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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File 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 5, 1997, was
$2,848,625. (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 5, 1997, there were 510,160 of the Registrant's common
shares issued and outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following portions of the London Financial Corporation Annual
Report to Shareholders for the fiscal year ended September 30, 1997, 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 1998
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. Compensation of Executive Officers and Directors.
<PAGE>
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 and 50% of the net proceeds of the
sale of 529,000 common shares of LFC in connection with the Conversion.
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
permanent and construction 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 permanent and construction
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 the risk of loss associated with nonperforming loans
as set forth under "Lending Activities - Delinquent Loans,
Nonperforming Assets and Classified Assets;"
1
<PAGE>
7. The discussion of the adequacy of the amount of Citizens' allowance
for loan losses as set forth under "Lending Activities - Allowance for
Loan Losses;"
8. The discussion of the maturity of certificates of deposit at Citizens
as set forth under "Deposits and Borrowings - Deposits;" and
9. The discussion of the effect of legislation which may be enacted as
set forth under "Regulation."
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.
Lending Activities
General. The principal lending activity of Citizens is the origination
of permanent and construction mortgage 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 nonresidential
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.
2
<PAGE>
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,
1997 1996
------ ----
Percent Percent
of total of total
Amount loans Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $23,489 75.89% $21,819 75.57%
Multifamily 671 2.17 258 0.90
Nonresidential 4,529 14.63 4,831 16.73
Construction 1,360 4.34 1,084 3.75
-------- ------ --------- ------
Total real estate 30,049 97.08 27,992 96.95
loans
Commercial loans 166 .54 190 0.66
Consumer loans:
Automobile loans 186 .60 152 0.53
Loans on deposits 70 .23 147 0.51
Other consumer loans 481 1.55 392 1.35
--------- ------ --------- ------
Total consumer loans 737 2.38 691 2.39
--------- ------ --------- ------
Total loans 30,952 100.00% 28,873 100.00%
====== ======
Less:
Undisbursed portion of
loans in process (885) (1,258)
Unearned and deferred
income (415) (397)
Allowance for loan losses
(187) (187)
--------- ---------
Net loans $29,465 $27,031
======= =======
</TABLE>
Loan Maturity. The following table sets forth certain information as of
September 30, 1997, 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 4-5 Due 6-10 Due 11-20
Due during the year ending years years years
September 30, after after after
1998 1999 2000 9/30/97 9/30/97 9/30/97 Total
-------- -------- ------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 717 $649 $704 $1,539 $4,355 $15,525 $23,489
Multifamily and nonresidential 2,964 1,499 737 - - - 5,200
Construction 998 362 - - - - 1,360
Commercial loans 86 65 15 - - - 166
Consumer loans 444 165 128 - - - 737
-------- -------- -------- ----------- ----------- ------------ ----------
Total $5,209 $2,740 $1,584 $1,539 $4,355 $15,525 $30,952
====== ====== ====== ====== ====== ======= =======
</TABLE>
3
<PAGE>
The table below sets forth the dollar amount of all loans due after
September 30, 1998, which have predetermined interest rates and have floating or
adjustable interest rates:
<TABLE>
<CAPTION>
Due after
September 30, 1998
(In thousands)
<S> <C>
Fixed rates of interest $ 1,764
Adjustable rates of interest $23,979
</TABLE>
Loans Secured by One- to Four-Family Residences. The principal lending
activity of Citizens is the origination of permanent mortgage loans secured by
one- to four-family residences, primarily single-family residences located
within Madison County. At September 30, 1997, one- to four-family residential
loans totaled approximately $235 million, or 75.9% 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 $23.3 million were secured by first mortgages
and approximately $194,000 were secured by second mortgages at September 30,
1997.
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. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 - Interest Rate
Risk."
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, 1997, the multifamily loan
portfolio consisted of three loans, which totaled approximately $671,000, or
2.2% of total loans, and which were performing in accordance with their 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. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 - Interest Rate
Risk."
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, 1997, approximately $4.5 million, or 14.6%, 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 $519,000 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%. Citizens also makes loans
for the construction of nonresidential properties.
4
<PAGE>
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. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 Interest Rate Risk."
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, 1997, the loan portfolio of Citizens included $1.4
million in construction loans, or 4.4% of total loans, including undisbursed
proceeds of approximately $885,000. All of the construction loans in the
portfolio of Citizens are for construction of residential properties in Madison
County and contiguous counties and all of such loans were performing in
accordance with their terms at September 30, 1997.
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.
See Exhibit 99.2, "Safe Harbor Under the Private Securities Litigation Reform
Act of 1995 - Interest Rate Risk."
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, 1997, the commercial loan portfolio of Citizens
totaled $166,000, less than 1% 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. See Exhibit 99.2, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995 - Interest Rate
Risk."
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, 1997, Citizens had
approximately $737,000, or 2.4% of total loans, invested in consumer loans, all
of which were performing in accordance with their terms.
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. See Exhibit
99.2, "Safe Harbor Under the Private Securities Litigation Reform Act of 1995 -
Interest Rate Risk."
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
5
<PAGE>
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,
1997 1996
--------- -------
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential $3,709 $3,399
Multifamily residential 434 -
Nonresidential 864 1,180
Construction 1,939 1,782
Commercial 172 156
Consumer 673 657
------- -------
Total loans originated 7,791 7,174
Principal repayments (5,438) (8,227)
Increase in other items, net (1) 81 112
-------- -------
Net increase (decrease) $2,434 $ (941)
====== ======
- -----------------------------
<FN>
(1) Other items consist of deferred loan fees, allowance for loan losses and
the undisbursed portion of construction loans.
</FN>
</TABLE>
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
$900,000 to one borrower at September 30, 1997. The largest amount Citizens had
outstanding to one borrower and related persons or entities at September 30,
1997, was $519,000, consisting of one loan, which is secured by real estate and
was performing in accordance with its terms on September 30, 1997.
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.
6
<PAGE>
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.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1997 1996
----- ----
Percent Percent
of total of total
Number Amount loans Number Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 4 $ 49 .16% 3 $ 51 .18%
60 - 89 days 2 40 .13 1 8 .03
90 days and over 5 268 .87 4 261 .90
--- ----- ----- - ----- -----
Total delinquent loans 11 $357 1.16% 8 $320 1.11%
== ==== ==== = ==== ====
</TABLE>
Nonperforming assets include nonaccruing loans, real estate acquired by
foreclosure or by deed-in-lieu thereof 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.
7
<PAGE>
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,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Accruing loans delinquent 90+ days $ 7 $ -
Loans accounted for on a
nonaccrual basis:
Real estate
One- to four-family 237 237
Multifamily - -
Nonresidential 24 24
Consumer - -
------- --------
Total nonaccrual loans 261 261
--- -----
Total nonperforming loans 268 261
Real estate owned - -
------ -------
Total nonperforming assets $268 $261
==== ====
Allowance for loan losses $187 $187
Nonperforming assets as a percent
of total assets .70% .71%
Nonperforming loans as a percent
of total loans .87% .90%
Allowance for loan losses as a
percent of nonperforming loans 69.78% 71.65%
</TABLE>
For the year ended September 30, 1997, gross interest income which
would have been recorded had nonaccruing loans been current in accordance with
their original terms was $20,000. Interest collected on such loans and included
in net earnings was approximately $2,000.
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, 1997, 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 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.
8
<PAGE>
The aggregate amounts of classified assets of Citizens at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
1997 1996
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $305 $261
Doubtful - -
Loss - -
------- -------
Total classified assets $305 $261
==== ====
</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. See Exhibit 99.2, "Safe Harbor Under the Private Securities
Litigation Reform Act of 1995 - Possible Inadequacy of the Allowance for Loan
Losses."
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 1997 and
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,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $187 $190
Charge-offs - (3)
Recoveries - -
-------- -------
Net charge-offs - (3)
Provision for loan losses - -
-------- -------
Balance at end of year $187 $187
==== ====
Ratio of net charge-offs
to average loans outstanding
during the period -% .01%
Ratio of allowance for loan losses
to total loans .60% .65%
</TABLE>
9
<PAGE>
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,
1997 1996
------ ----
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $182 97.08% $181 96.95%
Commercial loans 1 .54 1 0.66
Consumer loans 4 2.38 5 2.39
Unallocated - 2.38 - -
------- -------- ------- ----------
Total $187 100.00% $187 100.00%
==== ====== ==== ======
</TABLE>
The allowance for loan losses is based on estimates and is, therefore,
monitored monthly and adjusted as necessary to provide an adequate allowance.
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.
10
<PAGE>
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,
1997 1996
------ ----
Carrying % of Fair % of Carrying % of Fair % of
value total value total value total value total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Demand deposits $3,342 44.07% $3,342 43.91% $1,674 19.52% $1,674 19.74%
Overnight deposits - - - - 650 7.58 650 7.67
-------- -------- -------- -------- -------- ------ ------- -------
Total interest-bearing deposits 3,342 44.07 3,342 43.91 2,324 27.10 2,324 27.41
Investment securities:
Held to maturity:
U.S. Government and agency
securities 500 6.59 502 6.59 2,000 23.32 1,991 23.48
Available for sale:
Corporate equity securities 155 2.05 155 2.04 220 2.57 220 2.59
Mortgage-backed securities
held to maturity 3,586 47.29 3,613 47.46 4,032 47.01 3,944 46.52
------- ------- ------- ------- ------- ------- -------- -------
Total investments $7,583 100.00% $7,612 100.00% $8,576 100.00% $8,479 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The maturities of the interest-bearing deposits, U.S. Government and
agency obligations and mortgage-backed securities of Citizens at September 30,
1997, are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 1997
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 $3,342 4.79% - - - - - - $3,342 $3,342 4.79%
financial institutions
U.S. Government and
agency obligations 500 6.13 - - - - - - 500 502 6.13%
Mortgage-backed 53 6.28 251 6.28 416 6.28 2,866 6.28 3,586 3,613 6.28
-------- ---- ----- ---- ----- ---- ----- ---- ------ ------ ----
securities
Total $3,895 4.99% $251 6.28% $416 6.28% $2,866 6.28% $7,428 $7,457 5.63%
====== ==== ==== ==== ==== ==== ====== ==== ====== ====== ====
</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.
11
<PAGE>
At September 30, 1997, certificates of deposit at Citizens totaled
approximately $20.5 million, or 68.5% 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.
