiction. "Termination for cause," as defined in the Stock Option
Plan, will result in the annulment of any outstanding options.
LFC will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, LFC will receive
payment of cash, common shares of LFC or a combination of cash and common shares
from option recipients in exchange for shares issued. The market value of the
common shares underlying the options reserved for the Stock Option Plan is
$714,150, based upon the number of shares reserved, multiplied by the $13.50 per
share closing bid price quoted by The Nasdaq SmallCap Market ("Nasdaq") on
December 11, 1996.
-8-
<PAGE> 10
TAX TREATMENT OF INCENTIVE STOCK OPTIONS
An optionee who is granted an ISO will not recognize taxable income
either on the date of grant or on the date of exercise, although the alternative
minimum tax may apply. Upon disposition of shares acquired from the exercise of
an ISO, long-term capital gain or loss is generally recognized in an amount
equal to the difference between the amount realized on the sale or disposition
and the exercise price. If the optionee disposes of the shares within two years
of the date of grant or within one year from the date of the transfer of the
shares to the optionee (a "Disqualifying Disposition"), however, then the
optionee will recognize ordinary income, as opposed to capital gain, at the time
of disposition in an amount generally equal to the lesser of (i) the amount of
gain realized on the disposition, or (ii) the difference between the fair market
value of the shares received on the date of exercise and the exercise price. Any
remaining gain or loss is treated as a short-term or long-term capital gain or
loss, depending upon the period of time the shares have been held.
LFC is not entitled to a tax deduction upon either the exercise of an
ISO or the disposition of shares acquired pursuant to such exercise, except to
the extent that the optionee recognizes ordinary income in a Disqualifying
Disposition. Ordinary income from a Disqualifying Disposition will constitute
compensation but will not be subject to tax withholding, nor will it be
considered wages for payroll tax purposes.
If the holder of an ISO pays the exercise price, in whole or in part,
with previously acquired shares of LFC, the exchange should not affect the ISO
tax treatment of the exercise. Upon such exchange, and except as otherwise
described herein, no gain or loss is recognized by the optionee upon delivering
previously acquired shares to LFC, and shares received by the optionee equal in
number to previously acquired common shares exchanged therefor will have the
same basis and holding period for long-term capital gain purposes as the
previously acquired shares. (The optionee, however, will not be able to utilize
the prior holding period for the purpose of satisfying the ISO statutory holding
period requirements for avoidance of a Disqualifying Disposition.) Shares
received by the optionee in excess of the number of shares previously acquired
will have a basis for federal income tax purposes of zero and a holding period
which commences as of the date the shares are transferred to the optionee upon
exercise of the ISO. If the exercise of an ISO is effected using shares
previously acquired through the exercise of an ISO, the exchange of such
previously acquired shares will be considered a disposition of such shares for
the purpose of determining whether a Disqualifying Disposition has occurred.
TAX TREATMENT OF NON-QUALIFIED OPTIONS
An optionee receiving a Non-qualified Option does not recognize taxable
income on the date of grant of the option, provided that the option does not
have a readily ascertainable fair market value at the time it is granted. The
optionee must recognize ordinary income generally at the time of exercise of a
Non-qualified Option in the amount of the difference between the fair market
value of the shares on the date of exercise and the option price. The ordinary
income received will constitute compensation for which tax withholding by LFC
generally will be required. The amount of ordinary income recognized by an
optionee will be deductible by LFC in the year that the optionee recognizes the
income if LFC complies with the applicable withholding requirement.
If, at the time of exercise, the sale of the shares could subject the
optionee to short-swing profit liability under Section 16(b) of the Securities
Exchange Act of 1934, such person generally will not recognize ordinary income
until the date that the optionee is no longer subject to such Section 16(b)
liability. Upon such date, the optionee will recognize ordinary income in an
amount equal to the fair market value of the shares on such date less the option
exercise price. Nevertheless, the optionee may elect under Section 83(b) of the
Code within 30 days of the date of exercise to recognize ordinary income as of
the date of exercise, without regard to the restriction of Section 16(b).
Shares acquired upon the exercise of a Non-qualified Option will have a
tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized, and the holding period for
the shares generally will begin on the date of exercise or such other relevant
date. Upon subsequent disposition of the shares, the optionee will recognize
long-term capital gain or loss if the optionee has held the shares for more
-9-
<PAGE> 11
than one year prior to disposition, or short-term capital gain or loss if the
optionee has held the shares for one year or less.
If a holder of a Non-qualified Option pays the exercise price, in whole
or in part, with previously acquired shares of LFC, the optionee will recognize
ordinary income in the amount by which the fair market value of the shares
received exceeds the exercise price. The optionee will not recognize gain or
loss with respect to the previously acquired shares upon delivering such
previously acquired shares to LFC unless such delivery constitutes a
Disqualifying Disposition of shares acquired through the exercise of an ISO.
Shares received by an optionee equal in number to the previously acquired shares
exchanged therefor will have the same basis and holding period as such
previously acquired shares. Shares received by an optionee in excess of the
number of such previously acquired shares will have a basis equal to the fair
market value of such additional shares as of the date ordinary income is
recognized. The holding period for such additional shares will commence as of
the date of exercise or such other relevant date.
PROPOSED AWARDS
The Board of Directors of LFC adopted the Stock Option Plan on November
21, 1996. If the shareholders approve the Stock Option Plan, options to purchase
3,174 common shares of LFC will automatically be granted in accordance with the
terms of the Stock Option Plan to each non-employee director on the fifth
business day following the effective date of the Stock Option Plan. Options to
purchase 3,174 common shares of LFC will also be automatically granted in
accordance with the terms of the Stock Option Plan to each non-employee director
who is not a director on the effective date of the Stock Option Plan, but who is
subsequently elected or appointed to the Board of Directors of LFC, Citizens or
a subsidiary of LFC on the date of such election or appointment, if reserved
shares remain available under the Stock Option Plan.
In addition, if the shareholders approve the Stock Option Plan at the
Annual Meeting, the Stock Option Committee intends to grant the following
options under the Stock Option Plan to the corresponding executive officers:
<TABLE>
<CAPTION>
Name of Recipient Shares Subject to Options
----------------- -------------------------
<S> <C>
John J. Bodle 13,225
Joyce E. Bauerle 1,500
Rebecca A. Lohr 1,500
</TABLE>
The Stock Option Committee also intends to grant options to purchase 6,000
common shares to the employees of LFC and Citizens who are not executive
officers. No determination has yet been made with respect to the extent to which
the options granted to employees will be ISOs.
