<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, 1999
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 registered) (Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. Yes X No
---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on The OTC Bulletin Board as of December 17, 1999, was $3.1
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 20, 1999, 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, 1999, in Exhibit 13.
Part III of Form 10-KSB - Portions of Proxy Statement for 2000 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 Bank of London (formerly known as
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.
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"). The
Charter Conversion was consummated on January 4, 1999. As a result of the
Charter Conversion, Citizens is regulated by the Ohio Division of Financial
Institutions (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 became a bank holding company regulated by the
Federal Reserve Board and is no longer a unitary savings and loan holding
company regulated by the Office of Thrift Supervision (the "OTS").
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 commercial loans and secured and unsecured consumer
loans. For liquidity and interest rate risk management purposes, Citizens
invests in interest-bearing deposits in other financial institutions, U.S.
Government and agency obligations, mortgage-backed securities and other
investments permitted by applicable law. Funds for lending and other investment
activities are obtained primarily from savings deposits, which are insured up to
applicable limits by the FDIC, and principal repayments on loans. Advances from
the FHLB of Cincinnati are utilized from time to time when other sources of
funds are inadequate to fund loan demand.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements, the accuracy of which
is necessarily subject to present and future risks and uncertainties. Economic
circumstances, the operations of Citizens and LFC's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed in
Exhibit 99.2, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which should be read in conjunction with such forward-looking statements.
Without limiting the generality of the foregoing, the following
statements in the referenced sections of this discussion and analysis are
forward looking and are, therefore, subject to such risks and uncertainties:
1. The discussion of interest rate risk associated with
adjustable-rate mortgage lending as set forth under "Lending
Activities - One- to Four-Family Residences;"
2. The discussion of the risk associated with multifamily
mortgage lending as set forth under "Lending Activities -
Loans Secured by Multifamily Residences;"
3. The discussion of the risk associated with nonresidential
mortgage lending as set forth under "Lending Activities -
Loans Secured by Nonresidential Real Estate;"
4. The discussion of the risk associated with construction
lending as set forth under "Lending Activities - Construction
Loans;"
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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 commercial loans and consumer loans, including loans secured
by deposit accounts, automobile loans and a limited number of other secured and
unsecured loans.
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LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the loan portfolio of Citizens at
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ---------------------
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 $21,138 55.78% $22,648 66.74% $23,489 75.89%
Multifamily 642 1.69 665 1.96 671 2.17
Nonresidential 3,753 9.90 5,174 15.25 4,529 14.63
Construction 1,165 3.07 1,224 3.61 1,360 4.39
------- ----- ------- ----- ------- -----
Total real estate loans 26,698 70.44 29,711 87.56 30,049 97.08
Commercial loans 10,316 27.22 3,473 10.23 166 .54
Consumer loans:
Automobile loans 461 1.22 266 .78 186 .60
Loans on deposits 50 .13 66 .20 70 .23
Other consumer loans 373 .99 417 1.23 481 1.55
------- ----- ------- ----- ------- -----
Total consumer loans 884 2.34 749 2.21 737 2.38
------- ----- ------- ----- ------- -----
Total loans 37,898 100.00% 33,933 100.00% 30,952 100.00%
====== ====== ======
Less:
Undisbursed portion of
loans in process (601) (745) (885)
Unearned and deferred
income (359) (399) (415)
Allowance for loan
losses (238) (201) (187)
------- ------- -------
Net loans $36,700 $32,588 $29,465
======= ======= =======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
September 30, 1999, regarding the dollar amount of loans maturing in the
portfolio of Citizens based on their contractual terms to maturity. Demand
loans, home equity loans and other loans having no stated schedule of repayments
or no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-20 Due more
September 30, years years years than 20
-------------------------- after after after years after
2000 2001 2002 9/30/99 9/30/99 9/30/99 9/30/99 Total
---- ---- ---- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 5 $ 16 $ 114 $ 206 $1,209 $ 7,970 $11,618 $21,138
Multifamily and nonresidential 64 -- 197 80 935 2,168 951 4,395
Construction (1) -- -- -- -- -- -- 1,165 1,165
Commercial loans 337 5,173 1,088 2,767 -- 456 495 10,316
Consumer loans 135 136 226 387 -- -- -- 884
---- ------ ------ ------ ------ ------- ------- -------
Total $541 $5,325 $1,625 $3,440 $2,144 $10,594 $14,229 $37,898
==== ====== ====== ====== ====== ======= ======= =======
</TABLE>
- -------------------------
(1) Assumes construction loans will become real estate loans upon completion of
the construction phase.
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The table below sets forth the dollar amount of all loans due after
September 30, 2000, which have predetermined interest rates and have floating or
adjustable interest rates:
<TABLE>
<CAPTION>
Due after
September 30, 2000
------------------
(In thousands)
<S> <C>
Fixed rates of interest $ 1,401
Adjustable rates of interest 35,956
-------
Total $37,357
=======
</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, 1999, one- to four-family residential
loans totaled approximately $21.1 million, or 55.8% 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 $20.9 million were secured by first
mortgages and approximately $232,000 were secured by second mortgages at
September 30, 1999.
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, 1999, the multifamily loan
portfolio consisted of three loans, which totaled approximately $642,000, or
1.7% 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, 1999, approximately $3.8 million, or
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9.9%, 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 $600,000 and was performing in
accordance with its terms. The nonresidential real estate loans made by Citizens
have adjustable rates, terms of up to 25 years and LTVs of up to 75%. Citizens
also makes loans for the construction of nonresidential properties.
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, 1999, the loan portfolio of Citizens included $1.2
million in construction loans, or 3.1% of total loans, including undisbursed
proceeds of approximately $601,000. 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, 1999.
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, 1999, the commercial loan portfolio of Citizens
totaled $10.3 million, or 27.2% of total loans. All of the commercial loans are
to businesses and individuals in Madison County and contiguous areas and all of
such loans were performing in accordance with their terms at September 30, 1999.
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, 1999, Citizens had
approximately $884,000, or 2.3% 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."
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LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the lending staff of
Citizens and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel at the office of Citizens. Citizens typically obtains a credit report,
verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate which will be given as security for the loan is prepared by an
appraiser approved by the Board of Directors. Upon the completion of the
appraisal and the receipt of information on the credit history of the borrower,
the application for a loan is submitted for review in accordance with the
underwriting guidelines of Citizens. Loans of amounts less than $100,000 may be
approved by the President of Citizens. Loans of amounts between $100,000 and
$150,000 may be approved by the Executive Committee of the Board of Directors.
Loans in excess of $150,000 require approval of the full Board of Directors of
Citizens.
If a mortgage loan application is approved, Citizens typically obtains
an attorney's opinion of title. Citizens obtains title insurance on only
approximately 10% of its loans secured by real estate. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Citizens as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Citizens
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in portions based upon periodic inspections of construction progress.
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. 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,
------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Loans originated:
One- to four-family residential $ 3,334 $ 4,284
Multifamily residential -- --
Nonresidential 4,185 444
Construction 1,235 1,205
Commercial 10,490 5,848
Consumer 845 840
-------- --------
Total loans originated 20,089 12,621
Principal repayments (16,071) (9,600)
Increase in other items, net (1) 94 102
-------- --------
Net increase $ 4,112 $ 3,123
======== ========
</TABLE>
- -----------------------
(1) Other items consist of deferred loan fees, allowance for loan losses
and the undisbursed portion of construction loans.