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,
1997 1996
------ ----
Percent Percent
of total of total
Amount deposits Amount deposits
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $3,092 10.32% $ 2,963 10.51%
Super NOW accounts (2) 278 .94 235 0.83
Passbook savings accounts (3) 5,834 19.47 5,587 19.82
Money market accounts (4) 226 .75 278 .98
---------- ------- --------- --------
Total transaction accounts 9,430 31.48 9,063 32.14
Certificates of deposit:
6.00% or less 15,616 52.14 13,482 47.82
Over 6.01% 4,905 16.38 5,650 20.04
--------- ------ --------- -------
Total certificates of deposit (5) 20,512 68.52 19,132 67.86
--------- ------ -------- -------
Total deposits $29,951 100.00% $28,195 100.00%
======= ====== ======= ======
- -----------------------------
<FN>
(1) The weighted average rate on NOW accounts at September 30, 1997 and 1996,
was 2.27% and 2.29%, respectively.
(2) The weighted average rate on Super NOW accounts at September 30, 1997 and
1996, was 2.50% and 2.49%, respectively.
(3) The weighted average rate on passbook savings accounts at September 30,
1997 and 1996, was 3.00%.
(4) The weighted average rate on money market accounts at September 30, 1997
and 1996, was 2.71% and 2.74%, respectively.
(5) The weighted average rate on all certificates of deposit, including IRA
accounts, at September 30, 1997 and 1996, was 6.00% and 5.96%,
respectively.
</FN>
</TABLE>
Citizens bids on public funds from entities in its primary market area.
The amount of such deposits was approximately $90,000 at September 30, 1997.
12
<PAGE>
The following table shows rate and maturity information for
certificates of deposit at Citizens at September 30, 1997:
<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>
4.01% to 6.00% $10,939 $3,465 $ 824 $ 388 $15,616
6.01% to 8.00% 499 92 1,441 2,873 4,905
---------- --------- ----- ----- ---------
Total certificates
of deposit $11,438 $3,557 $2,265 $3,261 $20,521
======= ====== ====== ====== =======
</TABLE>
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, 1997:
<TABLE>
<CAPTION>
Maturity Amount
(In thousands)
<S> <C>
Three months or less $ 251
Over 3 months to 6 months 100
Over 6 months to 12 months 537
Over 12 months 716
------
Total $1,604
======
</TABLE>
The following table sets forth the deposit account balance activity at
Citizens for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996
(Dollars in thousands)
<S> <C> <C>
Beginning balance $28,195 $30,594
Deposits 51,086 51,564
Withdrawals (50,447) (55,118)
------- -------
Net deposits before interest
credited 28,834 27,040
Interest credited 1,117 1,155
-------- -------
Ending balance 29,951 28,195
------- -------
Net increase (decrease) $ 1,756 $(2,399)
======== =======
</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, 1997,
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.
13
<PAGE>
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."
Employees
As of September 30, 1997, Citizens had eight full-time employees and
three part-time employees.
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. In
addition, as 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 (the "Ohio Superintendent"). Because Citizens
deposits are insured by the FDIC, Citizens also is subject to regulatory
oversight by the FDIC. Citizens must file periodic reports with the OTS
concerning its activities and financial condition. Examinations are conducted
periodically by 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 federally-chartered
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 limiting the activities in
which LFC may engage and subjecting LFC to 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, if enacted, may
change the activities in which LFC or Citizens are authorized to engage, it is
not anticipated that the current activities of either LFC or Citizens will be
materially affected by those activity limits.
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
14
<PAGE>
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 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, with certain
exceptions, 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, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
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 costs 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. 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.
15
<PAGE>
Office of Thrift Supervision
General. The OTS is an office of 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.
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.
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, 1997.
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 the interest rate risk component, a savings association
will 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. 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 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 are those
that 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
16
<PAGE>
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, 1997, 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 and (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 4% of its net
withdrawable savings deposits plus 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,
1997, was approximately $3.0 million, or 10.2%, and exceeded the then applicable
5% liquidity requirement by approximately $1.5 million.
Qualified Thrift Lender Test. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL 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 and 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 nine
out of every 12 months. Effective September 30, 1996, a savings association may
also qualify as a QTL by meeting the definition of "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
In order for an institution to meet the definition of a "domestic building and
loan association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans 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, 1997, 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." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At September 30, 1997, Citizens was in compliance with
this lending limit.
17
<PAGE>
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
deposits). 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, 1997.
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, purchasing 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, 1997.
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 which has converted
from mutual to stock form 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 three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists 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 up to the
greater of (i) 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, and (ii) 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.
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 proposing 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 such 30-day period based on safety and soundness concerns.
Citizens paid no dividends to LFC during fiscal 1997.
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 is
subject to OTS regulations, examination, supervision and reporting requirements.
18
<PAGE>
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 LFC.
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 holding 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 generally has 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. It cannot be
predicted whether 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 LFC 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, 1997, 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 (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.
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<PAGE>
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 savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan 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.
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 required to maintain designated levels of reserves in the
SAIF and in the BIF. 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.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Citizens had
approximately $29.7 million in deposits at March 31, 1995, and paid a special
assessment of $193,000, or $127,000, net of tax effects.
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, 1997, 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 $49.3
million (subject to an exemption of up to $4.4 million), and of 10% of net
transaction accounts in excess of $49.3 million. At September 30, 1997, Citizens
was in compliance with its reserve requirements.
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 of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati 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 of Cincinnati.
Citizens was in compliance with this requirement with an investment in stock of
the FHLB of Cincinnati of $280,000 at September 30, 1997.
FHLB advances to member institutions who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At September 30, 1997, Citizens'
maximum limit on advances was approximately $5.6 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
20
<PAGE>
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.
TAXATION
Federal Taxation
LFC and Citizens are both subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, LFC and Citizens may be subject to the alternative minimum tax which
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 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. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
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 one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to 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 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.
The Act eliminated the percentage of taxable income 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.
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
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<PAGE>
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 require 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, 1997, the pre-1988 reserves of Citizens
for tax purposes totaled approximately $340,000. Citizens believes it had
approximately $3.3 million of accumulated earnings and profits for tax purposes
as of September 30, 1997, 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.
The tax returns of Citizens have been audited or closed without audit
through fiscal year 1993. 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 and (ii) 0.582% times
taxable net worth. Under these alternative measures of computing tax liability,
the states to which a taxpayer's adjusted total net income and adjusted total
net worth are apportioned or allocated are determined by complex formulas. The
minimum tax is $50 per year.
22
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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.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequence of legislative reforms enacted July 1, 1997. Tax liability, however,
continues to be measured by both net income and net worth. In general, tax
liability will be the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.40% of taxable net worth. Under these alternative measures of computing
tax liability, the states to which total net income and total net worth will be
apportioned or allocated will continue to be determined by complex formulas, but
the formulas change. The minimum tax will still be $50 per year and maximum tax
liability as measured by net worth will be limited to $150,000 per year. The
special litter taxes remain in effect. Various other changes in the tax law may
affect LFC.
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 Citizens'
apportioned book net worth, determined in accordance with GAAP, less any
statutory deduction. This rate of tax is scheduled to decrease in each of the
years 1990 and 2000. 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,
1997, 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 $247,000
</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.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The information contained in the 1997 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.
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<PAGE>
Item 7. Financial Statements
The Consolidated Financial Statements appearing in the Annual Report and
the report of Grant Thornton LLP ("Grant Thornton") dated November 14, 1997, are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 11, 1996, the Board of Directors approved the recommendation of
its Audit Committee to change its independent accountant from KPMG Peat Marwick
("KPMG") to Grant Thornton LLP ("Grant Thornton"). No adverse opinion,
disclaimer or qualification was contained in KPMG's report for either of the
last two fiscal years for which KPMG completed an audit of Citizens' financial
statements, nor were such reports modified as to uncertainty, audit scope or
accounting principles. Further, there was no disagreement between KPMG and
Citizens or Grant Thornton on any matter of accounting principles or practices,
financial statement disclosure or auditing 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 1998
Annual Meeting of Shareholders of LFC (the "Proxy Statement"), a copy of which
is attached as Exhibit 99.1 hereto, under the caption "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 "
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
"Election of Directors -- Voting Securities and Ownership of Certain Beneficial
Owners and Management" is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption
"Election of Directors -- Certain Transactions" is incorporated herein by
reference.
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<PAGE>
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 Incorporated by reference to LFC's Form 10-KSB for the
Incorporation fiscal year ended September 30, 1996
3(c) Code of Regulations Incorporated by reference to the Form S-1, Exhibit 3.2
10.1 London Financial Corporation 1996 Stock Incorporated by reference to the Form S-1, Exhibit 10.1
Option and Incentive Plan
10.2 The Citizens Loan & Savings Company Incorporated by reference to the Form S-1, Exhibit 10.2
Management Recognition Plan and Trust
Agreement
10.3 London Financial Corporation Employee Incorporated by reference to the Form S-1, Exhibit 10.4
Stock Ownership Plan
10.4 Employment Agreement between The Citizens Incorporated by reference to the Form S-1, Exhibit 10.5
Loan & Savings Company and John J. Bodle
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99.1 Proxy Statement
99.2 Reissued Report of
KPMG Peat Marwick LLP
99.3 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fiscal
year ended September 30, 1997.
25
<PAGE>
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, 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
Director Director
Date: December 11, 1997 Date: December 11, 1997
John J. Bodle Donovan D. Forrest
Chief Executive Officer, Principal Director
Financial Officer, Principal Accounting
Officer and Director
Date: December 11, 1997 Date: December 11, 1997
Edward D. Goodyear Shirley G. Hansgen
Director Director
Date: December 11, 1997 Date: December 11, 1997
Kennison A. Sims
Director
Date: December 11, 1997
26
Dear Shareholder,
It is with a great deal of pleasure that I present London Financial
Corporation's Annual Report to Shareholders for the fiscal year ending September
30, 1997.
Net earnings for fiscal 1997 totaled a record $385,000, or $.81 per share,
representing an increase of $161,000, or 72%, over the $224,000 of net earnings
reported in fiscal 1996. The growth in fiscal 1997 earnings resulted primarily
from a solid $100,000, or 7.9%, increase in net interest income and a $127,000
reduction in general, administrative and other expenses, which were partially
offset by a $102,000 increase in the provision for federal income taxes.
The value of your investment in London Financial increased during fiscal
1997 as well. Specifically, the price of our common shares increased by 40%
during the current fiscal year. Moreover, our shares continued to trade at
$15.25 per share on December 5, 1997, notwithstanding prior payment of a $5.00
return of capital distribution. This $5.00 distribution, coupled with the
capital appreciation of $4.00 per share since September 1996, represents growth
of 90% in the value of your investment over the last fourteen months.