If reserved shares are available under the Stock Option Plan, the Stock
Option Committee may grant options under the Stock Option Plan to the directors,
officers and employees of LFC and Citizens in the future at such times as they
deem most beneficial to LFC and Citizens on the basis of the individual
participant's responsibility, tenure and future potential. Options awarded under
the Stock Option Plan will become exercisable at the rate of one-fifth per year
commencing on the date that is one year after the date of grant of the award.
THE BOARD OF DIRECTORS OF LFC RECOMMENDS THAT THE SHAREHOLDERS OF LFC
APPROVE THE STOCK OPTION PLAN. Accordingly, the shareholders of LFC will be
asked to approve the following resolution at the Annual Meeting:
RESOLVED, that the London Financial Corporation 1997 Stock
Option and Incentive Plan be, and it hereby is, approved.
-10-
<PAGE> 12
PROPOSAL THREE - APPROVAL OF THE CITIZENS LOAN & SAVINGS COMPANY
----------------------------------------------------------------
MANAGEMENT RECOGNITION PLAN AND TRUST
-------------------------------------
GENERAL
On November 21, 1996, the Board of Directors of LFC adopted the MRP. In
accordance with the terms of the MRP and regulations of the OTS, the MRP must
also be approved by the holders of a majority of the outstanding shares of LFC.
The provisions of the MRP comply with OTS regulations. The OTS in no way
endorses or approves the MRP. THE BOARD OF DIRECTORS OF LFC RECOMMENDS THAT THE
SHAREHOLDERS OF LFC APPROVE THE MRP.
The following is a summary of the terms of the MRP and is qualified in
its entirety by reference to the full text of the MRP, a copy of which is
attached hereto as Exhibit B.
PURPOSE, ADMINISTRATION AND ELIGIBILITY
The purpose of the MRP is to provide directors, officers and certain
key employees of LFC and Citizens with an ownership interest in LFC in a manner
designed to compensate such directors, officers and key employees for services
to LFC and Citizens. If the shareholders approve the MRP at the Annual Meeting,
Citizens expects to contribute sufficient funds to enable the MRP to purchase up
to 21,160 common shares of LFC at the market price at the time of such purchase.
The MRP will be administered by a committee of directors composed of at
least three directors of Citizens who are not employees of Citizens (the "MRP
Committee"). The MRP Committee will determine the number of shares to be awarded
to eligible participants other than non-employee directors. The MRP Committee
may make awards under the MRP to the officers and employees of LFC and Citizens
at such times as they deem most beneficial to LFC on the basis of the individual
participant's responsibility, tenure and future potential. Grants must be made
in accordance with OTS regulations, which provide that no individual may be
awarded more than 25% of the shares which are reserved for issuance under the
MRP and that directors who are not employees of LFC or Citizens may not receive
more than 5% of such shares individually or 30% in the aggregate. The MRP will
either purchase the 21,160 common shares of LFC in the open market or from the
authorized, but unissued shares of LFC.
In the event that the MRP purchases all 21,160 shares from authorized,
but unissued shares of LFC, the voting power of current shareholders will be
diluted by approximately 4%.
TERMS
Unless the MRP Committee specifies a longer period of time, one-fifth
of the number of shares awarded to an individual will become earned and
non-forfeitable on each of the first five anniversaries of the date of such
award. Compensation expense in the amount of the fair market value of the MRP
shares will be recognized as the shares are earned. Until shares awarded are
earned by the participant, such shares will be forfeited in the event that the
participant ceases to be either a director or an employee of Citizens, except
that in the event of the death or disability of a participant, the participant's
shares will be deemed to be earned and non-forfeitable.
The shares, together with any cash dividends or distributions paid
thereon, will be distributed as soon as practicable after they are earned. A
participant may direct the voting of all shares awarded to him or her which have
been earned, but have not yet been distributed to him or her. Shares that have
been awarded, but not earned, will be voted in the discretion of the MRP Trustee
to be appointed by the MRP Committee. Shares that have been awarded, but not
earned, may not be transferred.
The Board of Directors of Citizens may, by resolution, amend or
terminate the MRP.
-11-
<PAGE> 13
TAX TREATMENT OF SHARES AWARDED UNDER THE MRP
Persons receiving shares under the MRP generally will not recognize
income upon the award of such shares, but will recognize ordinary income when
and to the extent such shares become earned and non-forfeitable, in an amount
equal to the fair market value of the shares at the time such shares become
earned and non-forfeitable plus the amount of any earnings distributed to the
participant with respect to such shares. If applicable withholding requirements
are satisfied, LFC will be entitled to a deduction each year in an amount equal
to the income, if any, recognized by participants for such year.
Under Section 83(b) of the Code, a participant may elect, within 30
days after the shares are awarded, to recognize ordinary income on the date the
shares are awarded based on the fair market value of the shares on such date. If
the election is made, Citizens would be entitled to a deduction for an
equivalent amount. A participant making such an election will have a tax basis
in the shares equal to the amount of ordinary income recognized, and the
participant's holding period for capital gains purposes for such shares will
commence on the date the shares are awarded. If a Section 83(b) election is
made, however, and the shares are subsequently forfeited, the participant will
not be entitled to either a deduction of the amount previously recognized as
income with respect to such shares or a refund of any tax paid thereon. If an
election under Section 83(b) is not made with respect to an award, Citizens will
recognize the compensation expense arising from such award ratably over the five
year vesting period, based on the fair market value of the shares at the time of
vesting.
PROPOSED AWARDS
The Board of Directors of LFC adopted the MRP on November 21, 1996. If
the shareholders approve the MRP, Citizens expects to contribute sufficient
funds to enable the MRP to purchase up to 21,160 common shares of LFC at the
market price at the time of such purchase. After such purchase, 1,270 common
shares of LFC will automatically be awarded in accordance with the terms of the
MRP to each non-employee director on the fifth business day following the
effective date of the MRP. Common shares of LFC may also be awarded under the
MRP to each non-employee director who was not a director on the effective date
of the MRP, but who is subsequently elected or appointed to the Board of
Directors of LFC, Citizens or a subsidiary of LFC on the date of such election
or appointment.
In addition, if the shareholders approve the MRP at the Annual Meeting,
the MRP Committee intends to make the following awards under the MRP:
<TABLE>
<CAPTION>
Name of Recipient Shares to be Awarded
----------------- --------------------
<S> <C>
John J. Bodle 5,290
Joyce E. Bauerle 1,000
Rebecca A. Lohr 1,000
</TABLE>
The MRP Committee also intends to award 4,000 common shares to the employees of
Citizens who are not executive officers. The MRP Committee may award shares
under the MRP to the directors, officers and key employees of LFC and Citizens
in the future at such times as they deem most beneficial to LFC and Citizens on
the basis of the individual participant's responsibility, tenure and future
potential.