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.
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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, NON-PERFORMING 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,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
Loans delinquent for:
<S> <C> <C> <C> <C> <C> <C>
30 - 59 days 1 $34 .09% 1 $27 .08%
60 - 89 days 1 2 .01 1 6 .02
90 days and over 1 1 -- - -- --
- --- --- - --- ---
Total delinquent loans 3 $37 .10% 2 $33 .10%
= === === = === ===
</TABLE>
Non-performing assets include non-accruing 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.
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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,
-------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Accruing loans delinquent 90+ days $ 1 $ --
Loans accounted for on a
nonaccrual basis:
Real estate
One- to four-family -- --
Multifamily -- --
Nonresidential -- --
Consumer -- --
---- ----
Total nonaccrual loans -- --
---- ----
Total nonperforming loans 1 --
Real estate owned -- --
---- ----
Total nonperforming assets $ 1 $ --
==== ====
Allowance for loan losses $238 $201
Nonperforming assets as a percent
of total assets -% -%
Nonperforming loans as a percent
of total loans -% -%
Allowance for loan losses as a
percent of nonperforming loans 23800.00% -%
</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, 1999, 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.
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The aggregate amounts of classified assets of Citizens at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
----------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $73 $77
Doubtful -- --
Loss -- --
--- ---
Total classified assets $73 $77
=== ===
</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 non-performing 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 1999 and 1998 were determined based upon past loan loss 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."
-10-
<PAGE> 11
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,
------------------------
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $201 $187
Charge-offs 1 8
Recoveries -- --
---- ----
Net charge-offs 1 8
Provision for loan losses 38 22
---- ----
Balance at end of year $238 $201
==== ====
Ratio of net charge-offs
to average loans outstanding
during the period -% .02%
Ratio of allowance for loan losses
to total loans .63% .59%
</TABLE>
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,
--------------------------------------------------------
1999 1998
------------------------- --------------------------
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 54.62% $130 87.56%
Commercial loans 90 37.82 51 10.23
Consumer loans 18 7.56 20 2.21
Unallocated -- -- -- --
---- ------ ---- ------
Total $238 100.0% $201 100.0%
==== ====== ==== ======
</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
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,
---------------------------------------------------------------------------------
1999 1998
------------------------------------- ----------------------------------------
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 $2,748 58.42% $2,748 58.51% $1,271 31.04% $1,271 30.81%
Investment securities:
Available for sale:
Corporate equity securities 127 2.70 127 2.70 121 2.95 121 2.93
Mortgage-backed securities
held to maturity 1,829 38.88 1,822 38.79 2,703 66.01 2,733 66.26
------ ------ ------ ------ ------ ------ ------ ------
Total investments $4,704 100.00% $4,697 100.00% $4,095 100.00% $4,125 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The maturities of the interest-bearing deposits and mortgage-backed
securities of Citizens at September 30, 1999, are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------------------------------------------------------------------------
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 $2,748 4.38% $ -- -% $ -- $ -- $ -- -% $2,748 $2,748 4.38%
other financial institutions
Mortgage-backed securities -- -- -- -- -- -- 1,829 6.29 1,829 1,822 6.29
------ ---- ----- -- ----- ---- ------ ---- ------ ------ ----
Total $2,748 4.38% $ -- -% $ -- -% $1,829 6.29% $4,577 $4,570 5.13%
====== ==== ===== == ===== ==== ====== ==== ====== ====== ====
</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, 1999, certificates of deposit at Citizens totaled
approximately $21.2 million, or 57.2% of total deposits. Of such amount,
approximately $12.3 million in certificates of deposit mature within one year.
Based on past experience and the prevailing pricing strategies of Citizens,
management believes that a substantial percentage of such certificates will be
renewed with Citizens at maturity. If there is a significant deviation from
historical experience, Citizens can utilize borrowings from the FHLB of
Cincinnati as an alternative source of funds.
-12-
<PAGE> 13
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,
-------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $ 5,540 14.93% $ 3,905 12.48%
Passbook savings accounts (2) 6,330 17.06 5,951 19.01
Money market accounts (3) 4,032 10.86 1,976 6.31
------- ------ ------- ------
Total transaction accounts 15,902 42.85 11,832 37.80
Certificates of deposit:
6.00% or less 16,626 44.80 15,170 48.47
Over 6.01% 4,584 12.35 4,298 13.73
------- ------ ------- ------
Total certificates of deposit (4) 21,210 57.15 19,468 62.20
------- ------ ------- ------
Total deposits $37,112 100.00% $31,300 100.00%
======= ====== ======= ======
</TABLE>
- ------------------------
(1) The weighted average rate on NOW accounts at September 30, 1999 and
1998, was 1.56% and 2.27%.
(2) The weighted average rate on passbook savings accounts at September 30,
1999 and 1998, was 3.00% and 3.00%.
(3) The weighted average rate on money market accounts at September 30,
1999 and 1998, was 4.44% and 4.68%, respectively.
(4) The weighted average rate on all certificates of deposit, including IRA
accounts, at September 30, 1999 and 1998, was 5.74% and 5.91%,
respectively.
Citizens bids on public funds from entities in its primary market area.
The amount of such deposits was approximately $233,000 at September 30, 1999.
The following table shows rate and maturity information for
certificates of deposit at Citizens at September 30, 1999:
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- --------- ---------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
4.01% to 6.00% $10,880 $2,458 $ 873 $2,415 $16,626
6.01% to 8.00% 1,383 2 1,009 2,190 4,584
------- ------ ------ ------ -------
Total certificates
of deposit $12,263 $2,460 $1,882 $4,605 $21,210
======= ====== ====== ====== =======
</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, 1999:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 125
Over 3 months to 6 months 107
Over 6 months to 12 months 1,211
Over 12 months 1,095
------
Total $2,538
======
</TABLE>
The following table sets forth the deposit account balance activity at
Citizens for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $ 31,300 $ 29,951
Deposits 100,105 61,467
Withdrawals (95,527) (61,268)
-------- --------
Net deposits before interest credited 35,878 30,150
Interest credited 1,234 1,150
-------- --------
Ending balance 37,112 31,300
-------- --------
Net increase $ 5,812 $ 1,349
======== ========
</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, 1999,
Citizens was in compliance with the QTL test and had $800,000 in advances from
the FHLB, bearing interest at the weighted average rate of 6.91% and with
maturity dates as follows:
Amount Due Date
------ --------
(In thousands)
$500 11/99
300 6/01
----
$800
====
COMPETITION
Citizens competes for deposits with 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
-14-
<PAGE> 15
economic conditions, current interest rate levels and other factors which are
not readily predictable. Citizens does not offer all of the products and
services offered by some of its competitors, particularly commercial banks.
Citizens monitors the product offerings of its competitors and adds new products
when it can do so competitively and cost effectively. See Exhibit 99.2, "Safe
Harbor Under the Private Securities Litigation Reform Act of 1995 -
Competition."
EMPLOYEES
As of September 30, 1999, Citizens had 11 full-time employees and 3
part-time employees.
GENERAL REGULATION
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 became an Ohio-chartered commercial bank
regulated by the Division and the FDIC. In addition, after the Charter
Conversion, LFC became a bank holding company regulated by the Board of
Governors of the Federal Reserve System (the "FRB").
