<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission File 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: (740) 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 (Title of Class)
registered)
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 OTC Bulletin Board as of December 18, 1998, was $5.4
million. (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 15, 1998, there were 479,450 of the Registrant's common
shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I of Form 10-KSB - Safe Harbor Under the Private Securities
Litigation Reform Act of 1995 in Exhibit 99. Part II of Form 10-KSB - Portions
of Annual Report to Shareholders for fiscal year ended September 30, 1998, in
Exhibit 13.
Part III of Form 10-KSB - Portions of Proxy Statement for 1999 Annual
Meeting in Exhibit 20.
Transitional Small Business Disclosure Format: Yes No X
---- ----
<PAGE> 2
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.
On July 9, 1998, the respective Boards of Directors of Citizens and LFC
approved the conversion of Citizens from a state-chartered savings and loan
association to a state-chartered commercial bank (the "Charter Conversion").
Shortly thereafter, Citizens filed an application with the Division seeking
approval of the Charter Conversion, and Citizen's application was approved by
the Division on December 8, 1998. It is currently anticipated that the Charter
Conversion will be consummated on January 4, 1999. As a result of the Charter
Conversion, Citizens will be permitted to increase its commercial lending
activities to small businesses and to agricultural concerns and to increase its
commercial checking activity. After the Charter Conversion, Citizens will be
regulated by the Division and the Federal Deposit Insurance Corporation (the
"FDIC").
Also in connection with the Charter Conversion, LFC filed an
application with the Federal Reserve Board for pre-approval to register as a
bank holding company. The Federal Reserve Board approved LFC's application for
pre-approval to become a bank holding company on October 16, 1998. Consequently,
after the Charter Conversion, LFC will be a bank holding company regulated by
the Federal Reserve Board and will no longer be a unitary savings and loan
holding company regulated by the OTS. As a unitary savings and loan holding
company, LFC has been permitted to engage in more numerous types of commercial,
securities and insurance activities than other financial institution holding
companies, including bank holding companies. However, LFC does not currently
engage in any activities which would be impermissible for it to engage in after
the Charter Conversion is consummated and LFC becomes a bank holding company.
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;"
-2-
<PAGE> 3
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;"
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.
-3-
<PAGE> 4
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,
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $22,648 66.74% $23,489 75.89% $21,819 75.57%
Multifamily 665 1.96 671 2.17 258 0.90
Nonresidential 5,083 14.98 4,529 14.63 4,831 16.73
Construction 1,315 3.88 1,360 4.39 1,084 3.75
------- ------ ------- ------ ------- ------
Total real estate loans 29,711 87.56 30,049 97.08 27,992 96.95
Commercial loans 3,473 10.23 166 .54 190 0.66
Consumer loans:
Automobile loans 266 .78 186 .60 152 0.53
Loans on deposits 66 .20 70 .23 147 0.51
Other consumer loans 417 1.23 481 1.55 392 1.35
------- ------ ------- ------ ------- ------
Total consumer loans 749 2.21 737 2.38 691 2.39
------- ------ ------- ------ ------- ------
Total loans 33,933 100.00% 30,952 100.00% 28,873 100.00%
====== ====== ======
Less:
Undisbursed portion of
loans in process (745) (885) (1,258)
Unearned and deferred
income (399) (415) (397)
Allowance for loan losses
(201) (187) (187)
------- ------- -------
Net loans $32,588 $29,465 $27,031
======= ======= =======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
September 30, 1998, 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 more
Due during the year ending years years years than 20
September 30, after after after years after
1999 2000 2001 9/30/98 9/30/98 9/30/98 9/30/98 Total
---------- ---------- --------- --------- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 37 $ 24 $ 11 $ 317 $1,008 $6,915 $14,336 $22,648
Multifamily and nonresidential 52 2 16 147 569 2,502 2,460 5,748
Construction 661 654 - - - - - 1,315
Commercial loans 2,205 49 137 559 73 200 250 3,473
Consumer loans 146 93 159 333 18 - - 749
------ ---- ----- ------ ------ ------ ------- -------
Total $3,101 $822 $323 $1,356 $1,668 $9,617 $17,046 $33,933
====== ==== ===== ====== ====== ====== ======= =======
</TABLE>
-4-
<PAGE> 5
The table below sets forth the dollar amount of all loans due after
September 30, 1999, which have predetermined interest rates and have floating or
adjustable interest rates:
<TABLE>
<CAPTION>
Due after
September 30, 1999
------------------
(In thousands)
<S> <C>
Fixed rates of interest $ 1,241
Adjustable rates of interest 29,591
--------
Total $30,832
=======
</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, 1998, one- to four-family residential
loans totaled approximately $22.6 million, or 66.7% 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 $22.3 million were secured by first
mortgages and approximately $368,000 were secured by second mortgages at
September 30, 1998.
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, 1998, the multifamily loan
portfolio consisted of 3 loans, which totaled approximately $665,000, or 2.0% 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, 1998, approximately $5.1 million, or 15.0%, 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 $485,000 and was performing in accordance with its
terms. The
-5-
<PAGE> 6
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.
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, 1998, the loan portfolio of Citizens included $1.3
million in construction loans, or 3.9% of total loans, including undisbursed
proceeds of approximately $745,000. All of the construction loans in the
portfolio of Citizens are for construction of residential and non-residential
properties in Madison County and contiguous counties and all of such loans were
performing in accordance with their terms at September 30, 1998.
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 offers commercial loans to businesses and
individuals 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, 1998, the commercial loan portfolio of Citizens
totaled $3.5 million, or 10.2% of total loans. All of the commercial loans are
to business and individuals in Madison County and contiguous areas and all of
such loans were performing in accordance with their terms at September 30, 1998.
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, 1998, Citizens had
approximately $749,000, or 2.2% 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.
-6-
<PAGE> 7
Loan applications for permanent real estate loans are taken by loan
personnel at the office of Citizens. Citizens typically obtains a credit report,
verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate which will be given as security for the loan is prepared by an
appraiser approved by the Board of Directors. Upon the completion of the
appraisal and the receipt of information on the credit history of the borrower,
the application for a loan is submitted for review in accordance with the
underwriting guidelines of Citizens. Loans of amounts less than $100,000 may be
approved by the President of Citizens. Loans of amounts between $100,000 and
$150,000 may be approved by the Executive Committee of the Board of Directors.
Loans in excess of $150,000 require approval of the full Board of Directors of
Citizens.
If a mortgage loan application is approved, Citizens typically obtains
an attorney's opinion of title. Citizens obtains title insurance on only
approximately 10% of its loans secured by real estate. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Citizens as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Citizens
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in portions based upon periodic inspections of construction progress.
Commercial loans are underwritten on the basis of the borrower's credit
history and the analysis of the borrower's income and expenses relating to the
business they operate, as well as the value of the collateral, if any.
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. [VERIFY] 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,
------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential $ 4,284 $3,709
Multifamily residential - 434
Nonresidential 444 864
Construction 1,205 1,939
Commercial 5,848 172
Consumer 840 673
------- ------
Total loans originated 12,621 7,791
Principal repayments (9,600) (5,438)
Increase in other items, net (1) 102 81
------- ------
Net increase $3,123 $2,434
======= ======
<FN>
- -----------------------------
(1) Other items consist of deferred loan fees, allowance for loan losses
and the undisbursed portion of construction loans.
</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.
-7-
<PAGE> 8
Based on the 15% limit, Citizens was able to lend approximately
$671,000 to one borrower at September 30, 1998. The largest amount Citizens had
outstanding to one borrower and related persons or entities at September 30,
1998, was $684,000, consisting of nine loans, which are secured by real estate
and were performing in accordance with their terms on September 30, 1998. The
slight amount in excess of the limit was the result of a $5.00 per share, or
$2.7 million, special distribution paid to shareholders during fiscal 1998
which decreased assets.
LOAN ORIGINATION AND OTHER FEES. Citizens realizes loan origination
fees and other fee income from its lending activities and also realizes income
from late payment charges, application fees and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91 as an adjustment to yield over
the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Payments
on loans made by Citizens are due on the first day of the month with the
interest portion of the payment applicable to interest accrued during the prior
month. When a loan payment has not been made by the fifteenth of the month, a
late notice is sent. If payment is not received by the thirtieth day, a second
notice is sent. Telephone calls are made to the borrower in connection with both
the 15- and 30-day notices. Each of the loans bears a late payment penalty which
is assessed as soon as such loan is more than 15 days delinquent. The late
penalty is the greater of 5% of the payment due or $20.
When a loan secured by real estate becomes more than 90 days
delinquent, the loan is placed in nonaccrual status and a letter is sent to the
borrower by Citizens to inform the borrower that foreclosure proceedings will
begin if the loan is not brought current within 30 days. If the loan has not
been brought current within such 30-day period, the Board of Directors normally
refers the loan to an attorney to commence foreclosure proceedings.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 1 $27 .08% 4 $ 49 .16%
60 - 89 days 1 6 .02 2 40 .13
90 days and over - - - 5 268 .87
--- --- --- -- ---- ----
Total delinquent loans 2 $33 .10% 11 $357 1.16%
=== === === == ==== ====
</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.
-8-
<PAGE> 9
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,
----------------
1998 1997
---- ----
(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
Multifamily - -
Nonresidential - 24
Consumer - -
------ -----
Total nonaccrual loans - 261
------ -----
Total nonperforming loans - 268
Real estate owned - -
------ -----
Total nonperforming assets $ - $268
====== =====
Allowance for loan losses $201 $187
Nonperforming assets as a percent
of total assets -% .70%
Nonperforming loans as a percent
of total loans -% .87%
Allowance for loan losses as a
percent of nonperforming loans -% 69.78%
</TABLE>
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, 1998, 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.
-9-
<PAGE> 10
The aggregate amounts of classified assets of Citizens at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
------------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $77 $305
Doubtful - -
Loss - -
--- ----
Total classified assets $77 $305
=== ====
</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 1998 and
1997 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,
-------------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $187 $187
Charge-offs 8 -
Recoveries - -
---- ----
Net charge-offs 8 -
Provision for loan losses 22 -
---- ----
Balance at end of year $201 $187
==== ====
Ratio of net charge-offs
to average loans outstanding
during the period -% -%
Ratio of allowance for loan losses
to total loans .59% .60%
</TABLE>
-10-
<PAGE> 11
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,
------------------------------------------------------------
1998 1997
------------------------- ---------------------------
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 $130 87.56% $182 97.08%
Commercial loans 51 10.23 1 .54
Consumer loans 20 2.21 4 2.38
Unallocated - - - -
---- ----- ---- ------
Total $201 100.0% $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.
-11-
<PAGE> 12
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,
--------------------------------------------------------------------------------------
1998 1997
------------------------------------------- -----------------------------------------
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 $1,271 31.04% $1,271 30.81% $3,342 44.07% $3,342 43.91%
Investment securities:
Held to maturity:
U.S. Government and agency
securities - - - - 500 6.59 502 6.59
Available for sale:
Corporate equity securities 121 2.95 121 2.93 155 2.05 155 2.04
Mortgage-backed securities
held to maturity 2,703 66.01 2,733 66.26 3,586 47.29 3,613 47.46
------ ------ ------ ------ ------ ------ ------ ------
Total investments $4,095 100.00% $4,125 100.00% $7,583 100.00% $7,612 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The maturities of the interest-bearing deposits and mortgage-backed
securities of Citizens at September 30, 1998, are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30, 1998
----------------------------------------------------------------------------------------------------------
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
financial institutions $1,271 3.50% $- -% $- -% $ - -% $1,271 $1,271 3.50%
Mortgage-backed
securities - - - - - - 2,703 6.29 2,703 2,733 6.29
------ ----- --- --- --- --- ----- ---- ------ ------ ----
Total $1,271 3.50% $- -% $- -% $2,703 6.29% $3,974 $4,004 5.42%
====== ==== == === === === ====== ==== ====== ====== ====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of funds
used by Citizens in lending and other investment activities. In addition to
deposits, Citizens derives funds from interest payments and principal repayments
on loans and income on earning assets. Loan payments are a relatively stable
source of funds, while deposit inflows and outflows fluctuate in response to
general interest rates and money market conditions. Citizens also utilizes FHLB
advances as an alternative source of funds.