THE BOARD OF DIRECTORS OF LFC RECOMMENDS THAT THE SHAREHOLDERS OF LFC
APPROVE THE MRP. Accordingly, the shareholders of LFC will be asked to approve
the following resolution at the Annual Meeting:
RESOLVED, that The Citizens Loan & Savings Company Management
Recognition Plan and Trust be, and it hereby is, approved.
-12-
<PAGE> 14
NEW PLAN BENEFITS
The following table sets forth certain information with respect to the
options expected to be granted pursuant to the Stock Option Plan and the awards
expected to be made pursuant to the MRP:
<TABLE>
<CAPTION>
Stock Option Plan (1) MRP
--------------------- ---------------------------------------
Name and Position Shares Subject to Options Dollar Value ($) (2) Shares (#)
- ----------------- ------------------------- -------------------- ----------
<S> <C> <C> <C>
John J. Bodle, President 13,225 $178,538 5,290
All executive officers, as a group
(3 persons) 16,225 219,038 7,290
All directors who are not officers, as
a group (5 persons) 15,870 214,245 6,350
All employees who are not executive
officers, as a group (6 persons) 6,000 81,000 4,000
- ----------------------------
<FN>
(1) The dollar value of the shares subject to options under the Stock
Option Plan is not determinable.
(2) Based upon the number of shares awarded multiplied by the $13.50 per
share closing bid price quoted by Nasdaq on December 11, 1996.
</TABLE>
PROPOSAL FOUR - SELECTION OF AUDITORS
-------------------------------------
On July 11, 1996, LFC, with the approval of its Board of Directors,
dismissed KPMG Peat Marwick ("KPMG") as LFC's independent auditor and engaged
Grant Thornton to act in such capacity. The reports of KPMG on the financial
statements of Citizens for the fiscal years ended September 30, 1994 and 1995,
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended September 30, 1994 and 1995, and the interim
period through July 11, 1996, there were no disagreements between LFC or
Citizens and KPMG on any matter of accounting principles or practices,
consolidated financial statement disclosure or audit scope or procedure.
The Board of Directors has selected Grant Thornton as the auditors of
LFC and Citizens for the current fiscal year and recommends that the
shareholders ratify such selection. Management expects that a representative of
Grant Thornton will be present at the Annual Meeting, will have the opportunity
to make a statement if he or she so desires and will be available to respond to
appropriate questions.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
-------------------------------------------
Any proposals of shareholders intended to be included in the proxy
statement for the 1998 Annual Meeting of Shareholders of LFC should be sent to
LFC by certified mail and must be received by LFC not later than August 14,
1997.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
-13-
<PAGE> 15
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
John J. Bodle, President
London, Ohio
December 12, 1996
-14-
<PAGE> 16
EXHIBIT A
LONDON FINANCIAL CORPORATION
1997 STOCK OPTION AND INCENTIVE PLAN
PURPOSE. The purpose of the London Financial Corporation 1997
Stock Option and Incentive Plan (this "Plan") is to promote and advance the
interests of London Financial Corporation (the "Company") and its shareholders
by enabling the Company to attract, retain and reward directors and managerial
and other key employees of the Company and any Subsidiary (hereinafter defined),
and to strengthen the mutuality of interests between such directors and
employees and the Company's shareholders, by providing such persons with a
proprietary interest in pursuing the long-term growth, profitability and
financial success of the Company.
DEFINITIONS. For purposes of this Plan, the following terms
shall have the meanings set forth below:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor thereto, together with rules, regulations and
interpretations promulgated thereunder.
"Committee" means the Committee of the Board constituted as provided in
Section 4 of this Plan.
"Company" means London Financial Corporation, an Ohio corporation, or
any successor corporation.
"Director" means a member of the Board or of the Board of Directors of
a Parent or Subsidiary of the Company.
"Effective Date" means the later of the date on which the Plan is
approved by the shareholders of the Company and the date on
which the Plan is adopted by the Board.
"Employee" means any person, other than an Officer or Director,
employed on a full-time basis by the Company or any Parent or
Subsidiary of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute.
"Fair Market Value" shall be determined as follows:
(i) If the Shares are traded on a national securities
exchange at the time of grant of the Stock Option, then the
Fair Market Value shall be the average of the highest and the
lowest selling price on such exchange on the date such Stock
Option is granted or, if there were no sales on such date,
then on the next prior business day on which a sale occurred.
(ii) If the Shares are quoted on The Nasdaq Stock
Market at the time of the grant of the Stock Option, then the
Fair Market Value shall be the mean between the closing high
bid and low asked quotation with respect to a Common Share on
such date on The Nasdaq Stock Market.
(iii) If the Shares are not traded on a national
securities exchange or quoted on The Nasdaq Stock Market, then
the Fair Market Value shall be as determined by the Committee.
"Incentive Stock Option" means any Stock Option granted pursuant to the
provisions of Section 6 of this Plan that is intended to be
and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
"Non-Qualified Stock Option" means any Stock Option granted pursuant to
the provisions of Section 6 of this Plan that is not an
Incentive Stock Option.
"Officer" means a person who holds one of the positions specified in
Article Three of the Code of Regulations of the Company or any
person who holds a comparable position with any Parent or
Subsidiary of the Company.
-1-
<PAGE> 17
"OTS" means the Office of Thrift Supervision, Department of the
Treasury.
"Parent" means any present or future corporation which would be a
"Parent Corporation" as defined in Subsections 424(e) and (q)
of the Code.
"Participant" means an employee or director of the Company or a
Subsidiary who is granted an Incentive Stock Option or a
Non-Qualified Stock Option under this Plan. Notwithstanding
the foregoing, for the purposes of the granting of any
Incentive Stock Option under this Plan, the term "Participant"
shall include only employees of the Company or a Subsidiary.
"Plan" means the London Financial Corporation 1997 Stock Option and
Incentive Plan, as set forth herein and as it may be hereafter
amended from time to time.
"Shares" means the common shares, without par value, of the Company or
any security of the Company issued in substitution or in
exchange therefor or in lieu thereof.
"Stock Option" means a right, granted pursuant to Section 6 of this
Plan, to purchase Shares.
"Subsidiary" means any present or future corporation which would be a
"subsidiary corporation", as defined in Subsections 424(f) and
(g) of the Code, including, but not limited to, The Citizens
Loan & Savings Company ("Citizens").