Our primary goals for fiscal 1998 are far simpler. We wish to continue to
grow your franchise while maintaining an acceptable level of profitability.
Additionally, we will carefully monitor and manage our capital levels so as to
strive to maximize our return on equity.
As we enter fiscal 1998 with a great deal of enthusiasm and optimism,
please be assured that we are totally committed to enhancing the value of your
investment in London Financial Corporation. On behalf of all the officers,
directors and employees, we wish to thank you for your support during the past
year and look forward to your continued support in the future.
Very truly yours,
LONDON FINANCIAL CORPORATION
John J. Bodle
President
1
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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 incorporated 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 510,160 of LFC's common shares outstanding on September 30, 1997, and
held of record by approximately 191 shareholders. Price information with respect
to LFC's common shares is quoted on The Nasdaq SmallCap Market ("Nasdaq") under
the symbol "LONF". The table below sets forth the high and low bid prices for
the common shares of London Financial Corporation, together with the dividends
declared per share, for each quarter of fiscal 1997 and the two full quarters of
fiscal 1996 during which LFC's shares were publicly traded. Price quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
<TABLE>
<CAPTION>
Cash dividends
High Bid Low Bid declared
<S> <C> <C> <C>
Fiscal 1996
Quarter ended:
June 30, 1996 $11.37 $ 9.75 $ -
September 30, 1996 11.25 10.00 .06
Fiscal 1997
Quarter ended:
December 31, 1996 14.67 11.00 .06
March 31, 1997 18.00 14.00 .06
June 30, 1997 17.50 14.63 .06
September 30, 1997 15.75 14.75 .06
</TABLE>
Dividends are subject to determination and declaration by the Board of Directors
of LFC, which takes into account LFC's financial condition, results of
operations, tax considerations, industry standards, economic conditions,
regulatory restrictions and other factors which affect the payment of dividends.
2
<PAGE>
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 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.
3
<PAGE>
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 1997 1996 1995 1994 1993
and other data: (Dollars in thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets ................................. $38,210 $36,817 $34,152 $31,737 $30,961
Cash and due from banks 322 319 835 851 531
Interest-bearing time deposits
in other financial institutions ...... 3,342 2,324 2,009 1,705 3,007
Investment securities (1) .............. 655 2,220 500 500 502
Mortgage-backed securities ............. 3,586 4,032 2,009 2,182 1,492
Loans receivable - net ................. 29,465 27,031 27,972 25,663 24,622
Deposits ............................... 29,951 28,195 30,594 28,324 27,792
FHLB advances .......................... 300 300 300 300 300
Shareholders' equity (2) ............... 7,604 7,907 3,224 3,080 2,835
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
Summary of earnings: 1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income ........................ $2,832 $2,769 $2,334 $2,164 $2,339
Interest expense ....................... 1,468 1,505 1,396 1,131 1,195
----- ----- ----- ----- -----
Net interest income .................... 1,364 1,264 938 1,033 1,144
Provision for loan losses .............. - - - 13 18
----- ----- ----- ------- -------
Net interest income after
provision for loan losses ............. 1,364 1,264 938 1,020 1,126
Other income ........................... 107 71 74 70 66
General, administrative and other
expense .............................. 887 1,014 792 722 678
------ ----- ------ ------ ------
Earnings before income taxes ........... 584 321 220 368 514
Federal income taxes ................... 199 97 77 122 168
------ ------- ------- ------ ------
Net earnings ........................... $ 385 $ 224 $ 143 $ 246 $ 346
====== ====== ====== ====== ======
- ----------------------
<FN>
(1) Includes securities designated as available for sale.
(2) Consisted solely of retained earnings at September 30, 1993 through
1995, inclusive.
</FN>
</TABLE>
4
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA (CONTINUED)
===============================================================================
<TABLE>
<CAPTION>
Selected financial ratios: At September 30,
1997 1996 1995 1994 1993
Performance ratios:
<S> <C> <C> <C> <C> <C>
Return on average assets ................... 1.01% 0.62% 0.44% 0.79% 1.18%
Return on average equity ................... 5.15 4.36 4.51 8.24 12.79
Interest rate spread ....................... 2.90 3.06 2.62 3.19 3.80
Net interest margin ........................ 3.77 3.67 2.95 3.44 4.06
General, administrative and
other expense to average assets .......... 2.33 2.80 2.42 2.31 2.31
Average equity to average assets ........... 19.67 14.21 9.68 9.56 9.22
Asset quality ratios:
Nonperforming assets to total assets ....... 0.70 0.71 0.13 0.24 0.21
Nonperforming loans to total loans ......... 0.87 0.90 0.15 0.27 0.25
Allowance for loan losses to total
loans .................................... 0.60 0.65 0.65 0.70 0.69
Allowance for loan losses to
nonperforming loans ...................... 69.78 71.65 422.22 254.67 269.70
Net charge-offs to average loans ........... - 0.01 - - -
Average interest-earning assets to
average interest-bearing liabilities ..... 121.39 113.83 107.52 106.54 106.06
</TABLE>
5
<PAGE>
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, 1997 and 1996" and "Comparison of Results of
Operations for the Years Ended September 30, 1996 and 1995;"
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."
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
FROM SEPTEMBER 30, 1996 TO SEPTEMBER 30, 1997
------------------------------------------------------------------------------
The Company's consolidated total assets amounted to $38.2 million at September
30, 1997, an increase of $1.4 million, or 3.8%, over the $36.8 million in total
assets at September 30, 1996. The increase in assets was funded primarily by a
$1.8 million increase in deposits, which was partially offset by a decline of
$303,000 in shareholders' equity.
6
<PAGE>
Cash and cash equivalents and investment securities totaled $4.3 million at
September 30, 1997, a decrease of $544,000, or 11.2%, from September 30, 1996
levels. During the fiscal year ended September 30, 1997, $1.5 million of
investment securities matured, which consisted primarily of intermediate-term
U.S. Government and agency obligations. Corporate equity securities totaling
$145,000 were sold, resulting in a gain of $40,000 during fiscal 1997.
Mortgage-backed securities totaled $3.6 million at September 30, 1997, a
decrease of $446,000 from September 30, 1996, levels. The decrease resulted
primarily from principal repayments of $439,000. The Company's mortgage-backed
securities portfolio consists of adjustable-rate mortgage-backed securities
bearing interest at rates ranging from 6.13% to 6.50% at September 30, 1997.
Loans receivable totaled $29.5 million at September 30, 1997, an increase of
$2.4 million, or 9.0%, over the $27.0 million total at September 30, 1996.
During fiscal 1997, loan disbursements amounted to $7.8 million, which were
partially offset by principal repayments of $5.4 million. Growth in the loan
portfolio consisted primarily of loans secured by one- to four-family
residential real estate, which increased by $1.7 million, or 7.7%, and loans
secured by multi-family residential real estate, which increased by $413,000, or
160.1%.
Citizens' allowance for loan losses totaled $187,000 at September 30, 1997 and
1996, which represented 0.60% and 0.65% of total loans and 69.78% and 71.65% of
nonperforming loans, respectively. Nonperforming loans amounted to $268,000 and
$261,000 at September 30, 1997 and 1996, respectively, representing 0.7% of
total assets at each of those dates. Although management believes that its
allowance for loan losses at September 30, 1997, was adequate based on the
available facts and circumstances, 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 $30.0 million at September 30, 1997, an increase of $1.8
million, or 6.2%, over the $28.2 million total at September 30, 1996. The
increase resulted primarily from management's continuing efforts to maintain
growth in deposits through marketing and pricing strategies.
The increase in deposits consisted of a $367,000, or 4.0%, increase in
transaction accounts and a $1.4 million, or 7.3%, increase in certificates of
deposit.
Shareholders' equity totaled $7.6 million at September 30, 1997, a $303,000, or
3.8%, decrease from 1996 levels. The decrease resulted primarily from a $282,000
purchase of treasury shares, a $315,000 purchase of shares to fund a stock
benefit plan and cash dividends of $118,000, which were partially offset by net
earnings of $385,000.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
------------------------------------------------------------------------------
General. Net earnings for the fiscal year ended September 30, 1997, amounted to
$385,000, an increase of $161,000, or 71.9%, over the $224,000 in net earnings
recorded in fiscal 1996. The increase in net earnings resulted primarily from a
$127,000 decline in general administrative and other expense, including a
one-time charge to recapitalize the Savings Association Insurance Fund ("SAIF")
totaling $193,000 which was recorded in fiscal 1996, coupled with a $100,000
increase in net interest income and a $36,000 increase in other income, which
were partially offset by a $102,000 increase in the provision for federal income
taxes.
7
<PAGE>
Net Interest Income. Net interest income totaled $1.4 million for the fiscal
year ended September 30, 1997, an increase of $100,000, or 7.9%, over the $1.3
million recorded in fiscal 1996. Interest income on loans during fiscal 1997,
increased by $4,000, or .2%, over fiscal 1996 levels, resulting from the
combination of a $1.1 million increase in the weighted-average balance of loans
outstanding and a decrease of 30 basis points (100 basis points equals one
percent) in the average yield, to 8.32%. Interest income on mortgage-backed
securities increased by $95,000, or 69.3%, due primarily to a $1.2 million, or
44.4%, increase in the weighted-average balance of mortgage-backed securities
outstanding, coupled with an increase in the weighted-average yield year to
year, from 5.23% in fiscal 1996 to 6.13% in fiscal 1997. Interest income on
investment securities and interest-bearing deposits decreased by $36,000, or
14.1%, for the fiscal year ended September 30, 1997, compared to fiscal 1996, as
the weighted-average balance decreased by $490,000 year to year, due to
maturities and sales, and the related yield decreased by 17 basis points, to
5.84% in fiscal 1997.
Interest expense on deposits decreased by $51,000, or 3.5%, during fiscal 1997,
compared to fiscal 1996, due primarily to a decline of 5 basis points in the
weighted-average cost of deposits, from 4.93% in fiscal 1996 to 4.88% in fiscal
1997, coupled with a $693,000 decrease in the weighted-average balance of
deposits outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $100,000, or 7.9%, during fiscal 1997, as
compared to fiscal 1996. The interest rate spread decreased by 16 basis points,
to 2.90% for fiscal 1997, as compared to 3.06% for fiscal 1996, while the net
interest margin increased by 10 basis points, to 3.77% for the fiscal year ended
September 30, 1997.