DEPOSITS. Deposits are attracted principally from within the market
area of Citizens through the offering of a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, regular passbook savings accounts, term certificate accounts and
Individual Retirement Accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by management of Citizens based on the liquidity
requirements and growth goals of Citizens and interest rates paid by
competitors. Citizens does not use brokers to attract deposits. The amount of
deposits received by Citizens from outside its market area is not significant.
At September 30, 1998, certificates of deposit at Citizens totaled
approximately $19.5 million, or 62.2% of total deposits. Of such amount,
approximately $9.5 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
-12-
<PAGE> 13
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,
---------------------------------------------------
1998 1997
----------------------- ---------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $ 3,905 12.48% $3,092 10.32%
Super NOW accounts (2) - - 278 .94
Passbook savings accounts (3) 5,951 19.01 5,834 19.47
Money market accounts (4) 1,976 6.31 226 .75
-------- ---- ------ -----
Total transaction accounts 11,832 37.80 9,430 31.48
Certificates of deposit:
6.00% or less 15,170 48.47 15,616 52.14
Over 6.01% 4,298 13.73 4,905 16.38
-------- ------- --------- ------
Total certificates of deposit (5) 19,468 62.20 20,521 68.52
------- ------- -------- ------
Total deposits $31,300 100.00% $29,951 100.00%
======= ====== ======= ======
<FN>
- -----------------------------
(1) The weighted average rate on NOW accounts at September 30, 1998 and
1997, was 2.27%.
(2) The weighted average rate on Super NOW accounts at September 30, 1997,
was 3.50%.
(3) The weighted average rate on passbook savings accounts at September 30,
1998 and 1997, was 3.00%.
(4) The weighted average rate on money market accounts at September 30,
1998 and 1997, was 4.68% and 2.71%, respectively.
(5) The weighted average rate on all certificates of deposit, including IRA
accounts, at September 30, 1998 and 1997, was 5.91% and 6.00%,
respectively.
</TABLE>
Citizens bids on public funds from entities in its primary market area.
The amount of such deposits was approximately $91,000 at September 30, 1998.
The following table shows rate and maturity information for
certificates of deposit at Citizens at September 30, 1998:
<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% $9,424 $2,573 $1,311 $1,862 $15,170
6.01% to 8.00% 95 1,101 83 3,019 4,298
------ ------ ------ ------ -------
Total certificates
of deposit $9,519 $3,674 $1,394 $4,881 $19,468
====== ====== ====== ====== =======
</TABLE>
-13-
<PAGE> 14
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, 1998:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 100
Over 3 months to 6 months 214
Over 6 months to 12 months 233
Over 12 months 960
------
Total $1,507
======
</TABLE>
The following table sets forth the deposit account balance activity at
Citizens for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $29,951 $28,195
Deposits 61,467 51,086
Withdrawals (61,268) (50,447)
------- -------
Net deposits before interest
credited 30,150 28,834
Interest credited 1,150 1,117
------- -------
Ending balance 31,300 29,951
------- -------
Net increase $ 1,349 $ 1,756
======= =======
</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, 1998,
Citizens was in compliance with the QTL test and had $1.8 million in advances
from the FHLB, bearing interest at the rate of 6.27% and with maturity dates as
follows:
<TABLE>
<CAPTION>
Amount Due Date
------ --------
(In thousands)
<S> <C> <C>
$ 500 12/98
1,000 2/99
300 6/01
------
$1,800
======
</TABLE>
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."
-14-
<PAGE> 15
EMPLOYEES
As of September 30, 1998, Citizens had 10 full-time employees and 4
part-time employees.
REGULATION PRIOR TO THE CHARTER CONVERSION
GENERAL
Prior to the Charter Conversion, LFC has been a savings and loan
holding company within the meaning of the Home Owners Loan Act, as amended (the
"HOLA"). Consequently, LFC has been subject to regulation, examination and
oversight by the OTS and has been required to submit periodic reports to the OTS
concerning its activities and financial condition. In addition, as a savings and
loan association chartered under the laws of Ohio, Citizens has been subject to
regulation, examination and oversight by the Superintendent of the Division (the
"Ohio Superintendent").
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 also subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association.
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 has been required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement require 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.
OTS regulations also 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 $210,000 at September 30, 1998.
The OTS has 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. Citizens' capital at September 30,
1998, met the standards for the highest category, a "well-capitalized"
institution.
-15-
<PAGE> 16
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 4.0% of its net
withdrawable savings deposits payable in one year 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, 1998, was approximately $2.0 million, or 5.9%, and exceeded the
then applicable 4.0% liquidity requirement by approximately $325,000.
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. A savings association that fails to meet the QTL test will not be
eligible for new FHLB advances. At September 30, 1998, 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.
HOLDING COMPANY REGULATION. Prior to the Charter Conversion, LFC has
been a savings and loan holding company within the meaning of the HOLA. As such,
LFC has been registered with the OTS and has been subject to OTS regulations,
examination, supervision and reporting requirements.
As a unitary savings and loan holding company, LFC generally has had 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. However, 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.
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. After the Charter Conversion, Citizens'
current deposits will continue to be insured by the SAIF.
FEDERAL HOME LOAN BANKS
The FHLBs 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 $288.000 at September 30, 1998.
-16-
<PAGE> 17
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, 1998, Citizens'
maximum limit on advances was approximately $5.8 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
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. Currently, Citizens intends to continue to be a
member of the FHLB after the Charter Conversion.
REGULATION AFTER THE CHARTER CONVERSION
GENERAL
As stated previously, on July 9, 1998, the respective Boards of
Directors of Citizens and LFC approved the Charter Conversion. As a result of
the Charter Conversion, Citizens will become a state-chartered commercial bank.
It is currently anticipated that the Charter Conversion will be consummated on
January 4, 1999. After the Charter Conversion, Citizens will be regulated by the
Division and the FDIC. In addition, after the Charter Conversion, LFC will be a
bank holding company regulated by the Board of Governors of the Federal Reserve
System (th "FRB") and will no longer be a unitary savings and loan holding
company regulated by the OTS.
As a unitary savings and loan holding company, LFC has been permitted
to engage in more numerous types of commercial, securities and insurance
activities than other financial institution holding companies, including bank
holding companies. However, LFC does not currently engage in any activities
which would be impermissible for it to engage in after the Charter Conversion is
consummated and LFC becomes a bank holding company.
OHIO CORPORATION LAW
LFC and Citizens have been and will continue to be subject to the
following Ohio corporation laws:
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an
-17-
<PAGE> 18
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
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 offerors filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statue 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.
BANK HOLDING COMPANY REGULATION
After the Charter Conversion, LFC will be registered with the FRB as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). Bank holding companies and their activities are subject to extensive
regulation by the FRB. Bank holding companies are required to file reports with
the FRB and such additional information as the FRB may require, and are subject
to regular examinations by the FRB. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to each subsidiary bank and to commit resources to support
such subsidiary banks. Under this policy, the FRB may require a bank holding
company to contribute additional capital to an undercapitalized subsidiary bank.
The BHCA requires the prior approval of the FRB in any case where a
bank holding company proposes to acquire direct or indirect ownership or control
of more than 5% of the voting shares of any bank that is not already
majority-owned by it, to acquire all or substantially all of the assets of
another bank or bank holding company, or to merge or consolidate with any other
bank holding company. Section 4 of the BHCA also prohibits a bank holding
company, with certain exceptions, from acquiring more than 5% of the voting
shares of any company that is not a bank and from engaging in any business other
than banking or managing or controlling banks. The primary exception allows the
ownership of shares by a bank holding company in any company the activities of
which the FRB has determined to be so closely related to banking or to managing
or controlling banks as to be a proper incident thereto.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act ("FRA") on maintenance of
reserves against deposits, extensions of credit to the bank holding company or
any of its subsidiaries, on investments in the stock or other securities of the
bank holding company or its subsidiaries and on the taking of such stock or
securities as collateral for loans to any borrower. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of any services. Various consumer laws and regulations
also affect the operations of these subsidiaries including, but not limited to,
truth-in-lending disclosures, equal credit opportunity, fair credit reporting
and community reinvestment.
-18-
<PAGE> 19
TRANSACTIONS WITH AFFILIATES
Sections 23A and 23B of the FRA restrict transactions by insured
depository institutions and their subsidiaries with their affiliates. An
affiliate of an institution is any company or entity which controls, is
controlled by or is under common control with the institution. Generally,
Sections 23A and 23B (i) limit the extent to which an institution 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 (i.e.,
tangible capital) and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
A financial institution's authority to extend credit to executive
officers, directors and greater than 10% shareholders, as well as entities such
persons control, is subject to Sections 22(g) and 22(h) of the FRA and
Regulation O promulgated thereunder by the FRB. Among other things, such loans
must be made on terms substantially similar to those offered to unaffiliated
individuals. In addition, the amount of loans an institution may make to such
persons is based, in part, on the institution's capital position, and certain
approval procedures must be followed in making such loans.
OHIO COMMERCIAL BANK REGULATION
State chartered commercial banking corporations are subject to federal
and state regulation of their business and activities by the Division and either
the FRB or the FDIC, depending upon whether the state-chartered bank is a member
of the FRB. Ohio statutes and regulations prohibit a bank from engaging in any
activities deemed to constitute unsafe or unsound banking practices and also
govern many aspects of the activities and operations of the bank, including, but
not limited to, capital levels, range of permissible activities and expansion.
Ohio law also provides for prior Division approval of bank acquisitions and
prior approval of certain voting security acquisitions of 10% or more of an
institution's voting securities.
FEDERAL DEPOSIT INSURANCE CORPORATION
As stated previously, the FDIC is an independent federal agency which
insures the deposits, up to prescribed statutory limits, of federally-insured
banks and savings associations and safeguards the safety and soundness of the
financial institution industry. Two separate insurance funds are maintained and
administered by the FDIC. In general, banking institutions are members of BIF
and savings associations are SAIF members. The insurance fund Charter Conversion
provisions do not prohibit a SAIF member from either converting to a bank
charter, as long as the resulting bank remains a SAIF member, or merging with a
bank, as long as the bank continues to pay the SAIF insurance assessments on the
deposits acquired. After the Charter Conversion, Citizens' current deposits will
continue to be insured by the SAIF.]
Insurance premiums for SAIF and BIF members are determined during each
semi-annual assessment period based upon the members' respective categorization
as either (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned.
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
INTERSTATE BANKING AND BRANCHING
In 1994, the Riegle-Neal Act was enacted to ease restrictions on
interstate banking. The Riegle-Neal Act allows the FRB to approve an application
of an adequately capitalized and adequately managed bank holding company to
acquire control of, or acquire all or substantially all of the assets of, a bank
located in a state other than such holding company's home state, without regard
to whether the transaction is prohibited by the laws of any state. The FRB may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. The Riegle-Neal Act also prohibits the FRB from approving an
application if the applicant (and its depository
-19-
<PAGE> 20
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit contained
in the Riegle-Neal Act.
Additionally, in 1997, the federal banking agencies were authorized to
approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state, unless the home state of one
of the banks opts out of the Riegle-Neal Act by adopting a law after the date of
enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally
to all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. A state could have permitted such transactions before such
time by enacting authorizing legislation. Interstate acquisitions of branches
are permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions will also
be subject to the nationwide and statewide insured deposit concentration amounts
described above.
The Riegle-Neal Act authorizes the FDIC to approve interstate branching
de novo by national and state banks, respectively, only in states which
specifically allow for such branching. The Riegle-Neal Act also required the
appropriate federal banking agencies to prescribe regulations by June 1, 1997
which prohibited any out-of-state bank from using the interstate branching
authority primarily for the purpose of deposit production. These regulations
include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve.