OHIO CORPORATION LAW
LFC and Citizens are 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 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
-15-
<PAGE> 16
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
LFC is 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.
GRAMM-LEACH-BLILEY ACT
During the fall of 1999, the Gramm-Leach-Bliley Act (better known as
the Financial Services Modernization Act of 1999 and hereinafter referred to as
the "FSMA") was enacted by Congress and signed into law by the President. The
FSMA provides for profound changes to the Federal banking laws and changes the
manner in which bank holding companies, banks, savings institutions,
broker-dealers, insurance companies, investment companies, and investment
advisors operate and are regulated. In general, the FSMA expands the lines of
business in which bank holding companies and banks may engage and also expands
the scope of powers of bank holding companies and banks within these lines of
business. Some of the most important changes included in the FSMA affecting bank
holding companies and/or banks are the following: (i) an expansion of the
permissible activities for bank holding companies and banks, (ii) permissible
affiliations among securities firms, insurance companies, and depository
institutions, (iii) the promulgation of functional regulations for bank
securities activities, (iv) changes in the regulations governing unitary savings
and loan holding companies, (v) changes to privacy regulations affecting
banking; (vi) changes in the regulations governing the Federal Home Loan Bank
System, and (vii) other provisions addressing ATM fees, the Community
Reinvestment Act and other various regulatory changes.
The specific effects of the enactment of the FSMA on the
banking industry in general and on LFC in particular have yet to be determined
due to the fact that the FSMA was adopted only a few months ago.
-16-
<PAGE> 17
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 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.
Citizens' current deposits 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
-17-
<PAGE> 18
(and its depository 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 which prohibit 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
-18-
<PAGE> 19
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 is not 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 is 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, 1999, was $3.1 million and as a result, Citizens does qualify as a
small corporation exempt from the alternative minimum tax.
-19-
<PAGE> 20
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." For tax year 1999, the franchise tax is imposed annually at a
rate of 1.4% of the book net worth of Citizens determined in accordance with
generally accepted accounting principles. For tax year 2000, however, the
franchise tax on financial institutions 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,
1999, 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 $346,000
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Neither LFC nor Citizens is presently involved in any material legal
proceedings. From time to time, Citizens is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Citizens.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the 1999 Annual Report to Shareholders (the
"Annual Report") under the caption "Common Stock and Related Information" is
incorporated herein by reference.
-20-
<PAGE> 21
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 15, 1999, 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 2000
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.
-21-
<PAGE> 22
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 Incorporated by reference to the Annual Report on Form
10-KSB for the fiscal year ended September 30, 1998,
Exhibit
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, 1999.
-22-
<PAGE> 23
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 9, 1999.
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 9, 1999 Date: December 9, 1999
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 9, 1999 Date: December 9, 1999
By /s/ Edward D. Goodyear By /s/ Shirley G. Hansgen
------------------------------- -----------------------------------
Edward D. Goodyear Shirley G. Hansgen
Director Director
Date: December 9, 1999 Date: December 9, 1999
By /s/ Kennison A. Sims
-------------------------------
Kennison A. Sims
Director
Date: December 9, 1999
-23-
<PAGE> 1
Exhibit 13
LONDON FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
2 East High Street London, Ohio 43140 Telephone (740)852-0787 Fax (740)852-4699
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, 1999.
Fiscal 1999 marked a record year of growth for your Company. Assets
increased $5.2 million, or 13.6%, to $43.3 million. Loans receivable stood at
$36.7 million at September 30, 1999, an increase of $4.1 million, or 12.6%.
Deposits increased 18.6% during this period to a total of $37.1 million.
Finally, shareholders' equity increased by $347,000, or 7.1%, to a total of $5.2
million.
During the past year your Company also expanded the services it offers to
the public. In January 1999, we completed our charter change, commencing
operations as Citizens Bank of London, a state-chartered commercial bank.
Expanded commercial and agricultural product lines were developed and
implemented, two new drive-thru lanes were added, and a new ATM was introduced.
Now customers can access their checking and savings accounts twenty-four hours a
day at our ATM and can also use newly issued Citizens VISA Check Cards instead
of a check wherever VISA cards are accepted. In the year ahead, even more
services will be offered to make your Bank more attractive to present and future
customers.
As we enter the new millennium, please be assured that we are totally
committed to enhancing the value of your investment in London Financial
Corporation. We wish to thank you for your support during the past year and look
forward to your continued support in the future.
Sincerely,
LONDON FINANCIAL CORPORATION
/s/ John J. Bodle
John J. Bodle
President
<PAGE> 2
BUSINESS OF LONDON FINANCIAL CORPORATION
================================================================================
London Financial Corporation ("LFC" or the "Company"), a bank holding company
incorporated under the laws of the State of Ohio, owns all of the issued and
outstanding common shares of The Citizens Bank of London ("Citizens"), a bank
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 bank holding company, LFC is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System. As a state
chartered commercial bank incorporated under the laws of Ohio, Citizens is
subject to regulation, supervision and examination by the Federal Deposit
Insurance Corporation (the "FDIC") 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 January 4, 1999, Citizens' completed a charter conversion of Citizens from a
state-chartered savings and loan association to a state-chartered commercial
bank (the "Charter Conversion"). As a result of the Charter Conversion, Citizens
is permitted to increase its commercial lending activities to small businesses
and to agricultural concerns and to increase its commercial checking activity.
Also in connection with the Charter Conversion, LFC converted to a bank holding
company regulated by the Federal Reserve Board and is no longer a unitary
savings and loan holding company regulated by the OTS.
MARKET PRICE OF LFC'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 479,450 of LFC's common shares outstanding on December 10, 1999, and
held of record by approximately 418 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 1999 and 1998. 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
MARKET PRICE OF LFC'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW DECLARED
<S> <C> <C> <C>
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
FISCAL 1999
Quarter ended:
December 31, 1998 $15.50 $13.75 $ .06
March 31, 1999 14.75 14.00 .06
June 30, 1999 15.00 12.50 .06
September 30, 1999 13.25 11.13 .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.
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. This selected financial data should be read in
conjunction with the consolidated financial statements appearing elsewhere in
this report
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
SELECTED FINANCIAL CONDITION 1999 1998 1997 1996 1995
AND OTHER DATA: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $43,323 $38,144 $38,210 $36,817 $34,152
Cash and due from banks 709 507 322 319 835
Interest-bearing deposits in other
financial institutions 2,748 1,271 3,342 2,324 2,009
Investment securities (1) 127 121 655 2,220 500
Mortgage-backed securities 1,829 2,703 3,586 4,032 2,009
Loans receivable - net 36,700 32,588 29,465 27,031 27,972
Deposits 37,112 31,300 29,951 28,195 30,594
FHLB advances 800 1,800 300 300 300
Shareholders' equity (2) 5,210 4,863 7,604 7,907 3,224
</TABLE>
- ----------------------
(1) Includes securities designated as available for sale.