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 during the fiscal year
ended September 30, 1997, and therefore a provision for loan losses was not
deemed necessary. There can be no assurance that the allowance will be adequate
to cover losses on nonperforming assets in the future.
Other Income. Other income totaled $107,000 for the fiscal year ended September
30, 1997, an increase of $36,000, or 50.7%, over the $71,000 recorded in fiscal
1996. The increase resulted primarily from the $40,000 gain recorded in
connection with the sale of investment securities designated as available for
sale.
8
<PAGE>
General, Administrative and Other Expense. General, administrative and other
expense decreased by $127,000, or 12.5%, to a total of $887,000 for the fiscal
year ended September 30, 1997, as compared to fiscal 1996. The decrease resulted
primarily from a $193,000 charge recorded as a result of legislation enacted to
recapitalize the SAIF during fiscal 1996, which was partially offset by a
$20,000, or 4.7%, increase in employee compensation and benefits and a $44,000,
or 25.9%, increase in other operating expenses. The increase in employee
compensation and benefits resulted primarily from costs associated with the
stock benefit plans of LFC 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 a public
stock company.
Federal Income Taxes. The provision for federal income taxes totaled $199,000
for the fiscal year ended September 30, 1997, an increase of $102,000, or
105.2%, over the $97,000 provision recorded in fiscal 1996. The increase
resulted primarily from an increase of $263,000, or 81.9%, in pretax earnings
year to year. Citizens' effective tax rates were 34.1% and 30.2% for the fiscal
years ended September 30, 1997 and 1996, respectively.
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
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.
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.
9
<PAGE>
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. Based on management's review of Citizens' 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, Citizens made
no provision for loan losses for the fiscal years ended September 30, 1996 and
1995.
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.
10
<PAGE>
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,
1997 1996
-------------------------------------------------- -------------------------------
Weighted Average Interest Average Average Interest Average
average yield at outstanding earned/ yield/ outstanding earned/ yield/
September 30, 1997 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 .................. 4.79% $ 2,562 $ 161 6.28% $ 3,278 $ 202 6.16%
Investment securities ..................... 6.13 1,188 58 4.88 962 53 5.51
Mortgage-backed securities ................ 6.30 3,782 232 6.13 2,620 137 5.23
Loans receivable(1) ....................... 8.28 28,618 2,381 8.32 27,567 2,377 8.62
------ ----- -------- ------ ----- --------
Total interest-earning assets ...................... 36,150 2,832 7.83 34,427 2,769 8.04
Non-interest-earning assets ............................. 1,870 1,732
------- -------
Total assets ....................................... $38,020 $36,159
====== ======
Interest-bearing liabilities:
NOW accounts .............................. 2.27 $ 3,450 65 1.88 $ 3,045 61 2.00
Money market accounts ..................... 2.71 233 6 2.58 333 9 2.70
Passbook savings accounts ................. 3.00 5,843 177 3.03 6,297 188 2.99
Certificates of deposit ................... 5.92 19,724 1,178 5.97 20,268 1,219 6.01
------ ----- -------- ------ ----- --------
Total deposits ....................... 4.92 29,250 1,426 4.88 29,943 1,477 4.93
FHLB advances ............................. 9.25 531 42 7.91 300 28 9.25
-------- ------- -------- -------- ------- --------
Total interest-bearing liabilities .... 4.96 29,781 1,468 4.93 30,243 1,505 4.98
----- -------- ----- --------
Non-interest-bearing liabilities ....................... 761 778
-------- --------
Total liabilities ................................. 30,542 31,021
Shareholders' equity(2) ................................ 7,478 5,138
------- -------
Total liabilities and
shareholders' equity ............................ $38,020 $36,159
====== ======
Net interest income .................................................. $1,364 $1,264
===== =====
Interest rate spread ........................................................... 2.90% 3.06%
======== ========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) ..................................................... 3.77% 3.67%
======== ========
Average interest-earning assets to
average interest-bearing liabilities ......................................... 121.39% 113.83%
====== ======
<CAPTION>
1995
------------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other
financial institutions ................ $ 1,827 $ 99 5.42%
Investment securities ..................... 730 43 5.89
Mortgage-backed securities ................ 2,093 99 4.73
Loans receivable(1) ....................... 27,094 2,093 7.72
------ ----- --------
Total interest-earning assets .......... 31,744 2,334 7.35
Non-interest-earning assets ................. 980
--------
Total assets ......................... $32,724
======
Interest-bearing liabilities:
NOW accounts .............................. $ 2,713 56 2.06
Money market accounts ..................... 425 12 2.82
Passbook savings accounts ................. 6,594 206 3.12
Certificates of deposit ................... 19,491 1,094 5.61
------ ----- --------
Total deposits ....................... 29,223 1,368 4.68
FHLB advances ............................. 300 28 9.25
-------- ------- --------
Total interest-bearing liabilities .... 29,523 1,396 4.73
------- --------
Non-interest-bearing liabilities ........... 33
---------
Total liabilities ..................... 29,556
Shareholders' equity(2) .................... 3,168
-------
Total liabilities and
shareholders' equity ................ $32,724
======
Net interest income ........................ $ 938
======
Interest rate spread ....................... 2.62%
======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) ................ 2.95%
======
Average interest-earning assets to
average interest-bearing liabilities ........ 107.52%
======
- -----------------------------------
<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 $81,
$112, and $54 for the fiscal years ended September 30, 1997, 1996, and
1995, respectively.
(2) Consisted solely of retained earnings for the fiscal year ended September
30, 1995.
</FN>
</TABLE>
11
<PAGE>
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 LFC 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,
1997 vs. 1996 1996 vs. 1995
------------------------------------ ----------------------------
Increase Total Increase Total
(decrease) due to increase (decrease) due to increase
Volume Rate (decrease) Volume Rate (decrease)
Interest income attributable to:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits ................ $ (45) $ 4 $(41) $ 85 $ 18 $103
Investment securities .................... 11 (6) 5 12 (2) 10
Mortgage-backed securities ............... 71 24 95 27 11 38
Loans receivable ......................... 88 (84) 4 38 246 284
---- ---- ---- ---- --- ---
Total interest income ................. 125 (62) 63 162 273 435
Interest expense attributable to:
NOW accounts ............................. 8 (4) 4 7 (2) 5
Money market accounts .................... (3) - (3) (2) (1) (3)
Passbook savings accounts ................ (14) 3 (11) (9) (9) (18)
Certificates of deposit .................. (33) (8) (41) 45 80 125
---- ----- --- ---- ---- ---
Total deposits ........................ (42) (9) (51) 41 68 109
Advances from FHLB ....................... 18 (4) 14 - - -
---- ----- --- -- -- -
Total interest expense ................ (24) (13) (37) 41 68 109
---- ---- --- ---- ---- ---
Increase in net interest income .......................................... $100 $326
=== ===
</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.
12
<PAGE>
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 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, 1997, 2% of the present value of Citizens' assets was
approximately $760,000. 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 $357,000 at September 30, 1997, 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, 1997 and 1996, 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, 1997, and September 30, 1996, respectively, the effect that
a particular change in market interest rates would have on the NPV of Citizens.
<TABLE>
<CAPTION>
At September 30, 1997 At September 30, 1996
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)% $ 31 -% $(316) (5)%
+300 (60) 213 3 (81) (1)
+200 (40) 277 4 63 1
+100 (20) 197 3 92 2
0 - - - - -
-100 (20) (236) (4) (150) (2)
-200 (40) (357) (5) (291) (5)
-300 (60) (374) (6) (275) (5)
-400 (80) (322) (5) (162) (3)
</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.
13
<PAGE>
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.
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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
For the year ended September 30,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Net earnings ...................................... $ 385 $ 224 $ 143
Adjustments to reconcile net earnings
to net cash from operating activities ........... (110) 216 (15)
------ ------ -------
Net cash from operating activities ................ 275 440 128
Net cash from investing activities ................ (295) (2,697) (2,111)
Net cash from financing activities ................ 1,041 2,056 2,271
----- ----- -----
Net change in cash and cash equivalents ........... 1,021 (201) 288
Cash and cash equivalents at beginning of year .... 2,643 2,844 2,556
----- ----- -----
Cash and cash equivalents at end of year .......... $3,664 $2,643 $2,844
===== ===== =====
</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.
14
<PAGE>
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 4% 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, 1997, Citizens liquid assets totaled approximately $3.0
million, which exceeded the OTS minimum requirements by $1.5 million. At such
date, Citizens had commitments to originate loans and loans in process totaling
$463,000 and $885,000, respectively, 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 shareholders' 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, 1997.
The following table sets forth the amount and percentage level of regulatory
capital of Citizens at September 30, 1997, and the amount by which it exceeds
the minimum requirements:
<TABLE>
<CAPTION>
At September 30, 1997
Percent of
Amount assets
(Dollars in thousands)
<S> <C> <C>
Capital under GAAP before adjustments ............. $5,824 15.9%
===== ====
Tangible capital:
Capital level ................................... $5,824 15.9%
Requirement ..................................... 551 1.5
------ -----
Excess .......................................... $5,273 14.4%
===== ====
Core capital:
Capital level ................................... $5,824 15.9%
Requirement ..................................... 1,102 3.0
----- -----
Excess .......................................... $4,722 12.9%
===== ====
Risk-based capital:
Capital level ................................... $6,011 30.8%
Requirement ..................................... 1,563 8.0
----- -----
Excess .......................................... $4,448 22.8%
===== ====
</TABLE>
15
<PAGE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
-------------------------------------------------------------------------------
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", establishing financial accounting and reporting
standards for stock-based compensation plans. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure compensation cost of all
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 the Corporation will continue to account for stock-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 on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
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.
16
<PAGE>
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Corporation's consolidated financial position or results
of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early application is not permitted. Based upon the provisions
of SFAS No. 128, the Corporation's basic and diluted earnings per share for the
year ended September 30, 1997, would have each been $.81.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 is not expected to have a material impact on the Corporation's
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
17
<PAGE>
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
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.
CHARTER UNIFICATION LEGISLATION
-------------------------------------------------------------------------------
Congress is considering legislation to eliminate the federal savings and loan
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 federal law as a bank. Such change in regulation 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 form of holding company regulation, 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 and Citizens regulatory requirements. 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.