REGULATORY CAPITAL
The FRB has adopted risk-based capital guidelines for bank holding
companies. The guidelines provide a systematic analytical framework which makes
regulatory capital requirements sensitive to differences in risk profiles among
banking organizations, takes off-balance sheet exposures expressly into account
in evaluating capital adequacy, and minimizes disincentives to holding liquid,
low-risk assets. Capital levels as measured by these standards also are used to
categorize financial institutions for purposes of certain prompt corrective
action regulatory provisions.
The minimum guideline for the ratio of total capital ("Total Capital")
to risk-weighted assets (including certain off-balance sheet items such as
standby letters of credit) is 8% ("Total Risk-Based Capital"). This Total
Risk-Based Capital ratio must be at least 10% to be considered well capitalized.
At least half of the minimum Total Risk-Based Capital ratio (4%) must be
composed of common stockholders' equity, minority interests in the equity
accounts of consolidated subsidiaries and a limited amount of perpetual
preferred stock, less goodwill and certain other intangibles ("Tier 1 Risk-Based
Capital"). To be considered well capitalized, the Tier 1 Risk-Based Capital
ratio must be at least 6%. The remainder of Total Risk-Based Capital may consist
of subordinated debt, other preferred stock and a limited amount of loan and
lease loss allowance.
The FRB also has established minimum leverage ratio guidelines for bank
holding companies. The guidelines provide for a minimum ratio of Tier 1
Risk-Based Capital to average assets (excluding the loan and lease loss
allowance, goodwill and certain other intangibles) ("Leverage Ratio") of 3% for
bank holding companies that meet certain criteria, including having the highest
regulatory rating. To be considered well capitalized, the Leverage Ratio must be
at least 5%. The guidelines further provide that bank holding companies making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum levels.
PROMPT CORRECTIVE REGULATORY ACTION
The federal banking agencies have established a system of prompt
corrective action to resolve certain of the problems of undercapitalized
institutions. This system is based on five capital level categories for insured
depository institutions - "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The federal banking agencies may (or in some cases must) take
certain supervisory actions depending upon an insured institution's capital
level. For example, the banking agencies must appoint a receiver or conservator
for an institution within 90 days after it becomes "critically undercapitalized"
unless the institution's primary regulator determines, with the concurrence of
the FDIC, that other action would better achieve regulatory purposes. Banking
operations otherwise may be significantly affected depending on an institution's
capital category. For example, an institution that is not "well
-20-
<PAGE> 21
capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized depository institution
must guarantee, in part, certain aspects of such depository institution's
capital plan for such plan to be acceptable.
Under the final rules implementing the prompt corrective action
provisions, a financial institution that has a Total Risk-Based Capital of 10%
or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater and a Leverage
Ratio of 5% or greater is deemed to be "well capitalized." An institution with a
Total Risk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capital
ratio of 4% or greater and a Leverage Ratio of 4% or greater (or a Leverage
Ratio of 3% or greater and a CAMEL 1 rating), is considered to be "adequately
capitalized." An institution that has a Total Risk-Based Capital of less than
8%, a Tier 1 Risk-Based Capital ratio of less than 4%, and a Leverage Ratio that
is less than 4% (or a Leverage Ratio of less than 3% and a CAMEL 1 rating), is
considered "undercapitalized." An institution that has a Total Risk-Based
Capital less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3% or a
Leverage Ratio that is less than 3% is considered to be "significantly
undercapitalized." An institution that has tangible equity (core capital minus
intangible assets other than qualifying supervisory goodwill and purchased
mortgage servicing rights) to total assets ratio equal to or less than 2% is
deemed to be "critically undercapitalized."
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
There are various legal limitations on the extent to which subsidiary
banks may finance or otherwise supply funds to their parent holding companies.
Under federal and Ohio law, subsidiary banks may not, subject to certain limited
exceptions, make loans or extensions of credit to, or investments in the
securities of, their bank holding companies. Subsidiary banks are also subject
to collateral security requirements for any loans or extension of credit
permitted by such exceptions.
The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is largely dependent on the amount
of dividends which may be declared by its subsidiary banks. However, the FRB
expects a bank holding company to serve as a source of strength to its
subsidiary banks, which may require it to retain capital for further investment
in the subsidiaries, rather than for dividends for shareholders of the bank
holding company. Consequently, Citizens will not be allowed to pay dividends to
LFC, if, after paying such dividends, Citizens would fail to meet the required
minimum levels under the risk-based capital guidelines and the minimum leverage
ratio requirements. In addition, Citizens will be required to have the approval
of the Division if a dividend in any year would cause the total dividends for
that year to exceed the sum of the current year's net profits and the retained
net profits for the preceding two years, less required transfers to surplus.
Payment of dividends by Citizens may be restricted at any time at the discretion
of its applicable regulatory authorities, if they deem such dividends to
constitute an unsafe and/or unsound banking practice. These provisions could
have the effect of limiting LFC's ability to pay dividends. FEDERAL TAXATION
LFC and Citizens are each 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.
Citizen's average gross receipts for the three tax years ending on
September 30, 1998, was $3.0 million and as a result, Citizens does qualify as a
small corporation exempt from the alternative minimum tax.
-21-
<PAGE> 22
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 1997, 1996 and
1995, Citizens used the percentage of taxable income 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
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, 1998, the pre-1988 reserves of Citizens
for tax purposes totaled approximately $340,000. Citizens believes it had
approximately $4.5 million of accumulated earnings and profits for tax purposes
as of June 30, 1998, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
See
-22-
<PAGE> 23
Notes H and L to the financial statements. 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 1994. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Citizens .
OHIO TAXATION
LFC is subject to the Ohio corporation franchise tax, which, as applied
to LFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth. For tax years beginning after December 31, 1998, the rate of
tax is 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)
.400% times taxable net worth.
In computing its tax under the net worth method, LFC may exclude 100%
of its investment in the capital stock of Citizens , as reflected on the balance
sheet of LFC in computing its taxable net worth as long as it owns at least 25%
of the issued and outstanding capital stock of Citizens . The calculation of the
exclusion from net worth is based on the ratio of the excludable investment (net
of any appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, LFC may be
entitled to various other deductions in computing taxable net worth that are not
generally available to operating companies.
A special litter tax is also applicable to all corporations, including
LFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Citizens is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the book net worth
of Citizens determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. 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,
1998, 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 $308,000
</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.
-23-
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the 1998 Annual Report to Shareholders (the
"Annual Report") under the caption "Common Stock and Related Information" is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements appearing in the Annual Report and
the report of Grant Thornton LLP ("Grant Thornton") dated November 6, 1998, are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 1999
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.
-24-
<PAGE> 25
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
20 Proxy Statement
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 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 quarter
ended September 30, 1998.
-25-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 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 on December 10, 1998.
LONDON FINANCIAL CORPORATION
By /s/ John J. Bodle
-----------------------------------
John J. Bodle
President,
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ John I. Andrix By /s/ Rodney A. Bell
------------------------- -----------------------------
John I. Andrix Rodney A. Bell
Director Director
Date: December 10, 1998 Date: December 10, 1998
By /s/ John J. Bodle By /s/ Donovan D. Forest
------------------------- -----------------------------
John J. Bodle Donovan D. Forest
President, Principal Financial Director
Officer, Principal Accounting
Officer and Director
Date: December 10, 1998 Date: December 10, 1998
By /s/ Edward D. Goodyear By /s/ Shirley G. Hansgen
------------------------- -----------------------------
Edward D. Goodyear Shirley G. Hansgen
Director Director
Date: December 10, 1998 Date: 10, 1998
By /s/ Kennison A. Sims
-------------------------
Kennison A. Sims
Director
Date: December 10, 1998
-26-
<PAGE> 1
Exhibit 13
Dear Shareholder:
It is with a great deal of pleasure that I present to you the Annual Report
to Shareholders of London Financial Corporation covering the fiscal year ended
September 30, 1998.
Fiscal 1998 marked your Company's second straight year of record earnings,
despite the payment of $5.24 per share in cash distributions to our shareholders
during the period.
We were able to exceed our prior year's record results by primarily
increasing loan yields through our entry into the commercial lending markets. On
July 9, 1998, your Board of Directors approved the conversion of Citizens Loan
and Savings Company ("Citizens") to a state-chartered commercial bank. We have
received all requisite regulatory approvals and Citizens will commence
operations on January 4, 1999 under the name of The Citizens Bank of London.
The investment community has rewarded our efforts with a 40% increase in
stock price since the first quarter of fiscal 1998. While this level of price
appreciation is very satisfying, understandably we can not continue these types
of returns year after year. However, please be assured that we remain committed
to maximizing the return on your investment in London Financial.
As always, we thank you for your support during the past year.
Sincerely,
LONDON FINANCIAL CORPORATION
John J. Bodle
President
<PAGE> 2
BUSINESS OF LONDON FINANCIAL CORPORATION
================================================================================
London Financial Corporation ("LFC" or the "Company"), a unitary savings and
loan holding company incorporated under the laws of the State of Ohio, owns all
of the issued and outstanding common shares of The Citizens Loan & Savings
Company ("Citizens"), a savings and loan association 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.
On July 9, 1998, the respective Boards of Directors of Citizens and LFC approved
the conversion of Citizens from a state-chartered savings and loan association
to a state-chartered commercial bank (the "Charter Conversion"). Shortly
thereafter, Citizens filed an application with the Division seeking approval of
the Charter Conversion, and Citizens' application was approved by the Division
on December 8, 1998. It is currently anticipated that the Charter Conversion
will be consummated on January 4, 1999. As a result of the Charter Conversion,
Citizens will be permitted to increase its commercial lending activities to
small businesses and to agricultural concerns and to increase its commercial
checking activity. After the Charter Conversion, Citizens will be regulated by
the Division and the Federal Deposit Insurance Corporation (the "FDIC").
Also in connection with the Charter Conversion, LFC filed an application with
the Federal Reserve Board for pre-approval to register as a bank holding
company. The Federal Reserve Board approved LFC's application for pre-approval
to become a bank holding company on October 16, 1998. Consequently, after the
Charter Conversion, LFC will be a bank holding company regulated by the Federal
Reserve Board and will no longer be a unitary savings and loan holding company
regulated by the OTS. As a unitary savings and loan holding company, LFC has
been permitted to engage in more numerous types of commercial, securities and
insurance activities than other financial institution holding companies,
including bank holding companies. However, LFC does not currently engage in any
activities which would be impermissible for it to engage in after the Charter
Conversion is consummated and LFC becomes a bank holding company.
MARKET PRICE OF LFC'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 479,450 of LFC's common shares outstanding on December 10, 1998, and
held of record by approximately 421 shareholders. Price information with respect
to LFC's common shares was quoted on The Nasdaq SmallCap Market ("Nasdaq") under
the symbol "LONF" from March 1996 through April 1998. Thereafter, LFC's shares
began trading through the OTC Bulletin Board. The table below sets forth the
high and low prices for the common shares of LFC together with the respective
dividends declared per share, for each quarter of fiscal 1998, 1997 and 1996
during which LFC's shares were publicly traded. Price information was obtained
from Nasdaq for the periods through April 1998. Price information subsequent to
April 1998 represents actual trade prices during the respective quarters.
2
<PAGE> 3
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW 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
FISCAL 1998
Quarter ended:
December 31, 1997 $21.00 $14.00 $5.06
March 31, 1998 16.50 14.50 .06
June 30, 1998 16.50 14.50 .06
September 30, 1998 17.25 14.50 .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.
The income of LFC consists primarily of interest and dividends on investments
and dividends which may periodically be declared and paid by the Board of
Directors of Citizens on the common shares of Citizens held by LFC.