SHARES SUBJECT TO THE PLAN.
Shares Available. Subject to adjustment as provided
in Section 3(b) hereof, the aggregate number of Shares with respect to which
Stock Options may be granted pursuant to the Plan shall be Fifty-Two Thousand
Nine Hundred (52,900). If, after the Effective Date, any Shares subject to a
Stock Option granted under the Plan, or to which such Stock Option relates, are
forfeited, or if a Stock Option otherwise terminates or is cancelled without the
delivery of Shares, then the Shares covered by such Stock Option, or to which
such Stock Option relates, or the number of Shares otherwise counted against the
aggregate number of Shares with respect to which Stock Options may be granted,
to the extent of any such forfeiture, termination or cancellation, shall again
be, or shall become, Shares with respect to which Stock Options may be granted,
to the extent permissible under Rule 16b-3 promulgated under the Exchange Act,
or any successor rule or regulation thereto as in effect from time to time.
Adjustments and Corporate Acts. In the event that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is necessary in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the Plan,
then the Committee shall proportionately adjust any or all (as necessary) of (i)
the number of Shares or other securities of the Company (or number and kind of
other securities or property) with respect to which Stock Options may be
granted, (ii) the number of Shares or other securities of the Company (or number
and kind of other securities or property) subject to outstanding Stock Options,
and (iii) the grant or exercise price with respect to any Stock Options;
provided, in each case, that no such adjustment shall be authorized to the
extent that such authority would cause the Plan to violate Section 422(b)(1) of
the Code, as from time to time amended, or Rule 16b-3 promulgated under the
Exchange Act, or any successor rule or regulation thereto as in effect from time
to time. The existence of this Plan and the Stock Options granted hereunder
shall not affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger, acquisition or consolidation of the
Company, any issuance of bonds, debentures, preferred or prior preference stocks
ahead of or affecting the Company's capital stock or the rights thereof, the
dissolution or liquidation of the Company or any sale or transfer of all or any
part of its assets or business, or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange of cash,
stock of another company or options to purchase the stock of another company for
any Stock Option outstanding at the time of such corporate transaction or which
would involve the termination of all Stock Options outstanding at the time of
such corporate transaction.
-2-
<PAGE> 18
ADMINISTRATION.
This Plan shall be administered by the Committee to
be comprised of not less than three of the members of the Board who are not
employees of the Company. The members of the Committee shall be appointed from
time to time by the Board. Members of the Committee shall serve at the pleasure
of the Board, and the Board may from time to time remove members from, or add
members to, the Committee. A majority of the members of the Committee shall
constitute a quorum for the transaction of business. Action approved in writing
by a majority of the members of the Committee then serving shall be fully as
effective as if the action had been taken by unanimous vote at a meeting duly
called and held.
The Committee is authorized to construe and interpret
this Plan and to make all other determinations necessary or advisable for the
administration of this Plan. The Committee may designate persons other than
members of the Committee to carry out its responsibilities under such conditions
and limitations as it may prescribe. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, or application of this Plan shall be final, conclusive and
binding upon all persons participating in this Plan and any person validly
claiming under or through persons participating in this Plan. The Company shall
effect the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in writing in
such form as approved by the Committee.
DURATION OF THIS PLAN. This Plan shall terminate on the date
which is ten (10) years from the date on which this Plan is adopted by the
Board, except with respect to Stock Options then outstanding. Notwithstanding
the foregoing, no Incentive Stock Option may be granted under this Plan after
the date which is ten (10) years from the date on which this Plan is adopted by
the Board or the date on which this Plan is approved by the shareholders of the
Company, whichever is earlier.
ELIGIBILITY AND GRANTS.
Persons eligible for Stock Options under this Plan shall
consist of Directors and managerial and other key Employees of the Company or a
Subsidiary who hold positions with significant responsibilities or whose
performance or potential contribution, in the judgment of the Committee, will
benefit the future success of the Company or a Subsidiary. In selecting the
Directors and Employees to whom Stock Options will be awarded and the number of
Shares subject to such Stock Options, the Committee shall consider the position,
duties and responsibilities of the eligible Directors and Employees, the value
of their services to the Company and the Subsidiaries and any other factors the
Committee may deem relevant.
STOCK OPTIONS. Stock Options granted under this Plan may be in
the form of Incentive Stock Options or Non-Qualified Stock Options, and such
Stock Options shall be subject to the following terms and conditions as the
Committee shall deem desirable:
Grant.
(i) NON-EMPLOYEE DIRECTORS. The grant of Stock
Options to non-employee Directors shall occur pursuant to the
following formula: Stock Options to purchase 3,174 Shares
shall automatically be granted to each non-employee Director
on the fifth business day next following the Effective Date;
in addition, Stock Options to purchase 3,174 Shares shall
automatically be granted to each non-employee Director who was
not a Director on the Effective Date but is elected or
appointed to the Board or Board of Directors of a Subsidiary
subsequent to the Effective Date on the date such election or
appointment is effective. The foregoing notwithstanding, no
Stock Option shall be granted if such grant would result in a
violation or possible violation of federal or state securities
laws.
(ii) OFFICERS AND EMPLOYEES. The Committee shall from
time to time determine the Officers and Employees to whom
Stock Options shall be granted under the Plan and the number
of Shares subject to such Stock Options. In selecting the
Participants and in determining the number of Shares subject
to each Stock Option granted under the Plan, the Committee may
consider the nature of the services rendered by each such
Participant, each such Participant's current and potential
contribution to the Company or any Parent or Subsidiary and
such other factors as the Committee may, in its sole
discretion, deem relevant. An Officer or Employee who has been
granted a Stock Option may, if otherwise eligible, be granted
additional Stock Options. The terms and conditions of all
grants of Stock Options under the Plan shall be subject to and
comply with such rules as may be prescribed by Section 422 of
the Code, as from time to time
-3-
<PAGE> 19
amended, and any regulations implementing such statute, except
that the Fair Market Value of Shares for which Stock Options
are exercisable for the first time may exceed $100,000 per
calendar year.
Each Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as approved by the Committee.
Stock Option Price. The option exercise price per
Common Share purchasable under a Stock Option shall be determined by the
Committee at the time of the grant; provided, however, that in no event shall
the exercise price of a Stock Option be less than 100% of the Fair Market Value
of the Shares on the date of the grant of such Stock Option. Notwithstanding the
foregoing, in the case of a Participant who owns Shares representing more than
10% of the outstanding Shares at the time the Incentive Stock Option is granted,
the option exercise price shall in no event be less than 110% of the Fair Market
Value of the Shares at the time the Incentive Stock Option is granted.