(2) Consisted solely of retained earnings at September 30, 1995.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
SUMMARY OF EARNINGS: 1999 1998 1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $3,177 $2,956 $2,832 $2,769 $2,334
Interest expense 1,600 1,557 1,468 1,505 1,396
------ ------ ------ ------ ------
Net interest income 1,577 1,399 1,364 1,264 938
Provision for losses on loans 38 22 - - -
------ ------ ------ ------ ------
Net interest income after
provision for losses on loans 1,539 1,377 1,364 1,264 938
Other income 85 143 107 71 74
General, administrative and other
expense 1,134 942 887 1,014 792
------ ------ ------ ------ ------
Earnings before income taxes 490 578 584 321 220
Federal income taxes 165 192 199 97 77
------ ------ ------ ------ ------
Net earnings $ 325 $ 386 $ 385 $ 224 $ 143
====== ====== ====== ====== ======
Earnings per share
Basic $.72 $.84 $.81 N/A N/A
==== ==== ==== === ===
Diluted $.70 $.80 $.81 N/A N/A
==== ==== ==== === ===
</TABLE>
4
<PAGE> 5
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS: AT OR FOR THE YEAR ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
Performance ratios:
<S> <C> <C> <C> <C> <C>
Return on average assets 0.80% 1.03% 1.01% 0.62% 0.44%
Return on average equity 6.47 7.14 5.15 4.36 4.51
Interest rate spread 3.55 3.07 2.90 3.06 2.62
Net interest margin 4.01 3.76 3.77 3.67 2.95
General, administrative and
other expense to average assets 2.79 2.51 2.33 2.80 2.42
Average equity to average assets 12.34 14.38 19.67 14.21 9.68
Asset quality ratios:
Nonperforming assets to total assets -- -- 0.70 0.71 0.13
Nonperforming loans to total loans -- -- 0.87 0.90 0.15
Allowance for loan losses to total
loans 0.63 0.59 0.60 0.65 0.65
Allowance for loan losses to
nonperforming loans -- -- 69.78 71.65 422.22
Net charge-offs to average loans 0.01 0.03 -- 0.01 --
Average interest-earning assets to
average interest-bearing liabilities 111.19 116.10 121.39 113.83 107.52
</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 "Discussion of
Changes in Financial Condition from September 30, 1998 to
September 30, 1999," "Comparison of Results of Operation for
the Years Ended September 30, 1999 and 1998" and "Comparison
of Results of Operations for the Years Ended September 30,
1998 and 1997;"
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 legislation enacted under the
"Gramm-Leach-Bliley Act," as set forth under "Potential Impact
of Current Legislation on Future Results of Operations;"
5. Management's estimate as to the effects of recent accounting
pronouncements as set forth under "Effects of Recent
Accounting Pronouncements;" and
6. Management's determination of the effect of the year 2000 on
LFC's information technology systems as set forth under "Year
2000 Compliance Matters."
6
<PAGE> 7
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
FROM SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
The Company's consolidated total assets amounted to $43.3 million at September
30, 1999, an increase of $5.2 million, or 13.6%, over the $38.1 million in total
assets at September 30, 1998. The increase in assets was funded primarily by a
$5.8 million growth in deposits and a $347,000 increase in shareholders' equity,
which were partially offset by a $1.0 million decrease in FHLB advances.
Cash and cash equivalents and investment securities totaled $3.6 million at
September 30, 1999, an increase of $1.7 million, or 88.7%, over September 30,
1998 levels. This increase was the result of cash received through the growth in
deposits during the fiscal year.
Mortgage-backed securities totaled $1.8 million at September 30, 1999, a
decrease of $874,000, or 32.3%, from September 30, 1998, 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 6.0% to 6.6% at September 30, 1999. Proceeds from principal
repayments on mortgage-backed securities were redeployed to fund growth in the
loan portfolio.
Loans receivable totaled $36.7 million at September 30, 1999, an increase of
$4.1 million, or 12.6%, over the $32.6 million total at September 30, 1998.
During fiscal 1999, loan disbursements amounted to $20.1 million, which were
partially offset by principal repayments of $16.1 million. Loan origination
volume during fiscal 1999 exceeded that of fiscal 1998 by $7.5 million, or
59.2%. Growth in the loan portfolio during fiscal 1999 occurred primarily in
commercial loans, generally secured by real estate and agricultural equipment,
which increased by $6.8 million.
Citizens' allowance for loan losses totaled $238,000 and $201,000 at September
30, 1999 and 1998, which represented .63% and .59% of total loans, respectively.
Citizens had no nonperforming loans at September 30, 1999 and 1998. Although
management believes that its allowance for loan losses at September 30, 1999 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 $37.1 million at September 30, 1999, an increase of $5.8
million, or 18.6%, over the $31.3 million total at September 30, 1998. The
increase in deposits consisted of a $4.1 million, or 34.4%, increase in
transaction accounts, and a $1.7 million, or 8.9%, increase 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 $5.2 million at September 30, 1999, a $347,000, or
7.1%, increase from 1998 levels. The increase resulted primarily from net
earnings of $325,000 and amortization related to stock benefit plans totaling
$126,000 during 1999, which were partially offset by cash dividends of $108,000.
7
<PAGE> 8
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
GENERAL. Net earnings for the fiscal year ended September 30, 1999, amounted to
$325,000, a decrease of $61,000, or 15.8%, from the $386,000 in net earnings
recorded in fiscal 1998. The decrease in net earnings resulted primarily from a
$192,000 increase in general, administrative and other expense, a $58,000
decrease in other income, and a $16,000 increase in the provision for losses on
loans, which were partially offset by a $178,000 increase in net interest income
and a $27,000 decrease in the provision for federal income taxes.
NET INTEREST INCOME. Net interest income totaled $1.6 million for the fiscal
year ended September 30, 1999, an increase of $178,000, or 12.7%, over the total
recorded in fiscal 1998. Interest income on loans during fiscal 1999 increased
by $335,000, or 12.9%, over fiscal 1998 levels, resulting from the combination
of a $3.1 million increase in the weighted-average balance of loans outstanding
and an increase of 23 basis points (100 basis points equals one percent) in the
average yield, to 8.57%. Interest income on mortgage-backed securities decreased
by $66,000, or 33.0%, due primarily to an $865,000, or 27.8%, decrease in the
weighted-average balance of mortgage-backed securities outstanding, coupled with
a decrease in the weighted-average yield year to year, from 6.43% in fiscal 1998
to 5.97% in fiscal 1999. Interest income on investment securities and
interest-bearing deposits decreased by $48,000, or 31.2%, for the fiscal year
ended September 30, 1999, compared to fiscal 1998, as the weighted-average yield
decreased by 273 basis points, to 3.73% in fiscal 1999, while the
weighted-average balance increased by $457,000 year to year.
Interest expense on deposits increased by $45,000, or 3.0%, during fiscal 1999,
compared to fiscal 1998, due primarily to a $3.8 million increase in the
weighted-average balance of deposits outstanding year to year, which was
partially offset by a decline of 40 basis points in the weighted-average cost of
deposits, from 4.86% in fiscal 1998 to 4.46% in fiscal 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $178,000, or 12.7%, during fiscal 1999, as
compared to fiscal 1998. The interest rate spread increased by 42 basis points,
to 3.55% for fiscal 1999, as compared to 3.13% for fiscal 1998, while the net
interest margin amounted to 4.01% and 3.81% for the fiscal years ended September
30, 1999 and 1998, 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 $38,000 provision for losses on loans during the fiscal year ended
September 30, 1999, an increase of $16,000, or 72.7%, over fiscal 1998. The
fiscal 1999 provision was predicated on the growth in the nonresidential
property loan portfolio. 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 $85,000 for the fiscal year ended September
30, 1999, a decrease of $58,000, or 40.6%, from the $143,000 recorded in fiscal
1998. The decrease resulted primarily from the absence of $71,000 in gains on
the sale of investment securities designated as available for sale during 1998,
partially offset by a $13,000, or 18.1%, increase in other operating income.