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> 4
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding LFC at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
SELECTED FINANCIAL CONDITION 1998 1997 1996 1995 1994
AND OTHER DATA: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $38,144 $38,210 $36,817 $34,152 $31,737
Cash and due from banks 507 322 319 835 851
Interest-bearing time deposits
in other financial institutions 1,271 3,342 2,324 2,009 1,705
Investment securities (1) 121 655 2,220 500 500
Mortgage-backed securities 2,703 3,586 4,032 2,009 2,182
Loans receivable - net 32,588 29,465 27,031 27,972 25,663
Deposits 31,300 29,951 28,195 30,594 28,324
FHLB advances 1,800 300 300 300 300
Shareholders' equity (2) 4,863 7,604 7,907 3,224 3,080
<CAPTION>
YEAR ENDED SEPTEMBER 30,
SUMMARY OF EARNINGS: 1998 1997 1996 1995 1994
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $2,956 $2,832 $2,769 $2,334 $2,164
Interest expense 1,557 1,468 1,505 1,396 1,131
------- ------- ------- ------- -------
Net interest income 1,399 1,364 1,264 938 1,033
Provision for loan losses 22 -- -- -- 13
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 1,377 1,364 1,264 938 1,020
Other income 143 107 71 74 70
General, administrative and other
expense 942 887 1,014 792 722
------- ------- ------- ------- -------
Earnings before income taxes 578 584 321 220 368
Federal income taxes 192 199 97 77 122
------- ------- ------- ------- -------
Net earnings $ 386 $ 385 $ 224 $ 143 $ 246
======= ======= ======= ======= =======
Earnings per share
Basic $.84 $.81 N/A N/A N/A
======= ======= ======= ======= =======
Diluted $.80 $.81 N/A N/A N/A
======= ======= ======= ======= =======
</TABLE>
- ----------------------
(1) Includes securities designated as available for sale.
(2) Consisted solely of retained earnings at September 30, 1994 and 1995.
4
<PAGE> 5
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS: AT OR FOR THE YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 1.03% 1.01% 0.62% 0.44% 0.79%
Return on average equity 7.14 5.15 4.36 4.51 8.24
Interest rate spread 3.07 2.90 3.06 2.62 3.19
Net interest margin 3.76 3.77 3.67 2.95 3.44
General, administrative and
other expense to average assets 2.51 2.33 2.80 2.42 2.31
Average equity to average assets 14.38 19.67 14.21 9.68 9.56
Asset quality ratios:
Nonperforming assets to total assets -- 0.70 0.71 0.13 0.24
Nonperforming loans to total loans -- 0.87 0.90 0.15 0.27
Allowance for loan losses to total
loans 0.59 0.60 0.65 0.65 0.70
Allowance for loan losses to
nonperforming loans -- 69.78 71.65 422.22 254.67
Net charge-offs to average loans 0.03 -- 0.01 -- --
Average interest-earning assets to
average interest-bearing liabilities 116.10 121.39 113.83 107.52 106.54
</TABLE>
5
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
-------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of LFC and Citizens should be read in conjunction with and with
reference to the consolidated financial statements, and the notes thereto,
presented in this Annual Report.
LFC was incorporated for the purpose of owning all of the outstanding common
shares of Citizens following the Conversion. As a result, the discussion and
analysis that follows pertains primarily to the financial condition of LFC on a
consolidated basis and to the results of operations of Citizens.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Citizens, and LFC's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein, but also include changes in the
economy and changes in interest rates in the nation and LFC's primary market
area.
Without limiting the generality of the foregoing, some of the statements in the
following 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 and adequacy of the allowance
for loan losses as set forth under "Financial Condition," "Comparison
of Results of Operation for the Years Ended September 30, 1998 and
1997" and "Comparison of Results of Operations for the Years Ended
September 30, 1997 and 1996;"
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;"
4. The discussion of the anticipated effect of legislation which may be
enacted as set forth under "Charter Unification Legislation."
5. Management's determination of the effect of the year 2000 on LFC's
information technology systems as set forth under "Year 2000
Compliance Issues;" and
6. Management's estimate as to the effects of recent accounting
pronouncements as set forth under "Effects of Recent Accounting
Pronouncements".
6
<PAGE> 7
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
FROM SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
The Company's consolidated total assets amounted to $38.1 million at September
30, 1998, a decrease of $66,000, or .2%, from the $38.2 million in total assets
at September 30, 1997. The decrease in assets was due primarily to a decline of
$2.7 million in shareholders' equity following the $2.5 million, or $5.00 per
share, special distribution to shareholders paid in November 1997, which was
partially offset by a $1.3 million increase in deposits and a $1.5 million
increase in FHLB advances.
Cash and cash equivalents and investment securities totaled $1.9 million at
September 30, 1998, a decrease of $2.4 million, or 56.0%, from September 30,
1997 levels. During the fiscal year ended September 30, 1998, $500,000 of
investment securities matured and corporate equity securities totaling $196,000
were sold, resulting in a gain of $71,000 during fiscal 1998. LFC purchased
$248,000 of corporate equity securities during fiscal 1998.
Mortgage-backed securities totaled $2.7 million at September 30, 1998, a
decrease of $883,000 from September 30, 1997, levels, due primarily to principal
repayments. The Company's mortgage-backed securities portfolio consists of
adjustable-rate mortgage-backed securities bearing interest at rates ranging
from 6.00% to 6.65% at September 30, 1998. Proceeds from maturity of investment
securities and principal repayments on mortgage-backed securities, as well as
excess liquidity, were redeployed to fund growth in the loan portfolio.
Loans receivable totaled $32.6 million at September 30, 1998, an increase of
$3.1 million, or 10.6%, over the $29.5 million total at September 30, 1997.
During fiscal 1998, loan disbursements amounted to $12.6 million, which were
partially offset by principal repayments of $9.6 million. Loan origination
volume during fiscal 1998 exceeded that of fiscal 1997 by $4.8 million, or
62.0%. Growth in the loan portfolio during fiscal 1998 consisted primarily of
nonresidential and commercial loans, generally secured by real estate and
agricultural equipment, which increased by $3.3 million.
Citizens' allowance for loan losses totaled $201,000 and $187,000 at September
30, 1998 and 1997, which represented .59% and .60% of total loans, respectively.
Citizens had no nonperforming loans at September 30, 1998. Nonperforming loans
amounted to $268,000 at September 30, 1997, representing .7% of total assets.
Although management believes that its allowance for loan losses at September 30,
1998, 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 $31.3 million at September 30, 1998, an increase of $1.3
million, or 4.5%, over the $30.0 million total at September 30, 1997. The
increase in deposits consisted of a $2.4 million, or 25.5%, increase in
transaction accounts, which was partially offset by a $1.1 million, or 5.1%,
decrease in certificates of deposit. The increase resulted primarily from
management's continuing efforts to maintain growth in deposits through marketing
and pricing strategies.
Shareholders' equity totaled $4.9 million at September 30, 1998, a $2.7 million,
or 36.0%, decrease from 1997 levels. The decrease resulted primarily from the
$2.5 million, or $5.00 per share, special distribution to shareholders paid in
November, 1997, coupled with purchases of treasury shares totaling $521,000 and
cash dividends of $123,000, which were partially offset by net earnings of
$386,000.
7
<PAGE> 8
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
GENERAL. Net earnings for the fiscal year ended September 30, 1998, amounted to
$386,000, an increase of $1,000, or .3%, over the $385,000 in net earnings
recorded in fiscal 1997. The increase in net earnings resulted primarily from a
$35,000 increase in net interest income, a $36,000 increase in other income, and
a $7,000 decrease in the provision for federal income taxes, which were
partially offset by a $22,000 increase in the provision for losses on loans and
a $55,000 increase in general administrative and other expense.
NET INTEREST INCOME. Net interest income totaled $1.4 million for the fiscal
year ended September 30, 1998, an increase of $35,000, or 2.6%, over the total
recorded in fiscal 1997. Interest income on loans during fiscal 1998 increased
by $221,000, or 9.3%, over fiscal 1997 levels, resulting from the combination of
a $2.6 million increase in the weighted-average balance of loans outstanding and
an increase of 2 basis points (100 basis points equals one percent) in the
average yield, to 8.34%. Interest income on mortgage-backed securities decreased
by $32,000, or 13.8%, due primarily to a $672,000, or 17.8%, decrease in the
weighted-average balance of mortgage-backed securities outstanding, which was
partially offset by an increase in the weighted-average yield year to year, from
6.13% in fiscal 1997 to 6.43% in fiscal 1998. Interest income on investment
securities and interest-bearing deposits decreased by $65,000, or 29.7%, for the
fiscal year ended September 30, 1998, compared to fiscal 1997, as the
weighted-average balance decreased by $1.4 million year to year, due to
maturities and sales, while the related yield increased by 62 basis points, to
6.46% in fiscal 1998.
Interest expense on deposits increased by $70,000, or 4.9%, during fiscal 1998,
compared to fiscal 1997, due primarily to a $1.5 million increase in the
weighted-average balance of deposits outstanding year to year, which was
partially offset by a decline of 2 basis points in the weighted-average cost of
deposits, from 4.88% in fiscal 1997 to 4.86% in fiscal 1998.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $35,000, or 2.6%, during fiscal 1998, as
compared to fiscal 1997. The interest rate spread increased by 17 basis points,
to 3.07% for fiscal 1998, as compared to 2.90% for fiscal 1997, while the net
interest margin amounted to 3.76% and 3.77% for the fiscal years ended September
30, 1998 and 1997, respectively.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance for loan losses 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 elected
to record a $22,000 provision for losses on loans during the fiscal year ended
September 30, 1998. The provision was predicated on the growth in the loan
portfolio comprised primarily of loans secured by nonresidential property. There
can be no assurance that the allowance will be adequate to cover losses on
nonperforming assets in the future.
8
<PAGE> 9
OTHER INCOME. Other income totaled $143,000 for the fiscal year ended September
30, 1998, an increase of $36,000, or 33.6%, over the $107,000 recorded in fiscal
1997. The increase resulted primarily from an increase of $31,000, or 77.5%, in
gain on sale of investment securities designated as available for sale.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased by $55,000, or 6.2%, to a total of $942,000 for the fiscal
year ended September 30, 1998, as compared to fiscal 1997. The increase was due
primarily to a $61,000, or 13.7%, increase in employee compensation and benefits
and a $7,000, or 13.5%, increase in occupancy and equipment, which were
partially offset by a $13,000, or 40.6%, decrease in federal deposit insurance
premiums. The increase in employee compensation and benefits resulted primarily
from costs associated with the stock benefit plans of LFC, an increase in
staffing levels and normal merit increases.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $192,000
for the fiscal year ended September 30, 1998, a decrease of $7,000, or 3.5%,
from the $199,000 provision recorded in fiscal 1997. The decrease resulted
primarily from a decrease of $6,000, or 1.0%, in pretax earnings year to year
coupled with an increase in nontaxable dividend income. LFC's effective tax
rates were 33.2% and 34.1% for the fiscal years ended September 30, 1998 and
1997, respectively.
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.
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.
9
<PAGE> 10
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 LOSSES ON LOANS. The amount of the provision for losses on loans
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.
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.
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.