Stock Option Terms. Subject to the right of the
Company to provide for earlier termination in the event of any merger,
acquisition or consolidation involving the Company, the term of each Stock
Option shall be fixed by the Committee; except that the term of Incentive Stock
Options will not exceed ten years after the date the Incentive Stock Option is
granted; provided, however, that in the case of a Participant who owns a number
of Shares representing more than 10% of the Shares outstanding at the time the
Incentive Stock Option is granted, the term of the Incentive Stock Option shall
not exceed five years.
Exercisability. Except as set forth in Section 7(f)
and Section 8 of this Plan, Stock Options awarded under this Plan shall become
exercisable at the rate of one-fifth per year commencing on the date that is one
year after the date of the grant of the Stock Option and shall be subject to
such other terms and conditions as shall be determined by the Committee at the
date of grant.
Method of Exercise. A Stock Option may be exercised,
in whole or in part, by giving written notice of exercise to the Company
specifying the number of Shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price in cash or, if acceptable
to the Committee in its sole discretion, in Shares already owned by the
Participant, or by surrendering outstanding Stock Options. The Committee may
also permit Participants, either on a selective or aggregate basis,
simultaneously to exercise Stock Options and sell Shares thereby acquired,
pursuant to a brokerage or similar arrangement, approved in advance by the
Committee, and use the proceeds from such sale as payment of the purchase price
of such Shares.
Special Rule for Incentive Stock Options. With
respect to Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive Stock
Option is granted) of the number of Shares with respect to which Incentive Stock
Options are exercisable under all plans of the Company or a Subsidiary for the
first time by a Participant during any calendar year exceeds $100,000, or such
other limit as may be required by the Code, such Stock Options shall be
Non-Qualified Stock Options to the extent of such excess.
Time of Granting of Stock Options. The date of grant
of a Stock Option under the Plan to a non-employee Director on the Effective
Date shall be the fifth business day next following the Effective Date. The date
of grant of a Stock Option under the Plan to a non-employee Director who is not
a Director on the Effective Date shall be the effective date of election or
appointment of such Director to the Board or the Board of Directors of a
Subsidiary. Notice of a grant shall be given to each Participant within a
reasonable time after the date of grant.
TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
Except in the event of the death or disability of a
Participant, upon the resignation, removal or retirement from the Board or the
Board of Directors of a Subsidiary of any Participant who is a Director or upon
the termination of employment of a Participant who is not a Director, any Stock
Option which has not yet become exercisable shall thereupon terminate and be of
no further force or effect, and any Stock Option which has become exercisable
shall terminate if it is not exercised within 12 months of such resignation,
removal or retirement.
Unless the Committee shall specifically state
otherwise at the time a Stock Option is granted, all Stock Options granted under
this Plan shall become exercisable in full on the date of termination of a
Participant's employment or directorship with the Company or a Subsidiary
because of his death or disability, and, subject to extension by the Committee,
all Stock Options shall terminate if not exercised within 12 months of the
Participant's death or disability.
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In the event the employment or the directorship of a
Participant is Terminated for Cause (hereinafter defined), any Stock Option
which has not been exercised shall terminate as of the date of such termination
for cause. For the purpose of this Section 8(c), the term "Terminated for Cause"
means any removal of a Director or discharge of an Employee for the personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profits, intentional failure to perform stated duties, willful
violation of a material provision of any law, rule or regulation (other than
traffic violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a Director or Employee which
results in a substantial financial loss to the Company or a Subsidiary.
NON-TRANSFERABILITY OF STOCK OPTIONS.
No Stock Option under this Plan, and no rights or interests
therein, shall be assignable or transferable by a Participant except by will,
pursuant to the laws of descent and distribution. During the lifetime of a
Participant, Stock Options are exercisable only by, and payments in settlement
of Stock Options will be payable only to, the Participant or his or her legal
representative.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
The existence of this Plan and the Stock Options
granted hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger, acquisition or consolidation of
the Company, any issuance of bonds, debentures, preferred or prior preference
stocks ahead of or affecting the Company's capital stock or the rights thereof,
the dissolution or liquidation of the Company or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange of cash,
stock of another company or options to purchase the stock of another company for
any Stock Option outstanding at the time of such corporate transaction or which
would involve the termination of all Stock Options outstanding at the time of
such corporate transaction.
In the event of any change in capitalization
affecting the Shares, such as a stock dividend, stock split, recapitalization,
merger, consolidation, split-up, combination or exchange of Shares or other form
of reorganization, or any other change affecting the Shares, such proportionate
adjustments, if any, as the Board in its discretion may deem appropriate to
reflect such change shall be made with respect to the aggregate number of Shares
for which Stock Options in respect thereof may be granted under this Plan, the
maximum number of Shares which may be sold or awarded to any Participant, the
number of Shares covered by each outstanding Stock Option, and the exercise
price per share in respect of outstanding Stock Options.
The Committee may also make such adjustments in the number of Shares
covered by, and the exercise price or other value of, any outstanding Stock
Options in the event of a spin-off or other distribution (other than normal cash
dividends) of Company assets to shareholders. In the event that another
corporation or business entity is being acquired by the Company, and the Company
agrees to assume outstanding employee stock options and/or the obligation to
make future grants of options or rights to employees of the acquired entity, the
aggregate number of Shares available for Stock Options under Section 4 of this
Plan may be increased accordingly.
AMENDMENT AND TERMINATION OF THIS PLAN.
Without further approval of the shareholders, the Board may at
any time terminate this Plan, or may amend it from time to time in such respects
as the Board may deem advisable, except that the Board may not, without approval
of the shareholders, make any amendment which would (a) increase the aggregate
number of Shares which may be issued under this Plan (except for adjustments
pursuant to Section 10 of this Plan), (b) materially modify the requirements as
to eligibility for participation in this Plan, or (c) materially increase the
benefits accruing to Participants under this Plan. Notwithstanding any other
provision contained in the Plan, in no event shall the provisions of the Plan
with respect to the amount of Shares subject to Stock Options, the exercise
price of Stock Options and the timing of Stock Option grants be amended more
often than once every six (6) months, other than to comport with changes in the
Code, as from time to time amended, the Employee Retirement Income Security Act,
as amended, or the rules and regulations promulgated thereunder.
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MODIFICATION OF STOCK OPTIONS.
The Board may authorize the Committee to direct the execution
of an instrument providing for the modification of any outstanding Stock Option
which the Board believes to be in the best interests of the Company; provided,
however, that no such modification, extension or renewal shall reduce the
exercise price or confer on the holder of such Stock Option any right or benefit
which could not be conferred on him by the grant of a new Stock Option at such
time and shall not materially decrease the Participant's benefits under the
Stock Option without the consent of the holder of the Stock Option, except as
otherwise permitted under this Plan.