This increase resulted from increased fees on checking accounts, late charges
and new fee income resulting from the addition of an ATM during the year.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased by $192,000, or 20.4%, to a total of $1.1 million for the
fiscal year ended September 30, 1999 compared to fiscal 1998. The increase was
due primarily to a $126,000, or 24.9%, increase in employee compensation and
benefits, a $68,000, or 31.9%, increase in other operating expenses and a
$22,000, or 37.3%, increase in occupancy and equipment expense, which were
partially offset by a $35,000, or 40.2%, decrease in franchise taxes. 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. The increase in other operating expense was due
primarily to costs associated with new deposit products, the establishment of
the Bank's ATM, and costs associated with the change in corporate charter.
Occupancy and equipment expense increased as a result of an increase in
depreciation expense, resulting from fixed asset additions during 1998 and 1999.
These expenses were offset by a reduction in franchise tax during 1999 as a
result of the decrease in stockholders' equity following the Corporation's
return of capital distribution paid in fiscal 1998.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $165,000
for the fiscal year ended September 30, 1999, a decrease of $27,000, or 14.1%,
from the $192,000 provision recorded in fiscal 1998. The decrease resulted
primarily from a decrease of $88,000, or 15.2%, in pretax earnings year to year.
LFC's effective tax rates were 33.7% and 33.2% for the fiscal years ended
September 30, 1999 and 1998, respectively.
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 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.
9
<PAGE> 10
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, compared
to fiscal 1997. The interest rate spread increased by 23 basis points, to 3.13%
for fiscal 1998, compared to 2.90% for fiscal 1997, while the net interest
margin amounted to 3.81% and 3.77% for the fiscal years ended September 30, 1998
and 1997, respectively.
PROVISION FOR LOSSES ON LOANS. 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, 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.
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, 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.
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. Management does not believe
that the use of month end balances instead of daily balances has caused any
material differences in the information presented.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1999 1998
--------------------------------- ---------------------------------
WEIGHTED AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
AVERAGE YIELD AT OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
SEPTEMBER 30, 1999 BALANCE PAID RATE BALANCE PAID RATE
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other
financial institutions 3.16% $ 2,723 $ 100 3.67% $ 2,245 $ 149 6.64%
Investment securities 4.72 117 6 5.12 138 5 3.62
Mortgage-backed securities 6.13 2,245 134 5.97 3,110 200 6.43
Loans receivable(1) 7.91 34,289 2,937 8.57 31,198 2,602 8.34
------- ------ ------ ------- ------ ------
Total interest-earning assets 39,374 3,177 8.07 36,691 2,956 8.06
Non-interest-earning assets 1,335 891
------- -------
Total assets $40,709 $37,582
======= =======
Interest-bearing liabilities:
NOW accounts 1.56 $ 5,191 72 1.39 $ 3,859 76 1.97
Money market accounts 4.44 3,205 144 4.49 932 41 4.40
Passbook savings accounts 3.00 6,083 185 3.04 5,919 180 3.04
Certificates of deposit 5.55 20,057 1,140 5.68 20,067 1,199 5.98
------- ------ ------ ------- ------ ------
Total deposits 34,536 1,541 4.46 30,777 1,496 4.86
FHLB advances and other borrowings 6.91 878 59 6.72 825 61 7.39
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities 35,414 1,600 4.52 31,602 1,557 4.93
------ ------ ------ ------
Non-interest-bearing liabilities 270 574
------- -------
Total liabilities 35,684 32,176
Shareholders' equity 5,025 5,406
------- -------
Total liabilities and
shareholders' equity $40,709 $37,582
======= =======
Net interest income $1,577 $1,399
====== ======
Interest rate spread 3.55% 3.13%
====== ======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 4.01% 3.81%
====== ======
Average interest-earning assets to
average interest-bearing liabilities 111.19% 116.10%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other
financial institutions $ 2,562 $ 161 6.28%
Investment securities 1,188 58 4.88
Mortgage-backed securities 3,782 232 6.13
Loans receivable(1) 28,618 2,381 8.32
------- ------ ------
Total interest-earning assets 36,150 2,832 7.83
Non-interest-earning assets 1,870
-------
Total assets $38,020
=======
Interest-bearing liabilities:
NOW accounts $ 3,450 65 1.88
Money market accounts 233 6 2.58
Passbook savings accounts 5,843 177 3.03
Certificates of deposit 19,724 1,178 5.97
------- ------ ------
Total deposits 29,250 1,426 4.88
FHLB advances and other borrowings 531 42 7.91
------- ------ ------
Total interest-bearing liabilities 29,781 1,468 4.93
------ ------
Non-interest-bearing liabilities 761
-------
Total liabilities 30,542
Shareholders' equity 7,478
-------
Total liabilities and
shareholders' equity $38,020
=======
Net interest income $1,364
======
Interest rate spread 2.90%
======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.77%
======
Average interest-earning assets to
average interest-bearing liabilities 121.39%
======
</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 $132,000, $124,000, and $81,000 for the fiscal years ended
September 30, 1999, 1998 and 1997, 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,
1999 VS. 1998 1998 VS. 1997
------------------------------------ -----------------------------------
INCREASE INCREASE
(DECREASE) DUE TO TOTAL (DECREASE) DUE TO TOTAL
------------------ INCREASE ------------------ INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 28 $(77) $(49) $(21) $ 9 $(12)
Investment securities (1) 2 1 (41) (12) (53)
Mortgage-backed securities (52) (14) (66) (42) 10 (32)
Loans receivable 261 74 335 215 6 221
---- ---- --- ---- ---- ----
Total interest income 236 (15) 221 111 13 124
Interest expense attributable to:
NOW accounts 20 (24) (4) 8 3 11
Money market accounts 102 1 103 26 9 35
Passbook savings accounts 5 - 5 2 1 3
Certificates of deposit (1) (58) (59) 19 2 21
---- ---- ---- ---- ---- ----
Total deposits 126 (81) 45 55 15 70
Advances from FHLB 6 (8) (2) 22 (3) 19
---- ---- ---- ---- ---- ----
Total interest expense 132 (89) 43 77 12 89
---- ---- ---- ---- ---- ----
Increase in net interest income $178 $ 35
==== ====
</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.
In managing its interest rate risk, Citizens begins with an objective to
increase the interest rate sensitivity of its assets by originating loans with
interest rates subject to periodic adjustment and market conditions and/or
shorter maturities. Citizens has historically had to rely primarily upon retail
deposit accounts as a source of funds and intends to continue to do so.
Management believes that reliance on retail deposit accounts as a source of
funds compared to brokered deposits and long-term borrowings may reduce the
effects of interest rate fluctuations because these deposits generally represent
a more stable source of funds. However, in fiscal 1999 and 1998, Citizens has
utilized FHLB advances as a source of financing to fund loan demand and
liquidity needs.