10
<PAGE> 11
The following table sets forth certain average balance sheet information,
including the average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the years indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. Average balances are derived from monthly balances, which
include nonaccruing loans in the loan portfolio.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998
--------------------------------------------------------
WEIGHTED AVERAGE INTEREST AVERAGE
AVERAGE YIELD AT OUTSTANDING EARNED/ YIELD/
SEPTEMBER 30, 1998 BALANCE PAID RATE
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other
financial institutions 4.46% $ 2,245 $ 149 6.64%
Investment securities 4.95 138 5 3.62
Mortgage-backed securities 6.49 3,110 200 6.43
Loans receivable(1) 8.08 31,198 2,602 8.34
------- ------ ----
Total interest-earning assets 36,691 2,956 8.06
Non-interest-earning assets 891
-------
Total assets $37,582
=======
Interest-bearing liabilities:
NOW accounts 2.27 $ 3,859 76 1.97
Money market accounts 4.68 932 41 4.40
Passbook savings accounts 3.00 5,919 180 3.04
Certificates of deposit 5.84 20,067 1,199 5.98
------- ------ ----
Total deposits 30,777 1,496 4.86
FHLB advances and other borrowings 825 61 7.39
------- ------ ----
Total interest-bearing liabilities 31,602 1,557 4.99
Non-interest-bearing liabilities 574
-------
Total liabilities 32,176
Shareholders' equity 5,406
-------
Total liabilities and
shareholders' equity $37,582
=======
Net interest income $1,399
======
Interest rate spread 3.07%
======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.76%
======
Average interest-earning assets to
average interest-bearing liabilities 116.10%
======
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
--------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other
financial institutions $ 2,562 $ 161 6.28% $ 3,278 $ 202 6.16%
Investment securities 1,188 58 4.88 962 53 5.51
Mortgage-backed securities 3,782 232 6.13 2,620 137 5.23
Loans receivable(1) 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 $ 3,450 65 1.88 $ 3,045 61 2.00
Money market accounts 233 6 2.58 333 9 2.70
Passbook savings accounts 5,843 177 3.03 6,297 188 2.99
Certificates of deposit 19,724 1,178 5.97 20,268 1,219 6.01
------- ------ ------ -------- ------ ------
Total deposits 29,250 1,426 4.88 29,943 1,477 4.93
FHLB advances and other borrowings 531 42 7.91 300 28 9.25
------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 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 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%
====== ======
</TABLE>
- -----------------------------------
(1) Net of deferred loan fees, loan discounts, the allowance for loan
losses and loans in process. Loan fees included in interest income
totaled $124,000, $81,000 and $112,000 for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
11
<PAGE> 12
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the interest income and interest expense of 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,
1998 VS. 1997 1997 VS. 1996
--------------------------------- ---------------------------------
INCREASE INCREASE
(DECREASE) DUE TO TOTAL (DECREASE) DUE TO TOTAL
----------------- INCREASE ----------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ (21) $ 9 $ (12) $ (45) $ 4 $(41)
Investment securities (41) (12) (53) 11 (6) 5
Mortgage-backed securities (42) 10 (32) 71 24 95
Loans receivable 215 6 221 88 (84) 4
----- ------ ----- ----- ------ ----
Total interest income 111 13 124 125 (62) 63
Interest expense attributable to:
NOW accounts 8 3 11 8 (4) 4
Money market accounts 26 9 35 (3) - (3)
Passbook savings accounts 2 1 3 (14) 3 (11)
Certificates of deposit 19 2 21 (33) (8) (41)
----- ------ ----- ----- ------ ----
Total deposits 55 15 70 (42) (9) (51)
Advances from FHLB 22 (3) 19 18 (4) 14
----- ------ ----- ----- ------ ----
Total interest expense 77 12 89 (24) (13) (37)
----- ------ ----- ----- ------ ----
Increase in net interest income $ 35 $100
===== ====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- -------------------------------------------------------------------------------
Citizens' interest rate spread is the principal determinant of Citizens' income.
The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term and cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. The
management and Board of Directors attempt to manage Citizens' exposure to
interest rate risk in a manner to maintain the projected four-quarter percentage
change in net interest income and the projected change in the market value of
portfolio equity within limits established by the Board of Directors, assuming a
permanent and instantaneous parallel shift in interest rates.
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> 13
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.
At September 30, 1998, 2% of the present value of Citizens' assets was
approximately $780,000. 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 $217,000 at September 30, 1998, 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, 1998 and 1997, 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 table also 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.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1997
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)% $937 21% $ 31 --%
+300 (60) 818 18 213 3
+200 (40) 583 13 277 4
+100 (20) 265 6 197 3
0 -- -- -- -- --
-100 (20) (160) (4) (236) (4)
-200 (40) (217) (5) (357) (5)
-300 (60) (225) (5) (374) (6)
-400 (80) (210) (5) (322) (5)
</TABLE>
As illustrated by the table, the NPV of Citizens is more sensitive to rising
than declining interest rates. Such 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 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> 14
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Net earnings $ 386 $ 385 $ 224
Adjustments to reconcile net earnings
to net cash from operating activities (296) (110) 216
------- ------- -------
Net cash from operating activities 90 275 440
Net cash from investing activities (1,648) (295) (2,697)
Net cash from financing activities (328) 1,041 2,056
------- ------- ------
Net change in cash and cash equivalents (1,886) 1,021 (201)
Cash and cash equivalents at beginning of year 3,664 2,643 2,844
------- ------- ------
Cash and cash equivalents at end of year $1,778 $3,664 $2,643
======= ======= ======
</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> 15
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, 1998, Citizens liquid assets totaled approximately $2.0
million, which exceeded the OTS minimum requirements by $325,000. At such date,
Citizens had commitments to originate loans and loans in process totaling
$895,000 and $745,000, 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 $201,000 at September
30, 1998.
The following table sets forth the amount and percentage level of regulatory
capital of Citizens at September 30, 1998, and the amount by which it exceeds
the minimum requirements:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
AMOUNT PERCENT OF ASSETS
(Dollars in thousands)
<S> <C> <C>
Capital under GAAP before adjustments $4,273 11.3%
====== ====
Tangible capital:
Capital level $4,273 11.3%
Requirement 568 1.5
------ ----
Excess $3,705 9.8%
====== ====
Core capital:
Capital level $4,273 11.3%
Requirement 1,135 3.0
------ ----
Excess $3,138 8.3%
====== ====
Risk-based capital:
Capital level $4,474 19.8%
Requirement 1,811 8.0%
------ ----
Excess $2,663 11.8%
====== ====
</TABLE>
15
<PAGE> 16
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments 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.
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 adopted SFAS No. 125 during fiscal 1998, as required, without
material effect on LFC's consolidated financial position or results of
operations.
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 LFC's financial statements.
16
<PAGE> 17
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on
LFC's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No.
133 is not expected to have a material impact on LFC's financial position or
results of operations.
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.
17
<PAGE> 18
YEAR 2000 COMPLIANCE MATTERS
- --------------------------------------------------------------------------------
As with most providers of financial services, Citizens' operations are heavily
dependent on information technology systems. Citizens is addressing the
potential problems associated with the possibility that the computers that
control or operate Citizens' information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. Citizens is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
Citizens' primary data processing applications are handled by a third-party
service bureau, Fiserv. Fiserv has advised Citizens that it has migrated to a
fully Year 2000 compliant processing system that will be fully tested by May 1,
1999. Management has also reviewed Citizens' ancillary equipment and is in the
process of providing the appropriate remedial measures, including requesting
service providers to assure Citizens that their systems and products are fully
year 2000 compliant. Citizens is in the process of upgrading its existing teller
operating system with a capital expense budget of $65,000. No assurance can be
given, however, that significant expense will not be incurred in future periods.
In the unlikely event that Citizens is ultimately required to purchase
replacement computer systems, programs and equipment, or incur substantial
expense to make Citizens' current systems, programs and equipment year 2000
compliant, LFC's net earnings and financial condition could be adversely
affected.
Citizens has developed a contingency plan in case mission-critical systems are
not successfully renovated in a timely manner or if they actually fail at Year
2000 critical dates. The contingency plan states that Citizens deems the
likelihood of failure of the service provider's efforts to implement Year 2000
changes to the on-line core account processing system to be remote; however, a
more likely scenario is that the service provider's system will be down for
several days or weeks upon arrival of Year 2000. The plan, therefore, primarily
addresses action to deal with the latter possibility rather than with a
catastrophic event, including Citizens' ability to process transactions manually
over a short-term period, if necessary, upon arrival of the year 2000. Citizens
does not consider contingency planning to be a static process; therefore, the
plan will be amended to address a catastrophic event if testing results indicate
greater concern.
In addition to possible expense related to its own systems, Citizens could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in Citizens' primary market area. Because Citizens' loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and Citizens' primary market area is not significantly dependent upon
one employer or industry, Citizens does not expect any significant or prolonged
difficulties that will affect net earnings or cash flow.
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that borrowers fail to prepare properly for Year
2000, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. Citizens is assessing such risks among
its customers. LFC could also be materially adversely affected if other third
parties, such as governmental agencies, clearing houses, telephone companies,
utilities and other service providers fail to prepare properly. Citizens is
therefore attempting to assess these risks and take action to minimize their
effect.
18
<PAGE> 19
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, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the years ended September 30, 1998, 1997 and 1996. 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.