MISCELLANEOUS.
Tax Withholding. The Company shall have the right to
deduct from any settlement, including the delivery or vesting of Shares, made
under this Plan any federal, state or local taxes of any kind required by law to
be withheld with respect to such payments or to take such other action as may be
necessary in the opinion of the Company to satisfy all obligations for the
payment of such taxes. If Shares are used to satisfy tax withholding, such
Shares shall be valued based on the Fair Market Value when the tax withholding
is required to be made.
No Right to Employment. Neither the adoption of this
Plan nor the granting of any Stock Option shall confer upon any Employee any
right to continued employment with the Company or a Subsidiary, as the case may
be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its Employees at any time, with
or without cause.
Annulment of Stock Options. The grant of any Stock
Option payable in Shares is provisional until the Participant becomes entitled
to the certificate in settlement thereof. In the event the employment or the
directorship of a Participant is Terminated for Cause, any Stock Option which is
provisional shall be annulled as of the date of such termination.
Other Company Benefit and Compensation Programs.
Payments and other benefits received by a Participant under a Stock Option made
pursuant to this Plan shall not be deemed a part of a Participant's regular,
recurring compensation for purposes of the termination indemnity or severance
pay law of any country and shall not be included in, nor have any effect on, the
determination of benefits under any other employee benefit plan or similar
arrangement provided by the Company or a Subsidiary unless expressly so provided
by such other plan or arrangement, or except where the Committee expressly
determines that a Stock Option or portion of a Stock Option should be included
to accurately reflect competitive compensation practices or to recognize that a
Stock Option has been made in lieu of a portion of competitive annual cash
compensation. Stock Options under this Plan may be made in combination with or
in tandem with, or as alternatives to, grants, stock options or payments under
any other plans of the Company or a Subsidiary. This Plan notwithstanding, the
Company or any Subsidiary may adopt such other compensation programs and
additional compensation arrangements as it deems necessary to attract, retain
and reward directors and employees for their service with the Company and its
Subsidiaries.
Securities Law Restrictions. No Shares shall be
issued under this Plan unless counsel for the Company shall be satisfied that
such issuance will be in compliance with applicable federal and state securities
laws. Certificates for Shares delivered under this Plan may be subject to such
stop-transfer orders and other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Shares are then listed,
and any applicable federal or state securities law. The Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
Stock Option Agreement. Each Participant receiving a
Stock Option under this Plan shall enter into an agreement with the Company in a
form specified by the Committee agreeing to the terms and conditions of the
Stock Option and such related matters as the Committee shall, in its sole
discretion, determine.
Cost of Plan. The costs and expenses of administering
this Plan shall be borne by the Company.
Governing Law. This Plan and all actions taken
hereunder shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed applicable.
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Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's shareholders. This
Plan shall be submitted to the shareholders of the Company for approval at an
annual or special meeting of shareholders to be held no sooner than six months
after the effective date of the Conversion of Citizens from mutual to stock
form.
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EXHIBIT B
THE CITIZENS LOAN & SAVINGS COMPANY
MANAGEMENT RECOGNITION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below, unless the
context clearly indicates otherwise. Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural:
1.01 "Agreement" means The Citizens Loan & Savings Company Management
Recognition Plan and Trust Agreement.
1.02 "Association" means The Citizens Loan & Savings Company, a savings
and loan association incorporated under the laws of the State of Ohio.
1.03 "Award" means a right granted to a Director, Officer or Employee
under this Plan to receive Plan Shares, dividends thereon and earnings on such
dividends.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Association.
1.06 "Committee" means the Management Recognition Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Association from mutual
to stock form.
1.09 "Corporation" means London Financial Corporation, a savings and
loan holding company incorporated under the laws of the State of Ohio for the
purpose of holding all of the common shares of the Association issued in
connection with the Conversion.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Association or a Subsidiary.
1.11 "Effective Date" means the later of the date on which the Plan is
approved by the shareholders of the Corporation and the date on which the Plan
is adopted by the Board.
1.12 "Employee" means any person who is employed by the Corporation,
the Association or a Subsidiary.
1.13 "Officer" means a person who holds one of the positions specified
in Article Three of the Code of Regulations of the Corporation or any person who
holds a comparable position with any Parent or Subsidiary of the Corporation.
1.14 "Person" means an individual, corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.15 "Plan" means the Management Recognition Plan established by this
Agreement.
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1.16 "Plan Shares" means the Common Shares held pursuant to the Trust
and which are awarded or issuable to a Recipient pursuant to the Plan.
1.17 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
1.18 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.19 "Subsidiaries" means subsidiaries of the Association which, with
the consent of the Board, agree to participate in the Plan.
1.20 "Trust" means the trust established by this Agreement.
1.21 "Trustee(s)" means the person(s) or entity nominated by the
Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold
legal title to the Plan assets for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Association hereby establishes a Management Recognition Plan
and Trust upon the terms and subject to the conditions set forth in this
Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
The purpose of the Plan is to reward and retain the Directors, Officers
and Employees of the Corporation, the Association and the Subsidiaries who are
in key positions of responsibility by providing such Directors, Officers and
Employees with an equity interest in the Corporation as reasonable compensation
for their contributions to the Corporation, the Association and the
Subsidiaries.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board who are not Employees. The Committee shall have all of the powers
set forth in this Plan. The interpretation and construction by the Committee of
any provisions of this Agreement or of any Award granted hereunder shall be
final, conclusive and binding, subject to the role of the Board pursuant to
Section 4.02 of this Agreement. The Committee shall act by the vote, or the
written consent, of a majority of its members. The Committee shall report
actions and decisions with respect to the Plan to the Board upon request by the
Board. The Committee shall recommend to the Board one or more persons or
entities to act as Trustee(s) in accordance with the provisions of the Plan and
the Trust and the terms of Article VIII of this Agreement.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee(s)
shall be appointed or approved by and will serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add Trustee(s). All
decisions, determinations and interpretations of the Board shall be final,
conclusive and binding upon all parties having an interest in the Plan.