12
<PAGE> 13
Banks have historically presented a gap analysis as a measure of interest rate
risk. The gap analysis presents the projected maturities and periods to
repricing of a bank's rate sensitive assets and liabilities. Citizens'
cumulative one-year gap, which represents the difference between the amount of
interest sensitive assets maturing or repricing in one year and the amount of
interest sensitive liabilities maturing or repricing in the same period, was a
positive 53.8% of total assets at September 30, 1999. A positive cumulative gap
indicates that interest sensitive assets exceed interest sensitive liabilities
at a specific date. In a rising interest rate environment, institutions with
positive repricing or maturity gaps generally experience a more rapid increase
in interest income earned on assets than the interest expense paid on
liabilities. Conversely, in an environment of falling interest rates, interest
income earned on assets will generally decrease more rapidly than the interest
expense paid on liabilities. A negative gap will have the opposite effect.
Citizens' one to three year gap reflected a negative gap totaling 19.9% of total
assets while the cumulative gap totaled 33.8% of total assets. Citizens' other
maturities greater than three years reflected a negative gap of 22.8% of total
assets. The foregoing totals have been based on certain prepayment and repricing
data that may not reflect actual performance in a rapidly rising or declining
interest rate environment.
The following table presents Citizens' interest rate sensitivity gap, or the
difference between repricing periods of interest earning assets and interest
bearing liabilities at September 30, 1999:
<TABLE>
<CAPTION>
MORE THAN MORE THAN MORE THAN MORE THAN
THREE 3 MONTHS 1 YEAR 3 YEARS 5 YEARS
MONTHS TO TO TO TO MORE THAN
OR LESS 1 YEAR 3 YEARS 5 YEARS 15 YEARS 15 YEARS TOTAL
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
First mortgage loans (1) $ -- $20,187 $ 74 $ 135 $ 18 $ -- $20,414
Other loans (1) 9,884 5,000 430 802 408 -- 16,524
Marketable securities -- 1,830 -- -- -- -- 1,830
Federal funds sold and other
interest-earning assets 2,710 -- -- -- -- -- 2,710
FHLB stock 262 -- -- -- -- -- 262
------- ------- ------- ------- ------- ------ -------
Total 12,856 27,017 504 937 426 -- 41,740
Interest-bearing liabilities:
Money market deposits (2) 564 484 1,292 726 726 240 4,032
Passbook deposits (2) 887 760 2,089 1,044 1,044 506 6,330
NOW and other demand
deposits (2) 600 517 1,421 776 776 214 4,304
Certificate accounts 2,944 9,319 4,342 4,606 -- -- 21,211
Borrowed funds -- 500 -- 596 -- -- 1,096
------- ------- ------- ------- ------- ------ -------
Total 4,995 11,580 9,144 7,748 2,546 960 36,973
------- ------- ------- ------- ------- ------ -------
Interest rate sensitivity
gap (3) $ 7,861 $15,437 $(8,640) $(6,811) $(2,120) $ (960) $ 4,767
======= ======= ======= ======= ======= ====== =======
Cumulative interest rate
sensitivity gap $ 7,861 $23,298 $14,658 $ 7,847 $ 5,727 $4,767 $ --
======= ======= ======= ======= ======= ====== =======
Cumulative interest rate
sensitivity gap as a
percentage of total
interest-earning assets 18.83% 55.82% 35.12% 18.80% 13.72% 11.42%
===== ===== ===== ====== ===== =====
Interest rate sensitive
assets/interest rate
sensitive liabilities 112.89%
======
</TABLE>
- ------------
(1) For purposes of the gap analysis, mortgage and other loans are not reduced
for non-performing loans or for the provision for credit losses.
(2) Repricing based on actual decay rates rather than assumptions.
(3) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
13
<PAGE> 14
A decrease or a significant increase in interest rates from current 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Net earnings $ 325 $ 386 $ 385
Adjustments to reconcile net earnings
to net cash from operating activities (67) (296) (110)
------- ------- -------
Net cash from operating activities 258 90 275
Net cash from investing activities (3,283) (1,648) (295)
Net cash from financing activities 4,704 (328) 1,041
------- ------- -------
Net change in cash and cash equivalents 1,679 (1,886) 1,021
Cash and cash equivalents at beginning of year 1,778 3,664 2,643
------- ------- -------
Cash and cash equivalents at end of year $ 3,457 $ 1,778 $ 3,664
======= ======= =======
</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
The FDIC requires banks to maintain a level of investments in specified types of
liquid assets sufficient to protect and ensure the safety and soundness of the
Bank. The FDIC has no specific minimum guideline for liquidity.
The primary investing activities of Citizens include investing in loans,
mortgage-backed securities and investment securities. Such investments are
funded primarily from loans and mortgage-backed securities repayments, increases
in customer deposit liabilities and borrowings from the FHLB. During the fiscal
year ended September 30, 1999, loan originations totaled $20.1 million,
representing the deployment of funds from deposit growth and FHLB advances.
Customer deposits increased during the fiscal year ended September 30, 1999, by
$5.8 million and increased during the fiscal year ended September 30, 1998 by
$1.3 million.
The FDIC has adopted risk-based capital ratio guidelines to which Citizens is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet commitments to four risk
weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier I")
includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debts and the allowance for loan and lease losses, subject to
certain limitations, less required deductions. Banks are required to maintain a
total risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of
which 4% must be Tier I capital. The FDIC may, however, set higher capital
requirements when a bank's particular circumstances warrant. Banks experiencing
or anticipating significant growth are expected to maintain a Tier I leverage
ratio, including tangible capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
The following table sets forth the regulatory capital of Citizens at September
30, 1999:
Total Capital to Risk-Weighted Assets 17.9%
Tier I Capital to Risk-Weighted Assets 16.8%
Tier I Leverage Ratio 10.9%
15
<PAGE> 16
POTENTIAL IMPACT OF CURRENT LEGISLATION
ON FUTURE RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act makes sweeping changes in the financial services in which
various types of financial institutions may engage. The Glass-Steagall Act,
which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
Banks' broad exemptions from broker-dealer registration have been replaced with
limited exemptions that are functionally regulated by the Securities and
Exchange Commission (the "SEC"). The exemptions include: trust, safekeeping,
custodian, shareholder and employee benefit plans, sweep accounts, certain
private placements and third-party providers of brokerage services to bank
customers. The regulation of the new hybrid products will be decided by the
Federal Reserve Board and the SEC. The GLB Act also established which insurance
products a bank and its subsidiaries may provide as principal, though the bill
provides for state regulation of insurance, subject to a standard that no state
may discriminate against persons affiliated with a bank.
The GLB Act has expanded the activities in which LFC and the Bank may engage.
The foregoing discussion is not a complete description of the changes provided
by the GLB Act. At this time, management and the Board are considering the
impact of the GLB Act and have not yet determined how it may alter the
activities engaged in by LFC and the Bank.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established 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. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management adopted SFAS No. 130 effective October 1, 1998, as required, without
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. Management adopted SFAS No. 131 effective October 1, 1998, as
required, without 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, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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.
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.
17
<PAGE> 18
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 was fully tested as of May 1,
1999. Management has also reviewed Citizens' ancillary equipment and has
completed the appropriate remedial measures, including requesting service
providers to assure Citizens that their systems and products are fully year 2000
compliant. Citizens upgraded 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. The plan,
therefore, primarily addresses action to deal with the possibility that the
service provider's system will be down for several days or weeks upon arrival of
Year 2000. Citizens' can process transactions manually over a short-term period,
if necessary, upon arrival of the year 2000.