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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the years ended September 30,
1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
Cincinnati, Ohio
November 6, 1998
19
<PAGE> 20
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 507 $ 322
Interest-bearing deposits in other financial institutions 1,271 3,342
------- -------
Cash and cash equivalents 1,778 3,664
Investment securities designated as available
for sale - at market 121 155
Investment securities - at cost, approximate
market value of $502 as of September 30, 1997 -- 500
Mortgage-backed securities - at amortized
cost, approximate market value of $2,733 and
$3,613 as of September 30, 1998 and 1997 2,703 3,586
Loans receivable - net 32,588 29,465
Office premises and equipment - at depreciated cost 374 360
Stock in Federal Home Loan Bank - at cost 288 280
Accrued interest receivable 216 169
Prepaid expenses and other assets 60 31
Prepaid federal income taxes 16 --
------- -------
Total assets $38,144 $38,210
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $31,300 $29,951
Advances from the Federal Home Loan Bank 1,800 300
Other liabilities 155 162
Accrued federal income taxes -- 141
Deferred federal income taxes 26 52
------- -------
Total liabilities 33,281 30,606
Commitments -- --
Shareholders' equity
Common stock - authorized 5,000,000 shares without par
value; 529,000 shares issued -- --
Additional paid-in capital 2,391 4,910
Retained earnings - substantially restricted 3,946 3,683
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects (26) 31
Shares acquired by Employee Stock Ownership Plan (381) (423)
Shares acquired by Management Recognition Plan (264) (315)
Less 49,550 and 18,840 treasury shares - at cost (803) (282)
------- -------
Total shareholders' equity 4,863 7,604
------- -------
Total liabilities and shareholders' equity $38,144 $38,210
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 21
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $2,602 $2,381 $2,377
Mortgage-backed securities 200 232 137
Investment securities 5 58 53
Interest-bearing deposits and other 149 161 202
------ ------ ------
Total interest income 2,956 2,832 2,769
Interest expense
Deposits 1,496 1,426 1,477
Borrowings 61 42 28
------ ------ ------
Total interest expense 1,557 1,468 1,505
------ ------ ------
Net interest income before provision
for losses on loans 1,399 1,364 1,264
Provision for losses on loans 22 -- --
------ ------ ------
Net interest income after provision for
losses on loans 1,377 1,364 1,264
Other income
Gain on investment securities transactions 71 40 --
Other operating 72 67 71
------ ------ ------
Total other income 143 107 71
General, administrative and other expense
Employee compensation and benefits 506 445 425
Occupancy and equipment 59 52 55
Franchise taxes 87 88 45
Federal deposit insurance premiums 19 32 262
Data processing 58 56 57
Other operating 213 214 170
------ ------ ------
Total general, administrative and other expense 942 887 1,014
------ ------ ------
Earnings before income taxes 578 584 321
Federal income taxes
Current 190 83 143
Deferred 2 116 (46)
------ ------ ------
Total federal income taxes 192 199 97
------ ------ ------
NET EARNINGS $ 386 $ 385 $ 224
====== ====== ======
EARNINGS PER SHARE
Basic $ .84 $ .81 N/A
====== ====== ======
Diluted $ .80 $ .81 N/A
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 22
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES
ACQUIRED BY
ADDITIONAL STOCK
COMMON PAID-IN BENEFIT
STOCK CAPITAL PLANS
<S> <C> <C> <C>
Balance at October 1, 1995 $ -- $ -- $ --
Reorganization to common stock form and issuance
of shares in connection therewith - net -- 4,910 (423)
Net earnings for the year ended September 30, 1996 -- -- --
Dividends of $.06 per share -- -- --
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- --
---- ------ -----
Balance at September 30, 1996 -- 4,910 (423)
Net earnings for the year ended September 30, 1997 -- -- --
Dividends of $.24 per share -- -- --
Purchase of treasury shares at cost -- -- --
Purchase of shares for Management Recognition Plan -- -- (315)
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- --
---- ------ -----
Balance at September 30, 1997 -- 4,910 (738)
Net earnings for the year ended September 30, 1998 -- -- --
Cash distributions of $5.24 per share -- (2,533) --
Amortization of stock benefit plan expense -- 14 93
Purchase of treasury shares at cost -- -- --
Unrealized losses on securities designated as available
for sale, net of related tax effects -- -- --
---- ------ -----
Balance at September 30, 1998 $ -- $2,391 $(645)
==== ====== =====
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
SECURITIES
DESIGNATED
AS AVAILABLE RETAINED TREASURY
FOR SALE EARNINGS STOCK TOTAL
<S> <C> <C> <C> <C>
Balance at October 1, 1995 $ -- $3,224 $ -- $ 3,224
Reorganization to common stock form and issuance
of shares in connection therewith - net -- -- -- 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 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)
Unrealized gains on securities designated as available
for sale, net of related tax effects 27 -- -- 27
---- ------ ----- -------
Balance at September 30, 1997 31 3,683 (282) 7,604
Net earnings for the year ended September 30, 1998 -- 386 -- 386
Cash distributions of $5.24 per share -- (123) -- (2,656)
Amortization of stock benefit plan expense -- -- -- 107
Purchase of treasury shares at cost -- -- (521) (521)
Unrealized losses on securities designated as available
for sale, net of related tax effects (57) -- -- (57)
---- ------ ----- -------
Balance at September 30, 1998 $(26) $3,946 $(803) $ 4,863
==== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 23
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 386 $ 385 $ 224
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts
on investments and mortgage-backed securities - net 6 7 6
Amortization of deferred loan origination fees (124) (81) (112)
Gain on investment securities transactions (71) (40) -
Depreciation and amortization 22 20 25
Provision for losses on loans 22 -- --
Federal Home Loan Bank stock dividends (20) (19) (17)
Amortization expense of stock benefit plans 107 -- --
Increase (decrease) in cash due to changes in:
Accrued interest receivable (47) 9 (39)
Prepaid expenses and other assets (45) (10) 13
Other liabilities (7) (117) 245
Federal income taxes
Current (141) 5 141
Deferred 2 116 (46)
------- ------ ------
Net cash provided by operating activities 90 275 440
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities -- -- (2,295)
Principal repayments on mortgage-backed securities 878 439 266
Purchase of investment securities designated as available
for sale (248) -- (214)
Purchase of investment securities designated as
held to maturity -- -- (1,500)
Proceeds from sale of investment securities designated
as available for sale 265 145 --
Proceeds from maturity of investment securities 502 1,500 --
Loan principal repayments 9,600 5,438 8,227
Loan disbursements (12,621) (7,791) (7,174)
Purchase of office premises and equipment (36) (26) (7)
Federal Home Loan Bank stock redemption 12 -- --
------- ------ ------
Net cash used in investing activities (1,648) (295) (2,697)
------- ------ ------
Net cash used in operating and investing
activities (balance carried forward) (1,558) (20) (2,257)
------- ------ ------
</TABLE>
23
<PAGE> 24
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(1,558) $ (20) $(2,257)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 1,349 1,756 (2,399)
Proceeds from Federal Home Loan Bank advances 1,500 500 --
Repayment of Federal Home Loan Bank advances -- (500) --
Proceeds from other borrowings 1,400 -- --
Repayment of other borrowings (1,400) -- --
Net proceeds from issuance of common shares -- -- 4,487
Purchase of shares for Management Recognition Plan -- (315) --
Distributions paid on common shares (2,656) (118) (32)
Purchase of treasury shares (521) (282) --
------- ------- -------
Net cash provided by (used in) financing activities (328) 1,041 2,056
------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,886) 1,021 (201)
Cash and cash equivalents at beginning of year 3,664 2,643 2,844
------- ------- -------
Cash and cash equivalents at end of year $ 1,778 $ 3,664 $ 2,643
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid during the year for:
Federal income taxes $ 226 $ 85 $ 55
======= ======= =======
Interest paid on deposits and borrowings $ 1,550 $ 1,463 $ 1,495
======= ======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of applicable tax effects $ (57) $ 27 $ 4
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 25
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
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 significant intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.
25
<PAGE> 26
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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 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, 1998, the
Corporation's shareholders' equity reflected a net unrealized loss on
securities designated as available for sale of $26,000, while at September
30, 1997, shareholders' equity reflected a net unrealized gain of $31,000.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans receivable are stated at the principal balance outstanding, reduced by
deferred loan origination fees and the allowance for loan losses. Interest
is accrued as earned unless the collectibility of the loan is in doubt.
Interest on loans that are contractually past due is charged off, or an
allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status. If
the ultimate collectibility of the loan is in doubt, in whole or in part,
all payments received on nonaccrual loans are applied to reduce principal
until such doubt is eliminated.
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> 27
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which 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.
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, 1998 and 1997, the Company had no loans that would be
defined as impaired under SFAS No. 114.
27
<PAGE> 28
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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". 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> 29
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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. No contributions were
made to the plan during the fiscal year ended September 30, 1998. The
Company's provision for expense under the SEP totaled $9,000 and $32,000 for
the years ended September 30, 1997 and 1996, 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
for each of the years ended September 30, 1998 and 1997, and $21,000 for the
year ended September 30, 1996.
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 $52,000
and $35,000 related to the MRP was charged to expense for the years ended
September 30, 1998 and 1997, respectively.
10. Earnings Per Share and Dividends Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated
and not committed to be released. Weighted-average common shares
outstanding, which gives effect to 37,309 and 42,320 unallocated ESOP
shares, totaled 463,016 and 476,337 for the years ended September 30, 1998
and 1997, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Company's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
481,498 and 476,337 for the years ended September 30, 1998 and 1997,
respectively.
Effective during the fiscal year ended September 30, 1998, the Company began
presenting earnings per share pursuant to the provisions of SFAS No. 128,
"Earnings Per Share." Accordingly, the fiscal 1997 earnings per share
presentation has been revised to conform to SFAS No. 128.
29
<PAGE> 30
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Earnings Per Share and Dividends Per Share (continued)
The provisions of SFAS No. 128 are not applicable for the fiscal year ended
September 30, 1996, 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, $5.00 of the $5.24 in distributions were considered a tax-free
return of capital.
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, 1998 and 1997:
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.
30
<PAGE> 31
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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 and other. 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.
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, 1998 and 1997 was not material.
31
<PAGE> 32
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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>
1998 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 1,778 $ 1,778 $ 3,664 $ 3,664
Investment securities 121 121 655 657
Mortgage-backed securities 2,703 2,733 3,586 3,613
Loans receivable 32,588 34,747 29,465 30,666
Federal Home Loan Bank stock 288 288 280 280
------- ------- ------- -------
$37,478 $39,667 $37,650 $38,880
======= ======= ======= =======
Financial liabilities
Deposits $31,300 $31,591 $29,951 $30,150
Advances from the Federal Home
Loan Bank 1,800 1,803 300 302
------- ------- ------- -------
$33,100 $33,394 $30,251 $30,452
======= ======= ======= =======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
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, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Corporate equity securities $160 $ - $39 $121
==== ==== === ====
</TABLE>
32
<PAGE> 33
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government and agency obligations $500 $ 2 $ -- $502
AVAILABLE FOR SALE:
Corporate equity securities 109 46 -- 155
---- --- --- ----
Total investment securities $609 $48 $ -- $657
==== === ==== ====
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1998 and
1997, are shown below:
<TABLE>
<CAPTION>
1998
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 $1,262 $13 $- $1,275
Government National Mortgage Association
participation certificates 877 18 - 895
Federal National Mortgage
Association participation certificates 564 4 5 563
------ --- -- ------
Total mortgage-backed securities $2,703 $35 $5 $2,733
====== === == ======
</TABLE>
<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>
33
<PAGE> 34
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
At September 30, 1998 and 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.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $22,648 $23,489
Multi-family 665 671
Construction 1,224 1,360
Nonresidential real estate 5,174 4,529
Commercial 3,473 166
Consumer and other loans 749 737
------- -------
33,933 30,952
Less:
Undisbursed portion of loans in process 745 885
Deferred loan origination fees 399 415
Allowance for losses on loans 201 187
------- -------
$32,588 $29,465
======= =======
</TABLE>
The Company's lending efforts have historically focused on one- to
four-family and multi-family residential real estate loans, which comprise
approximately $23.8 million, or 73%, of the total loan portfolio at
September 30, 1998, and approximately $24.6 million, or 84%, of the total
loan portfolio at September 30, 1997. 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 $193,000 and $388,000 at September 30, 1998 and
1997, respectively.
34
<PAGE> 35
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 187 $187 $ 190
Provision for losses on loans 22 -- --
Loan charge-offs (8) -- (3)
----- ---- -----
Ending balance $ 201 $187 $ 187
===== ==== =====
</TABLE>
As of September 30, 1998, 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.
The Company had no nonperforming and nonaccrual loans at September 30, 1998.
Nonperforming and nonaccrual loans at September 30, 1997 and 1996, totaled
$268,000 and $261,000, respectively. Interest income that would have been
recognized had nonaccrual loans performed pursuant to contractual terms
totaled approximately $20,000 and $15,000 for the years ended September 30,
1997 and 1996, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land and improvements $ 85 $ 85
Building 471 471
Furniture and equipment 248 212
---- ----
804 768
Less accumulated depreciation and
amortization 430 408
---- ----
$374 $360
==== ====
</TABLE>
35
<PAGE> 36
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1998 1997
AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1998 - 2.27% $ 3,905 12.5
1997 - 2.27% $ 3,370 11.2
Passbook
1998 - 3.00% 5,951 19.0
1997 - 3.00% 5,834 19.5
Money market investment accounts
1998 - 4.68% 1,976 6.3
1997 - 2.71% 226 .8
------- ----- ------- -----
Total demand, transaction and
passbook deposits 11,832 37.8 9,430 31.5
Certificates of deposit
Original maturities of:
One year or less
1998 - 5.22% 5,429 17.4
1997 - 5.42% 5,640 18.8
12 months to 36 months
1998 - 5.89% 8,085 25.8
1997 - 6.01% 8,604 28.7
Greater than 36 months
1998 - 6.57% 5,954 19.0
1997 - 6.50% 6,277 21.0
------- ----- ------- -----
Total certificates of deposit 19,468 62.2 20,521 68.5
------- ----- ------- -----
Total deposit accounts $31,300 100.0% $29,951 100.0%
======= ===== ======= =====
</TABLE>
At September 30, 1998 and 1997, the Company had certificate of deposit
accounts with balances greater than $100,000 totaling $807,000 and $1.1
million, respectively.