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<PAGE> 25
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member or Trustee of the Board or of the Committee or any Trustee is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member or Trustee in such capacity
under or with respect to this Plan, the Association shall indemnify such member
or Trustee against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such member or
Trustee in connection with such action, suit or proceeding if such member or
Trustee acted in good faith and in a manner such member or Trustee reasonably
believed to be in or not opposed to the best interests of the Corporation, the
Association and the Subsidiaries and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such member's or Trustee's
conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Association to the Trust. Such amounts shall be paid to the Trustee at the time
of contribution. No contributions to the Trust by Directors, Officers or
Employees shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS. Except as otherwise permitted by
Section 8.02 of this Agreement, the Trustee shall invest all of the Trust's
assets, after providing for any required withholding as needed for tax purposes,
exclusively in Common Shares; provided, however, that the Trust shall not
purchase a number of Common Shares equal to more than three percent of the
number of Common Shares issued in connection with the Conversion, except that if
the Association's tangible capital exceeds ten percent, the Trust may purchase a
number of Common Shares equal to up to four percent of the Common Shares issued
in connection with the Conversion. After such investment, the Common Shares
shall be held by the Trustee in the Plan Share Reserve until such Common Shares
are subject to one or more Awards. Any funds held by the Trust before purchasing
Common Shares shall be invested by the Trustee in such interest-bearing account
or accounts at the Association as the Trustee shall determine to be appropriate.
5.03 EFFECT OF AWARDS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the grant of Awards under Section 6.02 of this Agreement, or the
decision of the Committee to return Plan Shares to the Corporation, the Plan
Share Reserve shall be reduced by the number of Plan Shares so allocated or
returned. Any Plan Shares subject to an Award which is subject to forfeiture by
the Recipient pursuant to Section 7.01 of this Agreement shall be retained in
the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors, Officers and Employees are eligible to
receive Awards.
6.02 AWARDS TO OFFICERS AND EMPLOYEES. The Committee will determine
which of the Officers and Employees will be granted Awards and the number of
Plan Shares covered by each Award; provided, however, that the aggregate number
of Plan Shares covered by Awards to any one Officer or Employee shall not exceed
25% of the total number of Plan Shares. The number of Plan Shares covered by
such Awards may not exceed the number of Plan Shares in the Plan Share Reserve
immediately before the grant of such Awards. In the event Plan Shares are
forfeited for any reason or additional Plan Shares are purchased by the Trustee,
the Committee may, from time to time, determine which of the Employees will be
granted additional Awards to be awarded from forfeited or additional Plan
Shares.
In selecting the Officers and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Officers and
Employees, the value of their services to the Corporation, the Association and
the Subsidiaries and any other factors the Committee may deem relevant.
6.03 AWARDS TO DIRECTORS. An Award of 1,270 Plan Shares shall be
granted to each non-employee Director on the fifth business day next following
the Effective Date. In addition, an Award of 1,270 Plan Shares shall
automatically be granted to each non-employee Director who was not a Director on
the Effective Date but who is elected or appointed
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<PAGE> 26
Director subsequent to the Effective Date on the effective date of such election
or appointment. The foregoing notwithstanding, no Award shall be granted if such
grant would result in a violation or possible violation of federal or state
securities laws. Non-employee directors, individually, may not receive Awards
totalling more than 5% of the Plan Shares, and the number of Plan Shares awarded
to all non-employee Directors, in the aggregate, may not exceed 30% of the total
number of Plan Shares.
6.04 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, or following the grant of an Award pursuant to Section 6.03 of
this Agreement, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of Plan Shares covered by the Award and the terms upon
which the Plan Shares subject to the Award may be earned. The date on which the
Committee determines that an Award is to be made or a later date designated by
the Committee or, in the case of Awards granted pursuant to Section 6.03 of this
Agreement, the fifth business day next following the Effective Date or the
effective date of election or appointment, as appropriate, shall be considered
the date of grant of the Awards. The Committee shall maintain records as to all
grants of Awards under the Plan.
6.05 AWARDS NOT REQUIRED. None of the Officers or Employees, either
individually or as a group, shall have any right or entitlement to receive an
Award under the Plan. The Committee may, with the approval of the Board, and
shall, if so directed by the Board, return all Common Shares in the Plan Share
Reserve to the Corporation at any time and thereafter cease issuing Awards.
6.06 SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of the Corporation at an annual or special meeting to be held no
sooner than six months after the effective date of the Conversion.
Notwithstanding anything to the contrary in this Agreement, no Awards may be
granted hereunder until the shareholders of the Corporation approve this
Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares subject to each
Award shall be earned and non-forfeitable by a Recipient over a period of five
years at the rate of one-fifth per year commencing on the date which is one year
after the date of the grant of such Award.
(b) REVOCATION. Unless otherwise permitted by applicable
laws and regulations, any Plan Shares that have not been earned and are not
non-forfeitable in accordance with Section 7.01(a) of this Agreement shall be
forfeited in the event that (i) a Recipient who is a Director ceases to serve on
the Board or (ii) a Recipient who is not a Director of the Association ceases to
be an Employee of the Association, except as otherwise provided in subsection
(c) of this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
All Plan Shares subject to an Award held by a Recipient whose service as a
Director or Employee of the Corporation, the Association or a Subsidiary
terminates due to (i) death or (ii) disability (as determined by the Committee)
shall be deemed fully earned and non-forfeitable as of the later of the
Recipient's last day of service as a Director or the Recipient's last day of
service as an Employee and shall be distributed as soon as practicable
thereafter.
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as otherwise
provided in this Agreement, Plan Shares shall be distributed to the Recipient or
his Beneficiary, as the case may be, as soon as practicable after they have been
earned.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends (and earnings thereon) shall be made in cash.
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<PAGE> 27
(c) WITHHOLDING. The Trustee may withhold from any cash payment
made under this Plan sufficient amounts to cover any applicable withholding and
employment taxes and, if the amount of such cash payment is not sufficient, the
Trustee may require the Recipient or Beneficiary to pay to the Trustee the
amount required to be withheld as a condition of delivering the Plan Shares. The
Trustee shall pay over to the Association or the Subsidiary which employs or
employed such Recipient or which the Recipient serves or served as a Director,
any such amount withheld from or paid by the Recipient or Beneficiary.