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
Accountants and [GRANT THORNTON LOGO]
Management Consultants
Grant Thornton LLP
The US Member Firm of
Grant Thornton International
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, 1999 and 1998, and the
related consolidated statements of earnings, comprehensive income, shareholders'
equity and cash flows for each of the years ended September 30, 1999, 1998 and
1997. 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the years ended September 30,
1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
November 15, 1999
19
<PAGE> 20
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 709 $ 507
Interest-bearing deposits in other financial institutions 2,748 1,271
------- -------
Cash and cash equivalents 3,457 1,778
Investment securities designated as available
for sale - at market 127 121
Mortgage-backed securities held to maturity - at amortized
cost, approximate market value of $1,822 and
$2,733 as of September 30, 1999 and 1998 1,829 2,703
Loans receivable - net 36,700 32,588
Office premises and equipment - at depreciated cost 511 374
Stock in Federal Home Loan Bank - at cost 262 288
Accrued interest receivable 403 216
Prepaid expenses and other assets 31 60
Prepaid federal income taxes 3 16
------- -------
Total assets $43,323 $38,144
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $37,112 $ 31,300
Advances from the Federal Home Loan Bank 800 1,800
Other liabilities 106 155
Deferred federal income taxes 95 26
------- -------
Total liabilities 38,113 33,281
Commitments -- --
Shareholders' equity
Common stock - authorized 5,000,000 shares without par
value; 529,000 shares issued -- --
Additional paid-in capital 2,413 2,391
Retained earnings - substantially restricted 4,163 3,946
Accumulated other comprehensive income, unrealized losses on securities
designated as available for sale, net of related tax effects (22) (26)
Shares acquired by Employee Stock Ownership Plan (327) (381)
Shares acquired by Management Recognition Plan (214) (264)
Less 49,550 treasury shares - at cost (803) (803)
------- -------
Total shareholders' equity 5,210 4,863
------- -------
Total liabilities and shareholders' equity $43,323 $38,144
======= =======
</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>
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $2,937 $2,602 $2,381
Mortgage-backed securities 134 200 232
Investment securities 6 5 58
Interest-bearing deposits and other 100 149 161
------ ------ ------
Total interest income 3,177 2,956 2,832
Interest expense
Deposits 1,541 1,496 1,426
Borrowings 59 61 42
------ ------ ------
Total interest expense 1,600 1,557 1,468
------ ------ ------
Net interest income before provision
for losses on loans 1,577 1,399 1,364
Provision for losses on loans 38 22 --
------ ------ ------
Net interest income after provision for
losses on loans 1,539 1,377 1,364
Other income
Gain on investment securities transactions -- 71 40
Other operating 85 72 67
------ ------ ------
Total other income 85 143 107
General, administrative and other expense
Employee compensation and benefits 632 506 445
Occupancy and equipment 81 59 52
Franchise taxes 52 87 88
Federal deposit insurance premiums 19 19 32
Data processing 69 58 56
Other operating 281 213 214
------ ------ ------
Total general, administrative and other expense 1,134 942 887
------ ------ ------
Earnings before income taxes 490 578 584
Federal income taxes
Current 98 190 83
Deferred 67 2 116
------ ------ ------
Total federal income taxes 165 192 199
------ ------ ------
NET EARNINGS $ 325 $ 386 $ 385
====== ====== ======
EARNINGS PER SHARE
Basic $.72 $.84 $.81
==== ==== ====
Diluted $.70 $.80 $.81
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 22
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings $ 325 $ 386 $ 385
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during
the period, net of tax (benefit) of $2, $(5) and $27
in fiscal 1999, 1998 and 1997, respectively 4 (10) 53
Reclassification adjustment for realized gains
included in earnings, net of tax of $24 and
$14 in 1998 and 1997, respectively -- (47) (26)
----- ----- -----
Comprehensive income $ 329 $ 329 $ 412
===== ===== =====
Accumulated comprehensive income (loss) $ (22) $ (26) $ 31
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 23
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 1999, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
SHARES (LOSSES) ON
ACQUIRED BY SECURITIES
ADDITIONAL STOCK DESIGNATED
COMMON PAID-IN BENEFIT AS AVAILABLE RETAINED TREASURY
STOCK CAPITAL PLANS FOR SALE EARNINGS STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $-- $ 4,910 $(423) $ 4 $ 3,416 $ -- $ 7,907
Net earnings for the year ended September 30, 1997 -- -- -- -- 385 -- 385
Dividends of $.24 per share -- -- -- -- (118) -- (118)
Purchase of treasury shares at cost -- -- -- -- -- (282) (282)
Purchase of shares for Management Recognition Plan -- -- (315) -- -- -- (315)
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- 27 -- -- 27
--- ------- ----- ---- ------- ----- -------
Balance at September 30, 1997 -- 4,910 (738) 31 3,683 (282) 7,604
Net earnings for the year ended September 30, 1998 -- -- -- -- 386 -- 386
Cash distributions of $5.24 per share -- (2,533) -- -- (123) -- (2,656)
Amortization expense of stock benefit plans -- 14 93 -- -- -- 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 -- 2,391 (645) (26) 3,946 (803) 4,863
Net earnings for the year ended September 30, 1999 -- -- -- -- 325 -- 325
Cash distributions of $.24 per share -- -- -- -- (108) -- (108)
Amortization expense of stock benefit plans -- 22 104 -- -- -- 126
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- 4 -- -- 4
--- ------- ----- ---- ------- ----- -------
Balance at September 30, 1999 $-- $ 2,413 $(541) $(22) $ 4,163 $(803) $ 5,210
=== ======= ===== ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 24
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 325 $ 386 $ 385
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts
on investments and mortgage-backed securities - net 7 6 7
Amortization of deferred loan origination fees (132) (124) (81)
Gain on investment securities transactions -- (71) (40)
Depreciation and amortization 40 22 20
Provision for losses on loans 38 22 --
Federal Home Loan Bank stock dividends (19) (20) (19)
Amortization expense of stock benefit plans 126 107 --
Increase (decrease) in cash due to changes in:
Accrued interest receivable (187) (47) 9
Prepaid expenses and other assets 29 (45) (10)
Other liabilities (49) (7) (117)
Federal income taxes
Current 13 (141) 5
Deferred 67 2 116
-------- -------- -------
Net cash provided by operating activities 258 90 275
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 867 878 439
Purchase of investment securities designated as available
for sale -- (248) --
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 16,071 9,600 5,438
Loan disbursements (20,089) (12,621) (7,791)
Purchase of office premises and equipment (177) (36) (26)
Federal Home Loan Bank stock redemption 45 12 --
-------- -------- -------
Net cash used in investing activities (3,283) (1,648) (295)
-------- -------- -------
Net cash used in operating and investing
activities (balance carried forward) (3,025) (1,558) (20)
-------- -------- -------
</TABLE>
24
<PAGE> 25
LONDON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(3,025) $(1,558) $ (20)
Cash flows provided by (used in) financing activities:
Net increase in deposits 5,812 1,349 1,756
Proceeds from Federal Home Loan Bank advances -- 1,500 500
Repayment of Federal Home Loan Bank advances (1,000) -- (500)
Proceeds from other borrowings -- 1,400 --
Repayment of other borrowings -- (1,400) --
Purchase of shares for Management Recognition Plan -- -- (315)
Distributions paid on common shares (108) (2,656) (118)
Purchase of treasury shares -- (521) (282)
------- ------- -------
Net cash provided by (used in) financing activities 4,704 (328) 1,041
------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,679 (1,886) 1,021
Cash and cash equivalents at beginning of year 1,778 3,664 2,643
------- ------- -------
Cash and cash equivalents at end of year $ 3,457 $ 1,778 $ 3,664
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 233 $ 226 $ 85
======= ======= =======
Interest paid on deposits and borrowings $ 1,605 $ 1,550 $ 1,463
======= ======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of applicable tax effects $ 4 $ (57) $ 27
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 26
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
London Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of The Citizens Bank of London (the "Bank"). The Bank 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 Bank'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 Bank 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 Bank. All significant intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.