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
London Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of London Financial Corporation as of September 30, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for the years 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 audits. The
consolidated financial statements as of September 30, 1995, and for the year
then ended, 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 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 consolidated financial position of London Financial
Corporation as of September 30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Cincinnati, Ohio
November 14, 1997
19
<PAGE>
London Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks ............................................................... . $ 322 $ 319
Interest-bearing deposits in other financial institutions ............................. . 3,342 2,324
------- -------
Cash and cash equivalents .................................................... . 3,664 2,643
Investment securities designated as available
for sale - at market ................................................................ . 155 220
Investment securities - at cost, approximate
market value of $502 and $1,991 as of
September 30, 1997 and 1996 ......................................................... . 500 2,000
Mortgage-backed securities - at amortized
cost, approximate market value of $3,613 and
$3,944 as of September 30, 1997 and 1996 ............................................ . 3,586 4,032
Loans receivable - net ................................................................ . 29,465 27,031
Office premises and equipment - at depreciated cost ..................................... 360 354
Stock in Federal Home Loan Bank - at cost ............................................... 280 261
Accrued interest receivable ............................................................. 169 178
Prepaid expenses and other assets ....................................................... 31 21
Deferred federal income taxes ........................................................... - 77
------- ---------
Total assets ................................................................... $38,210 $36,817
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits ................................................................................ $29,951 $28,195
Advances from the Federal Home Loan Bank ................................................ 300 300
Other liabilities ....................................................................... 162 279
Accrued federal income taxes ............................................................ 141 136
Deferred federal income taxes ........................................................... 52 -
--------- ------
Total liabilities .............................................................. 30,606 28,910
Commitments ............................................................................. - -
Shareholders' equity
Common stock - authorized 5,000,000 shares without par
value; 529,000 shares issued ........................................................ - -
Additional paid-in capital ............................................................ 4,910 4,910
Retained earnings - substantially restricted .......................................... 3,683 3,416
Unrealized gains on securities designated as available
for sale, net of related tax effects ................................................ 31 4
Shares acquired by Employee Stock Ownership Plan ...................................... (423) (423)
Shares acquired by Management Recognition Plan ........................................ (315) -
Less 18,840 treasury shares - at cost ................................................. (282) -
-------- ------
Total shareholders' equity ..................................................... 7,604 7,907
------- -------
Total liabilities and shareholders' equity ..................................... $38,210 $36,817
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
London Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
Interest income
<S> <C> <C> <C>
Loans ........................................................... $2,381 $2,377 $2,093
Mortgage-backed securities ...................................... 232 137 99
Investment securities ........................................... 58 53 26
Interest-bearing deposits and other ............................. 161 202 116
------ ------ ------
Total interest income .................................... 2,832 2,769 2,334
Interest expense
Deposits ........................................................ 1,426 1,477 1,368
Borrowings ...................................................... 42 28 28
------- ------- -------
Total interest expense ................................... 1,468 1,505 1,396
----- ----- -----
Net interest income ...................................... 1,364 1,264 938
Other income
Gain on sale of investment securities designated
as available for sale ......................................... 40 - -
Other operating ................................................. 67 71 74
------- ------- -------
Total other income ....................................... 107 71 74
General, administrative and other expense
Employee compensation and benefits .............................. 445 425 404
Occupancy and equipment ......................................... 52 55 54
Franchise taxes ................................................. 88 45 44
Federal deposit insurance premiums .............................. 32 262 81
Data processing ................................................. 56 57 55
Other operating ................................................. 214 170 154
------ ------ ------
Total general, administrative and other expense .......... 887 1,014 792
------ ----- ------
Earnings before income taxes ............................. 584 321 220
Federal income taxes
Current ......................................................... 83 143 52
Deferred ........................................................ 116 (46) 25
------ ------- -------
Total federal income taxes ............................... 199 97 77
------ ------- -------
NET EARNINGS ............................................. $ 385 $ 224 $ 143
====== ====== ======
EARNINGS PER SHARE ....................................... $.81 N/A N/A
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
London Financial Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Shares gains on
acquired by securities
Additional stock designated
Common paid-in benefit as available Retained Treasury
stock capital plans for sale earnings stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 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 gains 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
Net earnings for the year ended September 30, 1997 ...... - - - - 385 - 385
Dividends of $.24 per share ............................. - - - - (118) - (118)
Purchase of treasury shares at cost ..................... - - - - - (282) (282)
Purchase of shares for Management Recognition Plan ...... - - (315) - - - (315)
Unrealized gains on securities designated as
available for sale, net of related tax effects ........ - - - 27 - - 27
-- ----- --- ---- ----- --- -------
Balance at September 30, 1997 ........................... $- $4,910 $(738) $ 31 $3,683 $(282) $7,604
== ===== ==== ==== ===== ==== =====
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
London Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings for the year .................................................... $ 385 $ 224 $ 143
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 ...................... 7 6 6
Amortization of deferred loan origination fees ............................. (81) (112) (54)
Gain on sale of investment securities designated as
available for sale ....................................................... (40) - -
Depreciation and amortization .............................................. 20 25 24
Federal Home Loan Bank stock dividends ..................................... (19) (17) (15)
Increase (decrease) in cash due to changes in:
Accrued interest receivable .............................................. 9 (39) (31)
Prepaid expenses and other assets ........................................ (10) 13 7
Other liabilities ........................................................ (117) 245 1
Federal income taxes
Current ................................................................ 5 141 22
Deferred ............................................................... 116 (46) 25
------ ------- -------
Net cash provided by operating activities ............................. 275 440 128
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities ....................................... - (2,295) -
Principal repayments on mortgage-backed securities ........................... 439 266 167
Purchase of investment securities designated as available
for sale ................................................................... - (214) -
Purchase of investment securities designated as
held to maturity ........................................................... - (1,500) -
Proceeds from sale of investment securities designated
as available for sale ...................................................... 145 - -
Proceeds from maturity of investment securities .............................. 1,500 - -
Loan principal repayments .................................................... 5,438 8,227 4,494
Loan disbursements ........................................................... (7,791) (7,174) (6,763)
Purchase of office premises and equipment .................................... (26) (7) (9)
------- -------- --------
Net cash used in investing activities ................................. (295) (2,697) (2,111)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits .......................................... 1,756 (2,399) 2,271
Proceeds from Federal Home Loan Bank advances ................................ 500 - -
Repayment of Federal Home Loan Bank advances ................................. (500) - -
Net proceeds from issuance of common shares .................................. - 4,487 -
Purchase of shares for Management Recognition Plan ........................... (315) - -
Dividends on common shares ................................................... (118) (32) -
Purchase of treasury shares .................................................. (282) - -
------ ----- ----
Net cash provided by financing activities ............................. 1,041 2,056 2,271
----- ----- -----
Net increase (decrease) in cash and cash equivalents ........................... 1,021 (201) 288
Cash and cash equivalents at beginning of year ................................. 2,643 2,844 2,556
----- ----- -----
Cash and cash equivalents at end of year ....................................... $3,664 $2,643 $2,844
===== ===== =====
</TABLE>
23
<PAGE>
London Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Supplemental disclosure of cash flow information: Cash paid during the year for:
<S> <C> <C> <C>
Federal income taxes ...................................................... $ 85 $ 55 $ 20
======= ======= =======
Interest paid on deposits and borrowings .................................. $1,463 $1,495 $1,393
===== ===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as
available for sale, net of applicable tax effects ......................... $ 27 $ 4 $ -
======= ======== ====
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
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 share purchases by the Employee
Stock Ownership Plan ("ESOP"), resulted in net capital proceeds of $4.5
million. Condensed financial statements of the Corporation are presented in
Note M. 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 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.
25
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments in debt and equity securities be categorized
as held-to-maturity, trading, or available for sale. Securities classified
as held-to-maturity are to be 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. At September 30, 1997 and
1996, the Corporation's shareholders' equity reflected a net unrealized gain
on securities designated as available for sale of $31,000 and $4,000,
respectively.
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.
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.
26
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses
It is the Company's policy to provide valuation allowances for estimated
losses on loans 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 June 1993, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". This
promulgation, which was amended by SFAS No. 118 as to certain income
recognition and financial statement disclosure provisions and was effective
as to the Corporation in fiscal 1996, 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, as
subsequently amended, 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 nonresidential and multi-family residential real estate loans,
and its evaluation of impairment thereof, such loans are generally
collateral dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value.
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, 1997 and 1996, the Company had no loans that would be
defined as impaired under SFAS No. 114.
27
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 federal income taxes in accordance with the
provisions of 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. Pursuant to the provisions of 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.
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 and percentage
of earnings bad debt deductions. Additional temporary differences result
from depreciation computed using accelerated methods for federal income tax
purposes.
28
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit 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 $9,000, $32,000 and $20,000 for the years
ended September 30, 1997, 1996 and 1995, 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 $42,000
and $21,000 for the years ended September 30, 1997 and 1996, respectively.
The Corporation also has a Management Retention Plan ("MRP"). Subsequent to
the offering the MRP purchased 21,160 shares of the Corporation's common
stock in the open market. During fiscal 1996, 17,640 shares available under
the MRP were granted to executive officers and members of the Board of
Directors of the Corporation effective upon ratification of the MRP by the
Corporation's shareholders. Common stock granted under the MRP vests ratably
over a five year period, commencing in January 1997. A provision of $35,000
related to the MRP was charged to expense for the year ended September 30,
1997.
10. Earnings Per Share and Per Share Capital Distributions
Earnings per share for the year ended September 30, 1997, is based upon the
weighted-average shares outstanding during the period, less 42,320 shares in
the ESOP that are unallocated and not committed to be released.
Weighted-average common shares deemed outstanding totaled 476,337 for the
year ended September 30, 1997. There was no material dilutive effect related
to the Corporation's stock option plan for fiscal 1997.
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share", are not applicable for the fiscal years ended September 30, 1996 and
1995, as the Corporation completed its conversion to the stock form of
ownership in March 1996.
During fiscal 1997, the Corporation received a Private Letter Ruling from
the Internal Revenue Service which stated that the Corporation's
distributions on common shares are deemed a tax-free return of capital to
the extent that such capital distributions exceed the Corporation's
accumulated earnings and profits. The Corporation paid $.24 in dividends
during the year ended September 30, 1997, and declared an additional $5.00
cash distribution on October 10, 1997, payable on November 6, 1997. Of these
amounts, management estimates that at least $5.00 of the $5.24 in
distributions will be considered a tax-free return of capital.
29
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 1997 and 1996:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements 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 statements of financial condition is
deemed to approximate fair value.