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming fully earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management, control and investment of the Trust,
and the Trustee shall invest all assets of the Trust, except those attributable
to cash dividends paid with respect to Plan Shares not held in the Plan Share
Reserve, in Common Shares to the fullest extent practicable, and except to the
extent that the Trustee determines that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. In performing his
duties, the Trustee shall have the power to do all things and execute such
instruments as may be deemed necessary or proper, including the following
powers:
(a) To invest up to one hundred percent of all Trust assets
in Common Shares without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and,
in making such investment, the Trustee is authorized to purchase Common
Shares from the Corporation or from any other source. Such Common
Shares so purchased may be outstanding, newly issued or treasury
shares;
(b) To invest any Trust assets not otherwise invested in
accordance with Section 8.02(a) of this Agreement in such deposit
accounts and certificates of deposit (including those issued by the
Association), obligations of the United States Government or its
agencies or such other investments as shall be considered the
equivalent of cash;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
Trustee's rights, duties and obligations hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
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<PAGE> 28
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends received with respect to Common Shares
shall be allocated to accounts for Recipients, if such shares are the subject of
outstanding Awards, or otherwise to the Plan Share Reserve.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Association.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan; provided, however, that in no event
shall the provisions of the Plan with respect to the number of Plan Shares which
may be subject to Awards and the timing of grants of Awards be amended more
often than once every six (6) months, other than to comport with changes in the
Internal Revenue Code of 1986, as amended (the "Code"), the Employee Retirement
Income Security Act, as amended, or the rules and regulations promulgated
thereunder. The power to amend or terminate the Plan shall include the power to
direct the Trustee to return to the Corporation or the Association all or any
part of the assets of the Trust, including Common Shares held in the Plan Share
Reserve, as well as Common Shares and other assets subject to Awards which are
not yet earned by the Directors or Employees to whom they are allocated;
provided, however, that the termination of the Trust shall not affect a
Recipient's right to earn Awards and to the distribution of Common Shares
relating thereto, and dividends and earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards and rights to Plan Shares shall not be
transferable by a Recipient. During the lifetime of the Recipient, Plan Shares
may only be earned by and paid to the Recipient who was notified in writing of
the Award by the Committee pursuant to Section 6.03 of this Agreement. No
Recipient or Beneficiary shall have any right in or claim to any assets of the
Plan or the Trust, nor shall the Corporation, the Association or any Subsidiary
be subject to any claim for benefits hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the
Association or a Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Association or a Subsidiary.
-6-
<PAGE> 29
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.02 and 7.03 of
this Agreement, prior to the time such Plan Shares are actually distributed to
such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.06 of this Agreement, this
Agreement shall be effective as of the ___ day of ____________, 1997.
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Association under the provisions of
Section 671, et seq., of the Code.
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the ___ day of ____________, 1997.
By: (Trustee)
---------------------------
By: (Trustee)
---------------------------
IN WITNESS WHEREOF, the Association has caused this Agreement to be
executed by its duly authorized officer and duly attested, all as of the ___ day
of ____________, 1997.
THE CITIZENS LOAN & SAVINGS COMPANY
By:
---------------------------
John J. Bodle
its President
ATTEST:
- -----------------------
Rebecca A. Lohr
its Secretary
-7-
<PAGE> 1
Exhibit 99.1
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Citizens Loan and Savings Company:
We have audited the accompanying balance sheet of Citizens Loan and Savings
Company as of September 30, 1995, and the related statements of income, retained
earnings, and cash flows for each of the years in the two-year period ended
September 30, 1995. These financial statements are the responsibility of the
Company'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 financial statements referred to above present fairly, in
all material respects, the financial position of Citizens Loan and Savings
Company as of September 30, 1995, and the results of its operations and its cash
flows for each of the years in the two-year period ended September 30, 1995, in
conformity with generally accepted accounting principles.
As discussed in note A (2) to the financial statements, the Company changed its
method of accounting for investments in 1995 to adopt the provisions of the
Financial Accounting Standard Board's Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
KPMG PEAT MARWICK LLP
October 27, 1995
<PAGE> 1
EXHIBIT 99.2
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. London
Financial Corporation ("LFC") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information regarding
future economic performance and finances and plans and objectives of management,
contained or incorporated by reference in LFC's Annual Report on Form 10-KSB for
fiscal year 1996 is forward-looking. In some cases, information regarding
certain important factors that could cause actual results of operations or
outcomes of other events to differ materially from any such forward-looking
statement appear together with such statement. In addition, forward-looking
statements are subject to other risks and uncertainties affecting the financial
institutions industry, including, but not limited to, the following:
Interest Rate Risk
- ------------------
LFC's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on deposits,
borrowings and other interest-bearing liabilities. The interest income and
interest expense of LFC change as the interest rates on interest-earning assets
and interest-bearing liabilities change. Interest rates may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond LFC's control. In a rising interest rate environment, loans
tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of
deposits tend to be shorter than the terms to maturity or prepayment of loans.
Such differences in the adjustment of interest rates on assets and liabilities
may negatively affect LFC's income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
LFC maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of LFC believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected if circumstances differ substantially from
the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and nonresidential
real estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions. Construction loans may also be negatively affected by such economic
conditions, particularly loans made to developers who do not have a buyer for a
property before the loan is made. The risk of default on consumer loans
increases during periods of recession, high unemployment and other adverse
economic conditions. When consumers have trouble paying their bills, they are
more likely to pay mortgage loans than consumer loans. In addition, the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
Competition
- -----------
The Citizens Loan & Savings Company, the wholly-owned subsidiary of LFC
("Citizens"), competes for deposits with other savings associations, commercial
banks and credit unions and issuers of commercial paper and other securities,
such as shares in money market mutual funds. The primary factors in competing
for deposits are interest rates and convenience of office location. In making
loans, Citizens competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies, mortgage companies
and other lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable. The
size of financial institutions competing with Citizens is likely to increase as
a result of changes in statutes and
<PAGE> 2
regulations eliminating various restrictions on interstate and inter-industry
branching and acquisitions. Such increased competition may have an adverse
effect upon LFC.
Legislation and Regulation that may Adversely Affect LFC's Earnings
- -------------------------------------------------------------------
Citizens is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan holding
company, LFC is also subject to regulation and examination by the OTS. Such
supervision and regulation of Citizens and LFC are intended primarily for the
protection of depositors and not for the maximization of shareholder value and
may affect the ability of the company to engage in various business activities.
The assessments, filing fees and other costs associated with reports,
examinations and other regulatory matters are significant and may have an
adverse effect on LFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such system,
assessments may vary depending on the risk the institution poses to its deposit
insurance fund. Such risk level is determined by reference to the institution's
capital level and the FDIC's level of supervisory concern about the institution.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, Citizens would have to convert to a different financial
institution charter. In addition, Citizens would be regulated under federal law
as a bank and would, therefore, become subject to the more restrictive activity
limitations imposed on national banks. Moreover, LFC might become subject to
more restrictive holding company requirements, including activity limits and
capital requirements similar to those imposed on Citizens. LFC cannot predict
the impact of the conversion of Citizens to, or regulation of Citizens as, a
bank until the legislation requiring such change is enacted.