Interest expense on deposits for the fiscal year ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook $ 180 $ 177 $ 188
NOW accounts 76 65 61
Money market investment accounts 41 6 9
Certificates of deposit 1,199 1,178 1,219
------ ------ ------
$1,496 $1,426 $1,477
====== ====== ======
</TABLE>
36
<PAGE> 37
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than one year $ 9,518 $11,438
One year to three years 5,068 5,822
More than three years 4,882 3,261
------- -------
$19,468 $20,521
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1998 by a pledge of certain residential mortgage loans totaling $2.7 million
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, 1998 1997
(In thousands)
<S> <C> <C> <C>
5.64% - 5.69% 1999 $1,500 $ --
9.25% 2001 300 300
------ ----
$1,800 $300
====== ====
Weighted-average interest rate 6.27% 9.25%
====== ====
</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>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 197 $199 $ 109
Decrease in taxes resulting from:
Other (5) -- (12)
----- ---- -----
Federal income taxes per consolidated
financial statements $ 192 $199 $ 97
===== ==== =====
Effective tax rate 33.2% 34.1% 30.2%
===== ==== =====
</TABLE>
37
<PAGE> 38
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE H - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1998 1997
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 50 $ 77
Difference between book and tax depreciation 3 1
General loan loss allowance 71 64
Retirement plans 16 --
Unrealized losses on securities designated as
available for sale 13 --
----- -----
Deferred tax assets 153 142
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (55) (50)
Percentage of earnings bad debt deduction (53) (64)
Accrual vs. cash basis of accounting (71) (65)
Unrealized gains on securities designated
as available for sale -- (15)
----- -----
Deferred tax liabilities (179) (194)
----- -----
Net deferred tax liability $ (26) $ (52)
===== =====
</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, 1998, include approximately $493,000 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, 1998. See Note L for additional information regarding future
percentage of earnings bad debt deductions.
38
<PAGE> 39
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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, 1998, the Company had outstanding commitments of
approximately $895,000 to originate loans. Additionally, the Company had
$687,000 of outstanding loan commitments under commercial lines of credit.
In the opinion of management, all loan commitments equaled or exceeded
prevalent market interest rates as of September 30, 1998, 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> 40
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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, 1998 and 1997, management believes that the Company met
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
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 $4,273 11.3% =>$ 568 =>1.5% =>$1,892 => 5.0%
Core capital $4,273 11.3% =>$1,135 =>3.0% =>$2,270 => 6.0%
Risk-based capital $4,474 19.8% =>$1,811 =>8.0% =>$2,264 =>10.0%
<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.
40
<PAGE> 41
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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. The Plan provides
for one-fifth of the shares granted to be exercisable on each of the Plan's
first five anniversaries commencing in January 1997.
In fiscal 1997, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue
to account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings
and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied.
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 reported
at the pro forma amounts indicated below for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Net earnings (In thousands) As reported $ 386 $ 385
======= =======
Pro-forma $ 386 $ 377
======= =======
Earnings per share
Basic As reported $ .84 $ .81
======= =======
Pro-forma $ .84 $ .79
======= =======
Diluted As reported $ .80 $ .81
======= =======
Pro-forma $ .80 $ .79
======= =======
</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.
41
<PAGE> 42
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of
September 30, 1998 and 1997, and changes during the periods ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 52,900 $15.00 -- $ --
Adjustment for return of capital distribution -- $(5.00) -- $ --
Granted -- $ -- 52,900 $15.00
Exercised -- $ -- -- $ --
Forfeited -- $ -- -- $ --
------ ------ ------ ------
Outstanding at end of year 52,900 $10.00 52,900 $15.00
====== ====== ====== ======
Options exercisable at year-end 10,580 $10.00 -- $ --
====== ====== ====== ======
Weighted-average fair value of
options granted during the year N/A $ 1.68
====== ======
</TABLE>
The following information applies to options outstanding at September 30,
1998:
Number outstanding 52,900
Range of exercise prices $10.00
Weighted-average exercise price $10.00
Weighted-average remaining contractual life 8.3 years
NOTE L - LEGISLATIVE MATTERS
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 were 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.
42
<PAGE> 43
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE L - LEGISLATIVE MATTERS (continued)
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, commencing in fiscal 1998.
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, 1998 and 1997,
and the results of its operations and its cash flows for the periods ended
September 30, 1998, 1997 and 1996.
LONDON FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 138 $ 801
Investment securities designated as available for sale - at market 121 155
Investment securities - at cost -- 500
Loan receivable from ESOP 339 381
Investment in The Citizens Loan and Savings Company 4,273 5,824
Accrued interest receivable 16 13
Prepaid expenses and other assets 40 13
------- -------
Total assets $ 4,927 $ 7,687
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 63 $ 83
Shareholders' equity
Common stock -- --
Additional paid-in capital 5,357 7,832
Retained earnings 600 338
Shares acquired by Management Recognition Plan (264) (315)
Treasury shares - at cost (803) (282)
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects (26) 31
------- -------
Total shareholders' equity 4,863 7,604
------- -------
Total liabilities and shareholders' equity $ 4,927 $ 7,687
======= =======
</TABLE>
43
<PAGE> 44
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
(continued)
LONDON FINANCIAL CORPORATION
STATEMENT OF EARNINGS
Periods ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
Revenue
<S> <C> <C> <C>
Interest income $ 48 $ 108 $ 68
Equity in earnings of subsidiary 396 387 60
Gain on sale of investments 71 40 --
----- ----- ----
Total revenue 515 535 128
Expenses
Interest expense on borrowings 20 -- --
General and administrative expenses 115 151 10
----- ----- ----
Total expenses 135 151 10
----- ----- ----
Earnings before income taxes (credits) 380 384 118
Federal income taxes (credits) (6) (1) 15
----- ----- ----
NET EARNINGS $ 386 $ 385 $103
===== ===== ====
</TABLE>
44
<PAGE> 45
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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>
1998 1997 1996
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the period $ 386 $ 385 $ 103
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
(Undistributed earnings of) distributions in excess from
consolidated subsidiary 1,551 (387) (60)
Gain on investment securities transactions (71) (40) --
Amortization expense of stock benefit plans 107 -- --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (27) (13) --
Accrued interest receivable (3) 18 (31)
Other liabilities 9 21 47
------- ------- -------
Net cash provided by (used in) operating activities 1,952 (16) 59
Cash flows provided by (used in) investing activities:
Investment in subsidiary -- -- (2,455)
Purchase of investment securities designated as available
for sale (248) -- (214)
Purchase of investment securities designated as held to maturity -- -- (1,500)
Proceeds from repayment of loan to ESOP 42 42 --
Proceeds from maturities of investment securities 502 1,000 --
Proceeds from sale of investment securities 266 145 --
Issuance of loan to ESOP -- -- (423)
------- ------- -------
Net cash provided by (used in) investing activities 562 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 (521) (282) --
Distributions paid on common stock (2,656) (118) (32)
------- ------- -------
Net cash provided by (used in) financing activities (3,177) (715) 4,878
------- ------- -------
Net increase (decrease) in cash and cash equivalents (663) 456 345
Cash and cash equivalents at beginning of period 801 345 --
------- ------- -------
Cash and cash equivalents at end of period $ 138 $ 801 $ 345
======= ======= =======
</TABLE>
45
<PAGE> 46
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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.
NOTE O - CHANGE IN CORPORATE CHARTER
On July 9, 1998, the Corporation's Board of Directors approved the
conversion of Citizens Loan and Savings Company to a state-chartered
commercial bank. The Charter conversion is subject to regulatory approval.
The Company will continue operations under the name of Citizens Bank.
46
<PAGE> 47
LONDON FINANCIAL CORPORATION
AND
THE CITIZENS LOAN & SAVINGS COMPANY
DIRECTORS AND OFFICERS
================================================================================
John J. Bodle President
President
The Citizens Loan & Savings Company
John I. Andrix Director
President
Andrix Insurance Agency
Rodney A. Bell Director
Salesman
Buckeye Ford
Donovan D. 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
Steven C. Adams Executive Vice President
Executive Vice President
The Citizens Loan & Savings 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
47
<PAGE> 48
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
Stock Transfer Department
Mail Drop 1090F5
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(513) 837-2755
ANNUAL MEETING
================================================================================
The 1999 Annual Meeting of Shareholders of London Financial Corporation will be
held on January 28, 1999, 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
<PAGE> 1
Exhibit 20
LONDON FINANCIAL CORPORATION
2 EAST HIGH STREET
LONDON, OHIO 43140
(740) 852-0787
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1999 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 28,
1999, 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 three directors of LFC for terms expiring
in 2001;
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
4, 1998, 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
London, Ohio John J. Bodle, President
December 17, 1998
<PAGE> 2
LONDON FINANCIAL CORPORATION
2 EAST HIGH STREET
LONDON, OHIO 43140
(740) 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 1999
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 28, 1999, 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 Donovan D. Forrest, Edward D. Goodyear,
and Kennison A. Sims as directors of LFC for terms expiring in
2001; 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 4,
1998 (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 479,450 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of LFC on or
about December 17, 1998.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and LFC's Code of Regulations (the "Regulations"), the
three nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified in the enclosed Proxy. If the enclosed Proxy is signed and
dated by the shareholder, but no vote is specified thereon, the shares held by
such shareholder will be voted FOR the re-election of the four nominees.
Shareholders may not cumulate their votes in the election of directors.
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
-1-
<PAGE> 3
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 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 persons known to LFC to own beneficially more than five percent of the
outstanding common shares of LFC as of November 30, 1998:
<TABLE>
<CAPTION>
Amount and nature of beneficial ownership
-----------------------------------------
Sole voting and Shared voting and Percent of
Name and Address investment power investment power shares outstanding
- ---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
First Bankers Trust, N.A.
1201 Broadway
Quincy, Illinois 62301 42,320 (1) 9,595 8.8%
John J. Bodle
76 Flax Drive
London, Ohio 43140 19,027 (2) 6,706 5.3
Edward D. Goodyear 11,724 (3) 12,482 5.0
1776 E. Choctaw Drive
London, Ohio 43140
Kennison A. Sims
1418 Old Xenia Road
London, Ohio 43140 36,953 (3)(4) 6,755 9.1
- -----------------------------
<FN>
(1) Consists of unallocated shares with respect to which First Bankers
Trust, N.A. (the "ESOP Trustee") as the Trustee for the London
Financial Corporation Employee Stock Ownership Plan (the "ESOP") has
sole voting power.
(2) Includes 5,290 shares that may be acquired upon the exercise of an
option awarded pursuant to the London Financial Corporation 1997 Stock
Option and Incentive Plan (the "Stock Option Plan") and 1,058 shares
that are expected to be earned in the next 60 days pursuant to The
Citizens Loan & Savings Company Management Recognition and Retention
Plan and Trust (the "MRP").
(3) Includes 1,058 shares that may be acquired upon the exercise of an
option awarded pursuant to the Stock Option Plan and 212 shares that
are expected to be earned in the next 60 days pursuant to the MRP.
(4) Includes 18,226 shares held by the MRP, with respect to which Mr. Sims
has sole voting power as Trustee.
</TABLE>
-2-
<PAGE> 4
The following table sets forth certain information with respect to the
number of common shares of LFC beneficially owned by each director of LFC and by
all directors and executive officers of LFC as a group as of November 30, 1998:
<TABLE>
<CAPTION>
Amount and nature of beneficial ownership
-----------------------------------------
Sole voting and Shared voting and Percent of
Name and Address (1) investment power investment power shares outstanding
- -------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
John I. Andrix 21,982 (2) - 4.6%
Rodney A. Bell 1,482 (2) 20,000 4.5
John J. Bodle 19,027 (3) 6,706 5.3
Donovan D. Forrest 2,741 (4) - 0.6
Edward D. Goodyear 11,724 (2) 12,482 5.0
Shirley C. Hansgen 3,676 (2) 1,901 1.2
Kennison A. Sims 36,953 (2) (5) 6,755 9.1
All directors and executive officers
as a group (9 people) 100,041(6) 48,844 30.1
<FN>
- -----------------------------
(1) Each of the persons listed on this table may be contacted at the address of LFC.
(2) Includes 1,058 shares that may be acquired upon the exercise of an
option awarded pursuant to the Stock Option Plan and 212 shares that
are expected to be earned in the next 60 days pursuant to the MRP.
(3) Includes 5,290 shares that may be acquired upon the exercise of an
option awarded pursuant to the Stock Option Plan and 1,058 shares that
are expected to be earned in the next 60 days pursuant to the MRP.
(4) Includes 529 shares that may be acquired upon the exercise of an option
awarded pursuant to the Stock Option Plan.