30
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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.
Advances from the 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, 1997 and 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, are as
follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents .................. $ 3,664 $ 3,664 $ 2,643 $ 2,643
Investment securities ...................... 655 657 2,220 2,211
Mortgage-backed securities ................. 3,586 3,613 4,032 3,944
Loans receivable ........................... 29,465 30,666 27,031 27,774
Federal Home Loan Bank stock ............... 280 280 261 261
-------- -------- -------- --------
$37,650 $38,880 $36,187 $36,833
====== ====== ====== ======
Financial liabilities
Deposits ................................... $29,951 $30,150 $28,195 $28,331
Advances from the Federal Home
Loan Bank ................................ 300 302 300 326
-------- -------- -------- --------
$30,251 $30,452 $28,495 $28,657
====== ====== ====== ======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
31
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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, 1997 and 1996,
are as follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ................. $500 $ 2 $- $502
Available for sale:
Corporate equity securities ............................ 109 46 - 155
--- -- -- ---
Total investment securities ......................... $609 $48 $- $657
=== == == ===
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
<S> <C> <C> <C> <C>
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
===== = ==== =====
</TABLE>
The amortized cost and estimated fair value of U. S. Government and agency
obligations at September 30, 1997, 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 .................. $500 $502
=== ===
</TABLE>
32
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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, 1997 and
1996, are shown below:
<TABLE>
<CAPTION>
1997
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 .......................... $1,749 $ 19 $ 14 $1,754
Government National Mortgage Association
participation certificates .......................... 1,197 35 - 1,232
Federal National Mortgage
Association participation certificates .............. 640 - 13 627
------ -- ---- ------
Total mortgage-backed securities ................... $3,586 $ 54 $ 27 $3,613
===== ==== ==== =====
</TABLE>
<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
===== ===== == =====
</TABLE>
At September 30, 1997, all mortgage-backed securities maintained by London
Financial Corporation are contractually due on a ratable basis over twenty
years. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
33
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family ......................... $23,489 $21,819
Multi-family ................................ 671 258
Construction ................................ 1,360 1,084
Nonresidential real estate .................... 4,529 4,831
Consumer and other loans ...................... 903 881
-------- --------
.................................................. 30,952 28,873
Less:
Undisbursed portion of loans in process ..... 885 1,258
Deferred loan origination fees .............. 415 397
Allowance for losses on loans ............... 187 187
-------- --------
$29,465 $27,031
======== ========
</TABLE>
The Company's lending efforts have historically focused on one- to
four-family and multi-family residential real estate loans, which comprise
approximately $24.0 million, or 82 %, of the total loan portfolio at
September 30, 1997, and approximately $21.3 million, or 79%, at September
30, 1996. 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.
In the ordinary course of business, the Company has made loans to some of
its directors, 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 $388,000 and $473,000 at September 30, 1997 and
1996, respectively.
34
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Beginning balance ..................... $187 $190 $191
Provision for losses on loans ......... - - -
Loan charge-offs ...................... - (3) (1)
-- ----- -----
Ending balance ........................ $187 $187 $190
=== === ===
</TABLE>
As of September 30, 1997, 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, 1997, 1996 and 1995,
totaled $268,000, $261,000 and $45,000, respectively. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $20,000, $15,000 and $3,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land and improvements .......................... $ 85 $ 85
Building ....................................... 471 471
Furniture and equipment ........................ 212 186
--- ---
768 742
Less accumulated depreciation and
amortization ............................... 408 388
--- ---
$360 $354
=== ===
</TABLE>
35
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-
average interest rate 1997 1996
Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1997 - 2.27% .............................. $ 3,370 11.2
1996 - 2.29% .................................................................. $ 3,198 11.3%
Passbook
1997 - 3.00% .............................. 5,834 19.5
1996 - 3.00% .................................................................. 5,587 19.8
Money market investment accounts
1997 - 2.71% .............................. 226 .8
1996 - 2.74% .................................................................. 278 1.0
--------- -------- -------- ------
Total demand, transaction and
passbook deposits ......................... 9,430 31.5 9,063 32.1
Certificates of deposit
Original maturities of:
One year or less
1997 - 5.42% .......................... 5,640 18.8
1996 - 5.14% .............................................................. 5,669 20.1
12 months to 36 months
1997 - 6.01% .......................... 8,604 28.7
1996 - 6.09% .............................................................. 7,968 28.3
Greater than 36 months
1997 - 6.50% .......................... 6,277 21.0
1996 - 6.62% .............................................................. 5,495 19.5
-------- ------- ------- ------
Total certificates of deposit ............... 20,521 68.5 19,132 67.9
------ ------ ------ ------
Total deposit accounts ...................... $29,951 100.0% $28,195 100.0%
====== ===== ====== =====
</TABLE>
At September 30, 1997 and 1996, the Company had deposit accounts with
balances greater than $100,000 totaling $1.8 million and $2.1 million,
respectively.
Interest expense on deposits for the fiscal year ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Passbook .......................... $ 177 $ 188 $ 206
NOW accounts ...................... 65 61 56
Money market investment accounts .. 6 9 12
Certificates of deposit ........... 1,178 1,219 1,094
----- ----- -----
...................................... $1,426 $1,477 $1,368
===== ===== =====
</TABLE>
36
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than one year ......................... $11,438 $11,390
One year to three years .................... 5,822 4,130
More than three years ...................... 3,261 3,612
------- -------
............................................... $20,521 $19,132
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1997 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, 1997 1996
(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 for the fiscal year ended September 30 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate ......... $199 $109 $75
Increase (decrease) in taxes resulting from:
Other (primarily surtax exemptions in 1996) .. - (12) 2
-- ---- ---
Federal income taxes per consolidated
financial statements ......................... $199 $ 97 $77
=== ==== ==
Effective tax rate ............................. 34.1% 30.2% 35.0%
==== ==== ====
</TABLE>
37
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax asset (liability) at
September 30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1997 1996
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees ...................... $ 77 $103
SAIF recapitalization assessment .................... - 66
Difference between book and tax depreciation ........ 1 -
General loan loss allowance ......................... 64 64
---- ----
Deferred tax assets .............................. 142 233
Deferred tax liabilities:
Federal Home Loan Bank stock dividends .............. (50) (43)
Difference between book and tax depreciation ........ - (3)
Percentage of earnings bad debt deduction ........... (64) (64)
Accrual vs. cash basis of accounting ................ (65) (44)
Unrealized gains on securities designated
as available for sale ............................. (15) (2)
---- -----
Deferred tax liabilities ......................... (194) (156)
--- ---
Net deferred tax asset (liability) ............... $ (52) $ 77
==== ====
</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, 1997, include approximately $525,000 for which federal income taxes have
not been provided. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $115,000 at
September 30, 1997. See Note L for additional information regarding future
percentage of earnings bad debt deductions.
38
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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, 1997, the Company had outstanding commitments of
approximately $463,000 to originate loans. In the opinion of management, all
loan commitments equaled or exceeded prevalent market interest rates as of
September 30, 1997, and will be funded from normal cash flow from
operations.
NOTE J - REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The minimum capital standards of the OTS 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
39
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE J - REGULATORY CAPITAL (continued)
4.0% - 5.0% of adjusted total assets for substantially all savings
associations. Management anticipates no material change to the Company's
excess regulatory capital position as a result of this proposed change in
the regulatory capital requirement. The risk-based capital requirement
currently 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%.
As of September 30, 1997, management believes that the Company met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
As of September 30, 1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $5,824 15.9% =>$ 551 =>1.5% =>$1,838 => 5.0%
Core capital $5,824 15.9% =>$1,102 =>3.0% =>$2,206 => 6.0%
Risk-based capital $6,011 30.8% =>$1,563 =>8.0% =>$1,953 =>10.0%
</TABLE>
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Company, such as increased interest rates or a downturn in the
economy in the Company's market area, could adversely affect future earnings
and, consequently, the ability to meet future minimum regulatory capital
requirements.
NOTE K - STOCK OPTION PLAN
The Board of Directors adopted a Stock Option Plan during fiscal 1997 that
provided for the issuance of 52,900 shares of authorized, but unissued
shares of common stock at fair value at the date of grant. As of September
30, 1997, none of the stock options granted had been exercised.
40
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE K - STOCK OPTION PLAN (continued)
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below at September 30, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
Net earnings As reported $385
Pro-forma $377
Earnings per share As reported $.81
Pro-forma $.81
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1997: dividend yield
of 7.0%, expected volatility of 20.0%, a risk-free interest rate of 6.5% and
expected lives of ten years.
A summary of the status of the Corporation's stock option plan as of
September 30, 1997, and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
Weighted-
average
exercise
Shares price
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted ......................................... 52,900 $15.00
Exercised ....................................... - $ -
Forfeited ....................................... - $ -
------- -----
Outstanding at end of year ...................... 52,900 $15.00
====== =====
Options exercisable at year-end ................. - $ -
======= =====
Weighted-average fair value of
options granted during the year ............................... $ 1.68
======
</TABLE>
41
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE K - STOCK OPTION PLAN (continued)
The following information applies to options outstanding at September 30,
1997:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding ............................................. 52,900
Range of exercise prices ....................................... $15.00
Weighted-average exercise price ................................ $15.00
Weighted-average remaining contractual life ................ 9.30 years
</TABLE>
NOTE L - RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Company and of other savings associations are
insured by the Federal Deposit Insurance Company ("FDIC") through 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
through 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 and 1997, no BIF assessments are required
for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided 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, which was charged to
operations in fiscal 1996.
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.
42
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of London Financial Corporation as of September 30, 1997 and 1996,
and the results of its operations and its cash flows for the periods ended
September 30, 1997 and 1996.
London Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks ........................................................... $ 801 $ 345
Investment securities designated as available for sale - at market ................ 155 220
Investment securities - at cost ................................................... 500 1,500
Loan receivable from ESOP ......................................................... 381 423
Investment in The Citizens Loan and Savings Company ............................... 5,824 5,437
Accrued interest receivable ....................................................... 13 31
Prepaid expenses and other assets ................................................. 13 -
------- ----
Total assets ................................................................. $7,687 $7,956
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ................................................................. $ 83 $ 49
Shareholders' equity
Common stock .................................................................... - -
Additional paid-in capital ...................................................... 7,832 7,832
Unrealized gains on securities designated as available
for sale, net of related tax effects .......................................... 31 4
Retained earnings ............................................................... 338 71
Shares acquired by Management Recognition Plan .................................. (315) -
Treasury shares - at cost ....................................................... (282) -
------ ----
Total shareholders' equity ................................................... 7,604 7,907
----- -----
Total liabilities and shareholders' equity ................................... $7,687 $7,956
===== =====
</TABLE>
43
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
(continued)
London Financial Corporation
STATEMENTS OF EARNINGS
Periods ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenue
Interest income ................................... $108 $ 68
Equity in earnings of subsidiary .................. 387 60
Gain on sale of investments ....................... 40 -
---- -
Total revenue .................................. 535 128
General and administrative expenses ................. 151 10
--- ----
Earnings before income taxes ................... 384 118
Federal income taxes (credits) ...................... (1) 15
----- ----
NET EARNINGS ................................... $385 $103
=== ===
</TABLE>
44
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
(continued)
London Financial Corporation
STATEMENTS OF CASH FLOWS
Periods ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the period .............................................. $ 385 $ 103
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary ...................... (387) (60)
Gain on sale of investment securities .................................. (40) -
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets .................................... (13) -
Accrued interest receivable .......................................... 18 (31)
Other liabilities .................................................... 21 47
------- -------
Net cash provided by (used in) operating activities .................. (16) 59
Cash flows provided by (used in) investing activities:
Investment in subsidiary ................................................. - (2,455)
Purchase of investment securities designated as available
for sale ............................................................... - (214)
Purchase of investment securities designated as held to maturity ......... - (1,500)
Proceeds from repayment of loan to ESOP .................................. 42 -
Proceeds from maturities of investment securities ........................ 1,000 -
Proceeds from sale of investment securities .............................. 145 -
Issuance of loan to ESOP ................................................. - (423)
----- ------
Net cash provided by (used in) investing activities .................. 1,187 (4,592)
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of common stock ............................... - 4,910
Purchase of shares for Management Recognition Plan ....................... (315) -
Purchase of treasury shares .............................................. (282) -
Payment of dividends on common stock ..................................... (118) (32)
------ -------
Net cash provided by (used in) financing activities .................. (715) 4,878
------ -----
Net increase in cash and cash equivalents .................................. 456 345
Cash and cash equivalents at beginning of period ........................... 345 -
------ ----
Cash and cash equivalents at end of period ................................. $ 801 $ 345
====== ======
</TABLE>
45
<PAGE>
London Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE N - 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.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation
distribution may be made with respect to common stock. Except for the
repurchase of stock and payment of dividends by the Company, the existence
of the liquidation account will not restrict the use or application of such
retained earnings. The Company may not declare, pay a cash dividend on, or
repurchase any of its common stock, if the effect thereof would cause
retained earnings to be reduced below either the amount required for the
liquidation account or the regulatory capital requirements for SAIF insured
institutions.
46
<PAGE>
LONDON FINANCIAL CORPORATION
AND
THE CITIZENS LOAN & SAVINGS COMPANY
DIRECTORS AND OFFICERS
===============================================================================
<TABLE>
<CAPTION>
<S> <C>
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
Donovan A. Forrest Director
President
Forest Trucking Company
Edward D. Goodyear Director
Certified Public Accountant
Shirley C. Hansgen Director
Attorney
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
</TABLE>
47
<PAGE>
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: Rick Grzymajlo
Cincinnati, Ohio 45202
(513) 579-5405
ANNUAL MEETING
===============================================================================
The 1998 Annual Meeting of Shareholders of London Financial Corporation (the
"Annual Meeting") will be held on January 22, 1998, 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
48
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The Citizens Loan & Savings Company
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 322
<INT-BEARING-DEPOSITS> 3,342
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 155
<INVESTMENTS-CARRYING> 4,086
<INVESTMENTS-MARKET> 4,115
<LOANS> 29,465
<ALLOWANCE> 187
<TOTAL-ASSETS> 38,210
<DEPOSITS> 29,951
<SHORT-TERM> 0
<LIABILITIES-OTHER> 355
<LONG-TERM> 300
0
0
<COMMON> 0
<OTHER-SE> 7,604
<TOTAL-LIABILITIES-AND-EQUITY> 38,210
<INTEREST-LOAN> 2,381
<INTEREST-INVEST> 290
<INTEREST-OTHER> 161
<INTEREST-TOTAL> 2,832
<INTEREST-DEPOSIT> 1,426
<INTEREST-EXPENSE> 1,468
<INTEREST-INCOME-NET> 1,364
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 887
<INCOME-PRETAX> 584
<INCOME-PRE-EXTRAORDINARY> 385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 385
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 3.77
<LOANS-NON> 261
<LOANS-PAST> 7
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 187
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 187
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 187
</TABLE>
Exhibit 99.1
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 1998 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 22,
1998, 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 re-elect four directors of LFC for terms expiring in 2000;
2. To ratify the selection of Grant Thornton LLP as the auditors of
LFC for the current fiscal year; and
3. 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, 1997, 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 11, 1997
<PAGE>
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 1998 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
22, 1998, 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 re-election of John I. Andrix, Rodney A. Bell, John J. Bodle,
and Shirley C. Hansgen as directors of LFC for terms expiring in 2000;
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, 1997
(the "Voting Record Date"), are entitled to notice of and 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
510,160 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of LFC on or
about December 18, 1997.
VOTE REQUIRED
Election of Directors
Under Ohio law and LFC's Code of Regulations (the "Regulations"), the four
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 four nominees. Shareholders
may not cumulate their votes in the election of directors.
1
<PAGE>
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. 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 the ratification of the selection of Grant Thornton
("Non-votes"), will have the same effect as votes 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 10, 1997:
<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) 8.3%
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 (the
"ESOP").
</FN>
</TABLE>
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 10, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership (2) Shares Outstanding
- -------------------- ------------------------ ------------------
<S> <C> <C>
John I. Andrix 41,221 (3) 8.08%
Rodney A. Bell 20,000 (4) 3.92
John J. Bodle 20,187 (5) 3.95
Donovan D. Forrest 2,000 0.39
Edward D. Goodyear 44,096 (3)(6) 8.64
Shirley C. Hansgen 3,155 (7) 0.61
Kennison A. Sims 43,160 (3)(8) 8.46
All directors and executive officers
as a group (9 people) 132,980 26.06
- -----------------------------
<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.
(Footnotes continued on next page.)
2
<PAGE>
(3) Includes 21,160 shares held by The Citizens Loan & Savings Company
Management Recognition and Retention Plan and Trust, with respect to which
Messrs. Andrix, Goodyear and Sims have shared voting power as Trustees.
Such shares are counted only once in determining the number of shares owned
by all directors and executive officers of LFC as a group.
(4) Mr. Bell shares voting and investment power over such shares with his wife.
(5) Includes 10,895 shares with respect to which Mr. Bodle shares voting and
investment power with his wife and 811 shares owned by Mr. Bodle's wife.
(6) Includes 10,832 shares with respect to which Mr. Goodyear shares voting and
investment power with his wife and 1,650 shares owned by Mr. Goodyear's
wife.
(7) Includes 1,430 shares owned by Ms. Hansgen's husband.
(8) Includes 6,775 shares with respect to which Mr. Sims shares voting and
investment power with his wife.
</FN>
</TABLE>
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
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 re-election of the following persons to
serve until the Annual Meeting of Shareholders in 2000 and until their
successors are duly elected and qualified or until their earlier resignation,
removal from office or death:
<TABLE>
<CAPTION>
Director of
Name Age (1) Positions Held LFC Since (2)
- ---- ------- -------------- -------------
<S> <C> <C> <C>
John I. Andrix 50 Director 1996
Rodney A. Bell 78 Director 1996
John J. Bodle 50 Director and President 1996
Shirley C. Hansgen 46 Director 1997
- ------------------------------
<FN>
(1) As of December 1997.
(2) With the exception of Ms. Hansgen, each director became a director in 1995
at the time of the formation of LFC in connection with the conversion of
Citizens from mutual to stock form (the "Conversion"). Ms. Hansgen was
appointed by the Board of Directors in 1997 to fill a vacancy created by
the death of George O. Matthewson.
</FN>
</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.
3
<PAGE>
The following directors will continue to serve as directors of LFC
after the Annual Meeting for the terms indicated:
<TABLE>
<CAPTION>
Director of
Name Age (1) Position(s) Held LFC since (2) Term Expires
- ---- ------- ---------------- ------------- ------------
<S> <C> <C> <C>
Donovan D. Forrest 48 Director 1997 1999
Edward D. Goodyear 50 Director 1996 1999
Kennison A. Sims 45 Director 1996 1999
- -----------------------------
<FN>
(1) As of December 10, 1997.
(2) Mr. Goodyear became a director in 1995, at the time of the formation of LFC
in connection with the Conversion. Mr. Sims was appointed in May 1996 by
the Board of Directors to fill a vacancy on the Board of Directors created
in 1996 by the resignation of Mary Goodyear. Mr. Forrest was appointed in
September 1997 by the Board of Directors to fill a vacancy created in 1997
by the resignation of Donald E. Forrest.
</FN>
</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, sold 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.
Mr. Donovan D. Forrest. For the past 18 years, Mr. Forrest has been the
President 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.
Ms. Shirley C. Hansgen. Ms. Hansgen is an attorney at law and has been
practicing in Madison County, Ohio for the past 18 years..
Mr. Kennison A. Sims. Mr. Sims has been the owner-operator of The Sims
Construction Company, London, Ohio, since 1976.
Meetings of Directors
The Board of Directors of LFC met 13 times for regularly scheduled and
special meetings during the fiscal year ended September 30, 1997. With the
exception of Mr. Forrest, who joined the Board of Directors in September 1997,
and Ms. Hansgen, 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 an Audit Committee and a Stock Option
Plan Committee, but no separate nominating or compensation committees.
4
<PAGE>
The members of the Audit Committee are Messrs. Bell and Goodyear and Ms.
Hansgen. 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, 1997.
The members of Stock Option Plan Committee are Messrs. Andrix, Goodyear and
Sims. The Stock Option Plan Committee administers the London Financial
Corporation 1997 Stock Option and Incentive Plan (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 Stock
Option Plan Committee met one time during the fiscal year ended September 30,
1997.
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. Bauerle 45 Vice President and Treasurer of
Citizens and Treasurer of LFC
Rebecca A. Lohr 40 Secretary of LFC and Citizens
- -----------------------------
<FN>
(1) As of December 1997.
</FN>
</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 six 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 $100,000 during the fiscal year ended September 30, 1997. The following table
sets forth the compensation paid to John J. Bodle, the President of LFC and
Citizens, for the fiscal years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------
Annual compensation Long term compensation All other
compensation (3)
----------------------------------------------------------------------------------------------
Awards
------------------------------------------
Name and principal Fiscal Restricted Securities
position Year Salary ($) Bonus ($) stock awards ($) underlying
options/SARs (#)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John J. Bodle 1997 $59,500 $11,500 $79,350 (1) $13,225 (2) $14,414
President 1996 55,530 10,725 - - 8,400
- --------------------------------------------------------------------------------------------------------------------------
Footnotes on next page
5
<PAGE>
<FN>
(1) On January 30, 1997, Mr. Bodle was awarded 5,290 common shares pursuant to
the MRP. Mr. Bodle paid no consideration for such shares. Such shares will
become earned and nonforfeitable at the rate of one-fifth per year on the
anniversary of the date of the award, beginning on January 30, 1998,
assuming continued employment with or service on the Board of Directors of
Citizens. The market price of LFC's shares on January 30, 1997, determined
by reference to the closing bid for LFC's shares on the Nasdaq SmallCap
Market ("Nasdaq") on such date, was $15.00 per share. The aggregate market
value of the shares awarded to Mr. Bodle under the MRP, as of such date,
was $79,350. By reference to the closing bid for LFC's shares on Nasdaq on
September 30, 1997, the shares which have been awarded to Mr. Bodle under
the MRP had an aggregate market value of $82,987 on such date. Dividends
and other distributions paid on such shares and earnings on such dividends
and distributions will be distributed to Mr. Bodle according to the vesting
schedule.
(2) Represents the number of common shares of LFC underlying options granted to
Mr. Bodle pursuant to the Stock Option Plan.
(3) Consists of directors' fees and the $7,514 allocated to Mr. Bodle under
Citizens' Simplified Employee Pension Plan, which was terminated in 1997.
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.
</FN>
</TABLE>
Stock Option Plan
The shareholders of LFC adopted the Stock Option Plan at the 1997 Annual
Meeting of Shareholders. Pursuant to the Stock Option Plan, 52,900 shares were
reserved for issuance by LFC upon exercise of options to be granted to certain
directors, officers and employees of LFC and Citizens from time to time under
the Stock Option Plan. Options to purchase 38,095 common shares of LFC were
granted pursuant to the Stock Option Plan during the fiscal year ended September
30, 1997.
The Stock Option Committee may grant options under the Stock Option Plan at
such times as it deems most beneficial to LFC and Citizens on the basis of the
individual participant's responsibility, tenure and future potential to LFC and
Citizens and in accordance with the regulations of the Office of Thrift
Supervision.
Options granted to officers and employees under the Stock Option Plan may
be "incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Options granted under
the Stock Option Plan to directors who are not employees of LFC or Citizens will
not qualify under the Code and thus will not be incentive stock options
("Non-Qualified Stock 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 or, if acceptable to the Stock Option Committee, common shares
of LFC or outstanding awarded stock options.
The following table sets forth information regarding all grants of options
to purchase common shares of LFC made to Mr. Bodle during the fiscal year ended
September 30, 1997:
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
Number of Securities % Of Total Options/SARs
Underlying Options/ Granted to Employees in Exercise or Base
Name SARs Granted (#) 1997 Fiscal Year Price ($/Share) Expiration Date
- ---- ----------------- ------------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
John J. Bodle 13,225 (1) 34.7% $15.00 January 30, 2007
- ----------------------------
<FN>
(1) The options were granted on January 30, 1997. One-fifth of such options
will become exercisable on each anniversary of such grant, commencing
January 30, 1998.
</FN>
</TABLE>
6
<PAGE>
The following table sets forth information regarding the number and value
of unexercised options held by Mr. Bodle at September 30, 1997:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 9/30/97 Option/SAR Values
Number of Securities Underlying
Unexercised Options/SARs at Value of Unexercisable
Shares Acquired on Value 9/30/97(#) "In The Money" Options/
Name Exercise(#) Realized($) Exercisable/Unexercisable SARs at 9/30/97(#)(1)
<S> <C> <C> <C> <C>
John J. Bodle -0- N/A -0-/13,225 -0-/$9,092
- ---------------------------
<FN>
(1) For purposes of this table, the value of the option was determined by
multiplying the number of shares subject to unexercised options by the
difference between the $15.00 exercise price and the fair market value of
LFC's common shares, which was $15.6875 on September 30, 1997, based on the
closing bid price reported by Nasdaq.
</FN>
</TABLE>
Management Recognition Plan and Trust
The shareholders of LFC adopted the MRP at the 1997 Annual Meeting of
Shareholders. The MRP purchased 21,160 shares of LFC's common stock, 17,640 of
which were awarded to directors, executive officers and employees of LFC and
Citizens in January 1997.
The MRP is administered by the MRP Committee of the Board of Directors of
LFC. Subject to express provisions of the MRP, the MRP Committee determines
which directors, executive officers and employees of Citizens and LFC will be
awarded shares under the MRP and the number of shares to be awarded.
Unless the MRP Committee specifies a longer period of time, one-fifth of
the MRP shares awarded to a recipient will become earned and nonforfeitable on
each of the first five anniversaries of the date of the awards. 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, an officer or an
employee of LFC or Citizens. In the event of the death or disability of a
participant, however, the participant's shares will be deemed to be earned and
nonforfeitable upon such date.
MRP shares will be distributed as soon as practicable after they are
earned. All plan shares which have been awarded but not earned will be voted in
the discretion of the MRP Trustee appointed by the MRP Committee.
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 Citizens' Executive Committee, Audit Committee and Classification
and Fixed Asset Committee receives, respectively, $300, $100 and $100 for each
committee meeting attended.
Employment Agreement
On April 30, 1997, Citizens entered into an employment agreement with Mr.
Bodle (the "Employment Agreement"). Citizens has not entered into an employment
agreement with any other officer.
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.
7
<PAGE>
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, subject to certain limits. 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. 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 and do not involve more than the normal risk of
collectibility or present other unfavorable features.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires LFC's directors and executive
officers, and persons who own more than 10% of a registered class of LFC's
equity securities, to file with the Securities and Exchange Commission ("SEC")
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Corporation. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish LFC with copies of
all Section 16(a) forms they file. Form 3, "Initial Statement of Beneficial
Ownership of Securities," required to filed with the SEC within ten days of
becoming an executive officer or director, was filed late by Mr. Forrest
following his appointment to the Board of Directors. To LFC's knowledge, based
solely on a review of the copies of such reports furnished to LFC and written
representations that no other reports were required during the fiscal year ended
September 30, 1997, LFC's directors and executive officers complied with all
other Section 16(a) filing requirements applicable to them.
8
<PAGE>
SELECTION OF AUDITORS
On July 11, 1996, the Board of Directors approved the recommendation of its
Audit Committee to change its independent accountant from KPMG Peat Marwick
("KPMG") to Grant Thornton LLP ("Grant Thornton"). No adverse opinion,
disclaimer or qualification was contained in KPMG's report for either of the
last two fiscal years for which KPMG completed an audit of Citizens' financial
statements, nor were such reports modified as to uncertainty, audit scope or
accounting principles. Further, there was no disagreement between KPMG and
Citizens or Grant Thornton on any matter of accounting principles or practices,
financial statement disclosure or auditing 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 1999 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,
1998.
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.
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 11, 1997
9
<PAGE>
REVOCABLE PROXY
LONDON FINANCIAL CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF LONDON FINANCIAL CORPORATION
The undersigned shareholder of London Financial Corporation ("LFC") hereby
constitutes and appoints Edward D. Goodyear and Kennison A. Sims, or either one
of them, the Proxy or Proxies of the undersigned with full power of substitution
and resubstitution, to vote at the Annual Meeting of Shareholders of LFC to be
held at the office of The Citizens Loan & Savings Company, located at 2 East
High Street, London, Ohio, on January 22, 1998, at 10:00 a.m., Eastern Time (the
"Annual Meeting"), all of the shares of LFC which the undersigned is entitled to
vote at the Annual Meeting, or at any adjournment thereof, on each of the
following proposals, all of which are described in the accompanying Proxy
Statement:
1. The election of four directors for terms expiring in 2000:
FOR all nominees listed WITHHOLD authority to
below (except as marked vote for all nominees
to the contrary below) listed below
John I. Andrix
Rodney A. Bell
John J. Bodle
Shirley C. Hansgen
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below).
- -------------------------------------------------------------------------------
2 The ratification of the selection of Grant Thornton LLP as the
auditors of London Financial Corporation for the current fiscal year.
FOR AGAINST ABSTAIN
3. In their discretion, upon such other business as may properly come
before the Annual Meeting or any adjournments thereof.
Important: Please sign and date this proxy on the reverse side.
1
<PAGE>
This Revocable Proxy will be voted as directed by the undersigned member.
If no direction is given, this Revocable Proxy will be voted FOR proposals 1 and
2.
All Proxies previously given by the undersigned are hereby revoked. Receipt
of the Notice of Annual Meeting of Shareholders of LFC and of the accompanying
Proxy Statement is hereby acknowledged.
NOTE: Please sign your name exactly as it appears on this Proxy. Joint accounts
require only one signature. If you are signing this Proxy as an attorney,
administrator, agent, corporation, officer, executor, trustee or guardian, etc.,
please add your full title to your signature.
Signature Signature
Print or Type Name Print or Type Name
Date Date
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF LFC. PLEASE
DATE, SIGN AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED FOR MAILING IN THE U.S.A.
IMPORTANT: IF YOU RECEIVE MORE THAN ONE CARD, PLEASE SIGN AND RETURN ALL CARDS
IN THE ACCOMPANYING ENVELOPE.
2
Exhibit 99.2
KPMG Peat Marwick LLP
Independent Auditors' Report
The Board of Directors
Citizens Loan and Savings Company:
We have audited the accompanying statements of earnings, shareholders' equity
and cash flows of Citizens Loan and Savings Company for the year 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 results of operations and cash flows of Citizens Loan
and Savings Company for the year ended September 30, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
October 27, 1995
Exhibit 99.3
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 1997 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
1
<PAGE>
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 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.
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 federally-chartered
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 limiting the activities in
which LFC may engage and subjecting LFC to 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, if enacted, may
change the activities in which LFC or Citizens are authorized to engage, it is
not anticipated that the current activities of either LFC or Citizens will be
materially affected by those activity limits.
2