(5) Includes 18,226 shares held by the MRP, with respect to which Mr. Sims
has sole voting power as Trustee.
(6) Includes 12,309 shares that may be acquired upon the exercise of
options awarded pursuant to the Stock Option Plan and 2,518 shares
which are expected to be earned in the next 60 days pursuant to the
MRP.
</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.
-3-
<PAGE> 5
The Board of Directors proposes the re-election of the following
persons to serve until the Annual Meeting of Shareholders in 2001 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>
Donovan D. Forrest 49 Director 1997
Edward D. Goodyear 51 Director 1995
Kennison A. Sims 46 Director 1996
<FN>
- ------------------------------
(1) As of December 10, 1998.
(2) 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. Mr. Goodyear 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"). 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.
</TABLE>
If any nominee is unable to stand for election, any proxies granting authority
to vote for such nominee will be voted for such substitute as the Board of
Directors recommends.
The following directors will continue to serve as directors of LFC
after the Annual Meeting for the terms indicated:
<TABLE>
<CAPTION>
Director of
Name Age (1) Position(s) Held LFC since (2) Term Expires
- ---- ------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
John I. Andrix 51 Director 1995 2000
Rodney A. Bell 79 Director 1995 2000
John J. Bodle 51 Director and President 1995 2000
Shirley C. Hansgen 47 Director 1997 2000
<FN>
- -----------------------------
(1) As of December 10, 1998.
(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. Ms. Hansgen was appointed by the Board of Directors in 1997
to fill a vacancy created by the death of George O. Matthewson.
</TABLE>
MR. DONOVAN D. FORREST. For the past 19 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.
Since 1974, Mr. Goodyear has been the Assistant Treasurer of The Dispatch
Printing Company, publisher of The Columbus Dispatch newspaper.
MR. KENNISON A. SIMS. Mr. Sims has been the owner-operator of The Sims
Construction Company, London, Ohio, since 1976.
-4-
<PAGE> 6
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, which was 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.
MS. SHIRLEY C. HANSGEN. Ms. Hansgen is an attorney at law and has been
practicing in Madison County, Ohio for the past 19 years.
MEETINGS OF DIRECTORS
The Board of Directors of LFC met eight times for regularly scheduled
and special meetings during the fiscal year ended September 30, 1998. Each
director of LFC is also a director of Citizens. The Board of Directors of
Citizens met 13 times for regularly scheduled and special meetings during the
fiscal year ended September 30, 1998.
COMMITTEES OF DIRECTORS
The Board of Directors of LFC has an MRP Committee and a Stock Option
Plan Committee, but no separate nominating or compensation committees.
The members of the MRP Committee are Messrs. Andrix, Goodyear and Sims.
The MRP Committee administers the MRP and determines the number of shares to be
awarded to officers and employees of LFC and Citizens pursuant to the MRP. The
MRP Committee did not meet during the fiscal year ended September 30, 1998.
The members of the Stock Option Plan Committee are Messrs. Andrix,
Goodyear and Sims. The Stock Option Plan Committee administers the Stock Option
Plan and determines the number of shares to be covered by options granted to the
officers and employees of LFC and Citizens pursuant to the Stock Option Plan.
The Stock Option Plan Committee did not meet during the fiscal year ended
September 30, 1998.
The Board of Directors of Citizens has an Audit Committee, an Executive
Committee and a Classification and Fixed Asset Committee, but no separate
nominating or compensation committees.
The members of the Audit Committee are Messrs. Bell, Goodyear and Sims
and Ms. Hansgen. The Audit Committee is responsible for auditing teller boxes,
reviewing and reporting to the full Board of Directors on the independent audit
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, 1998.
The members of the Executive Committee are Messrs. Andrix, Goodyear and
Bodle. The Executive Committee has the authority to approve individual loans in
amounts less than $150,000, sets compensation for the executive officers of
Citizens, subject to approval by the full Board of Directors, and is authorized
to act on behalf of the Board of Directors between regular meetings of the Board
of Directors. The Executive Committee met 12 times during the fiscal year ended
September 30, 1998.
The members of the Classification and Fixed Asset Committee are Messrs.
Andrix, Bell, Bodle and Forrest. The function of the Classification and Fixed
Asset Committee is to review delinquent loans, non-performing assets and real
estate acquired through foreclosure proceedings and to report and recommend
action to the full Board of Directors with regard thereto. The Classification
and Fixed Asset Committee met four times during the fiscal year ended September
30, 1998.
-5-
<PAGE> 7
EXECUTIVE OFFICERS
In addition to Mr. Bodle, the President of both LFC and Citizens, the
following persons are executive officers of LFC or Citizens and hold the
designated positions:
<TABLE>
<CAPTION>
Name Age (1) Position(s) Held
- ---- ------- ----------------
<S> <C> <C>
Steven C. Adams 41 Executive Vice President of Citizens
Joyce E. Bauerle 46 Vice President and Treasurer of
Citizens and Treasurer of LFC
Rebecca A. Lohr 41 Secretary of LFC and Citizens
<FN>
- -----------------------------
(1) As of December 10, 1998.
</TABLE>
MR. STEVEN C. ADAMS was appointed Executive Vice President of Citizens
in May 1998. Prior to joining Citizens, Mr. Adams was a Vice President and the
City Manager of Huntington National Bank ("Huntington") in London, Ohio from
1995 to 1998, and an Assistant Vice President and commercial lender at
Huntington from 1987 to 1995.
MS. JOYCE E. BAUERLE. Ms. Bauerle has served as a Vice President of
Citizens since January 1996, as the Treasurer of Citizens since 1981 and as
Treasurer of LFC since the incorporation of LFC in October 1995.
MS. REBECCA A. LOHR. Ms. Lohr has served as the Secretary of Citizens
for the past eight 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 $100,000 during the fiscal year ended September 30, 1998. The following table
sets forth the compensation paid to John J. Bodle, the President of LFC and
Citizens, for the fiscal years ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------
Annual compensation Long term compensation All other
compensation (1)
- ---------------------------------------------------------------------------------------------------------------------------
Awards
------------------------------------------
Name and principal Fiscal Restricted Securities
position Year Salary ($) Bonus ($) stock awards ($) underlying
options/SARs (#)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John J. Bodle 1998 $68,250 - - - $ 7,300
President 1997 $59,500 $11,500 $79,350 (2) 13,225 (3) 14,414 (4)
1996 $55,530 $10,725 - - 8,400
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(1) 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.
(2) 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 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. As of September 30, 1998,
the shares which have been awarded to Mr. Bodle under the MRP had an
aggregate market value of approximately $81,995 based on the
-6-
<PAGE> 8
$15.50 closing price for LFC shares on the OTC Bulletin Board.
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.
(3) Represents the number of common shares of LFC underlying options
granted to Mr. Bodle pursuant to the Stock Option Plan.
(4) Includes $7,514 allocated to Mr. Bodle under Citizens' Simplified
Employee Pension Plan, which was suspended in 1997.
</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
have been granted pursuant to the Stock Option Plan.
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.
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 the number and
value of unexercised options held by Mr. Bodle at September 30, 1998:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 9/30/98 Option/SAR Values
---------------------------------------------------------------------------------------------
Number of Securities Value of Unexercisable
Underlying Unexercised "In The Money" Options/
Shares Acquired Value Options/SARs at 9/30/98(#) SARs at 9/30/98(#)(1)
Name on Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
John J. Bodle -0- N/A 2,645/10,580 $40,998/$163,990
<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 $15.50 on September 30, 1998, based
on the closing bid price reported by the OTC Bulletin Board.
</TABLE>
MANAGEMENT RECOGNITION PLAN AND TRUST
The shareholders of LFC adopted the MRP at the 1997 Annual Meeting of
Shareholders. With funds contributed by Citizens, the MRP purchased 21,160
shares of LFC's common stock, 17,640 of which have been awarded.
-7-
<PAGE> 9
The MRP is administered by the MRP Committee. 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 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.
Shares awarded pursuant to the MRP, along with any dividends, and other
distributions paid on such shares and earnings thereon, are distributed to
recipients as soon as practicable after such shares become earned. Recipients
are not permitted to transfer or direct the voting of shares awarded under the
RRP until they become earned.
EMPLOYEE STOCK OWNERSHIP PLAN
LFC has established the ESOP for the benefit of employees of LFC and
its subsidiaries, including Citizens, who are age 21 or older and who have
completed at least one year of service with LFC and its subsidiaries. The ESOP
provides an ownership interest in LFC to all eligible full-time employees of
LFC. The ESOP trust borrowed funds from the Company with which it acquired
42,320 of the common shares sold in the Conversion.
Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation. Except for
participants who retire, become disabled or die during a plan year, all other
participants must have completed at least 1,000 hours of service in order to
receive an allocation.
Benefits become fully vested after five years of service.
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.
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
-8-
<PAGE> 10
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 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 of 1933 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
(the "SEC") reports of ownership and reports of changes in ownership of common
stock and other equity securities of LFC. Officers, directors and greater than
10% shareholders are required by SEC regulation to furnish LFC with copies of
all Section 16(a) forms they file. Based upon a review of such reports, LFC must
disclose any failure to file such reports timely in proxy statements used in
connection with annual meetings of shareholders. A Form 4 for the month ended
February 28, 1998, reporting an acquisition of LFC shares by Mr. Sims and a Form
4 for the month ended November 30, 1998, reporting an acquisition of LFC shares
by Mr. Goodyear were not timely filed.
SELECTION OF AUDITORS
The Board of Directors has selected Grant Thornton as the auditors of
LFC 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 LFC's proxy
statement for the 2000 Annual Meeting of Shareholders should be sent to LFC by
certified mail and must be received by LFC not later than August 19, 1999. In
addition, if a shareholder intends to present a proposal at the 2000 Annual
Meeting without including the proposal in the proxy materials related to that
meeting, and if the proposal is not received by November 2, 1999, then the
proxies designated by the Board of Directors of LFC for the 2000 Annual Meeting
of Shareholders of LFC may vote in their discretion on any such proposal any
shares for which they have been appointed proxies without mention of such matter
in the proxy statement or on the proxy card for such meeting.
-9-
<PAGE> 11
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
London, Ohio John J. Bodle, President
December 17, 1998
-10-
<PAGE> 12
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 John I. Andrix and Rodney A. Bell, 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 28, 1999, 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 three directors for terms expiring in 2001:
FOR all nominees listed [ ] WITHHOLD authority to [ ]
below (except as marked vote for all nominees
to the contrary below) listed below
Donovan D. Forrest
Edward D. Goodyear
Kennison A. Sims
(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> 13
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-
<PAGE> 1
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-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 507
<INT-BEARING-DEPOSITS> 1,271
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121
<INVESTMENTS-CARRYING> 2,703
<INVESTMENTS-MARKET> 2,733
<LOANS> 32,588
<ALLOWANCE> 201
<TOTAL-ASSETS> 38,144
<DEPOSITS> 31,300
<SHORT-TERM> 0
<LIABILITIES-OTHER> 181
<LONG-TERM> 1,800
0
0
<COMMON> 0
<OTHER-SE> 4,863
<TOTAL-LIABILITIES-AND-EQUITY> 38,144
<INTEREST-LOAN> 2,602
<INTEREST-INVEST> 205
<INTEREST-OTHER> 149
<INTEREST-TOTAL> 2,956
<INTEREST-DEPOSIT> 1,496
<INTEREST-EXPENSE> 1,557
<INTEREST-INCOME-NET> 1,399
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 71
<EXPENSE-OTHER> 942
<INCOME-PRETAX> 578
<INCOME-PRE-EXTRAORDINARY> 386
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 386
<EPS-PRIMARY> .84
<EPS-DILUTED> .80
<YIELD-ACTUAL> 3.76
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 187
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 201
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 201
</TABLE>
<PAGE> 1
Exhibit 99
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 1998 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,
<PAGE> 2
commercial banks, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. The size of financial institutions competing with Citizens is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon LFC.