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, 1999 and 1998, the
Corporation's shareholders' equity reflected a net unrealized loss on
securities designated as available for sale of $22,000 and $26,000,
respectively.
26
<PAGE> 27
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
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 Bank 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 Bank's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method. Fees for other loan
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
5. Allowance for Loan Losses
It is the Bank'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 Bank's primary lending area. When the collection
of a loan becomes doubtful, or otherwise troubled, the Bank 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).
27
<PAGE> 28
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
The Bank 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 Bank 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 Bank's
investment in nonresidential, commercial 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, 1999 and 1998, the Bank had no loans that would be defined
as impaired under SFAS No. 114.
6. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the value
determined at the recording date. In determining the lower of cost or fair
value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line method over
the useful lives of the assets, estimated to be thirty years for the
building, ten to thirty years for building improvements and five to ten
years for furniture and equipment. An accelerated method is used for tax
reporting purposes.
28
<PAGE> 29
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
9. Benefit Plans
The Bank 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 years ended September 30, 1999 and 1998.
The Bank's provision for expense under the SEP totaled $9,000 for the fiscal
year ended September 30, 1997.
The Corporation has an Employee Stock Ownership Plan ("ESOP") which 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 $66,000,
$42,000 and $42,000 for the fiscal years ended September 30, 1999, 1998 and
1997, respectively.
29
<PAGE> 30
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit Plans (continued)
The Corporation also has a Management Retention Plan ("MRP"). The MRP
purchased 21,160 shares of the Corporation's common stock in the open
market. At September 30, 1999, a total of 20,307 shares available under the
MRP had been awarded to executive officers and members of the Board of
Directors of the Corporation. Common stock awarded under the MRP vests
ratably over a five year period, commencing with the date of the award. A
provision of $42,000, $52,000 and $35,000 related to the MRP was charged to
expense for the fiscal years ended September 30, 1999, 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 27,919, 37,309 and 42,320 unallocated
ESOP shares, totaled 450,320, 463,016 and 476,337 for the fiscal years ended
September 30, 1999, 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 Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
462,915, 481,498 and 476,337 for the fiscal years ended September 30, 1999,
1998 and 1997, respectively. Incremental shares related to the assumed
exercise of stock options included in the calculation of diluted earnings
per share totaled 12,595 and 18,482 for the fiscal years ended September 30,
1999 and 1998, respectively.
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. Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of October 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It 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 presented
with the same
30
<PAGE> 31
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Comprehensive Income (continued)
prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify items of other comprehensive income by their nature
in a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital. Financial statements for earlier periods were restated for
comparative purposes. The Corporation's accumulated comprehensive income
consists solely of the change in unrealized gains and losses on securities
designated as available for sale in accordance with SFAS No. 115.
12. 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.
13. 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, 1999 and 1998:
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.
31
<PAGE> 32
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. 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, 1999 and 1998 was not material.
32
<PAGE> 33
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. 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>
1999 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,457 $ 3,457 $ 1,778 $ 1,778
Investment securities 127 127 121 121
Mortgage-backed securities 1,829 1,822 2,703 2,733
Loans receivable 36,700 36,612 32,588 34,747
Federal Home Loan Bank stock 262 262 288 288
------- ------- ------- -------
$42,375 $42,280 $37,478 $39,667
======= ======= ======= =======
Financial liabilities
Deposits $37,112 $36,822 $31,300 $31,591
Advances from the Federal Home
Loan Bank 800 801 1,800 1,803
------- ------- ------- -------
$37,912 $37,623 $33,100 $33,394
======= ======= ======= =======
</TABLE>
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
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, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
1999
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 $-- $33 $127
==== === === ====
</TABLE>
33
<PAGE> 34
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<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>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities at September 30, 1999 and
1998, are shown below:
<TABLE>
<CAPTION>
1999
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 $ 747 $ 8 $ 8 $ 747
Government National Mortgage Association
participation certificates 631 11 -- 642
Federal National Mortgage Association
participation certificates 451 -- 18 433
------ -- --- ------
Total mortgage-backed securities $1,829 $19 $26 $1,822
====== === === ======
</TABLE>
<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>
34
<PAGE> 35
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
At September 30, 1999 and 1998, all mortgage-backed securities maintained by
the Bank 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>
1999 1998
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family $21,138 $22,648
Multi-family 642 665
Construction 1,165 1,224
Nonresidential real estate 3,753 5,174
Commercial 10,316 3,473
Consumer and other loans 884 749
------- -------
37,898 33,933
Less:
Undisbursed portion of loans in process 601 745
Deferred loan origination fees 359 399
Allowance for losses on loans 238 201
------- -------
$36,700 $32,588
======= =======
</TABLE>
The Bank's lending efforts have historically focused on one- to four-family
and multi-family residential real estate loans, which comprise approximately
$22.3 million, or 61%, of the total loan portfolio at September 30, 1999,
and approximately $23.8 million, or 73%, of the total loan portfolio at
September 30, 1998. Generally, such loans have been underwritten on the
basis of no more than an 80% loan-to-value ratio, which has historically
provided the Bank with adequate collateral coverage in the event of default.
Nevertheless, the Bank, 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 Bank's primary lending area are
presently stable.
In the ordinary course of business, the Bank 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 $295,000 and $193,000 at September 30, 1999 and 1998,
respectively.
35
<PAGE> 36
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Beginning balance $201 $187 $187
Provision for losses on loans 38 22 --
Loan charge-offs (1) (8) --
---- ---- --
Ending balance $238 $201 $187
==== ==== ====
</TABLE>
As of September 30, 1999, the Bank'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 Bank had no nonperforming and nonaccrual loans at September 30, 1999 and
1998. Nonperforming and nonaccrual loans at September 30, 1997, totaled
$268,000. Interest income that would have been recognized had nonaccrual
loans performed pursuant to contractual terms totaled approximately $20,000
for the year ended September 30, 1997.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Land and improvements $136 $ 85
Building 471 471
Furniture and equipment 374 248
---- ----
981 804
Less accumulated depreciation and
amortization 470 430
---- ----
$511 $374
==== ====
</TABLE>
36
<PAGE> 37
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1999 1998
AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts
1999 - 1.56% $ 5,540 14.9
1998 - 2.27% $ 3,905 12.5
Passbook
1999 - 3.00% 6,330 17.0
1998 - 3.00% 5,951 19.0
Money market investment accounts
1999 - 4.44% 4,032 10.9
1998 - 4.68% 1,976 6.3
------- ----- ------- -----
Total demand, transaction and
passbook deposits 15,902 42.8 11,832 37.8
Certificates of deposit
Original maturities of:
One year or less
1999 - 5.16% 7,166 19.3
1998 - 5.22% 5,429 17.4
12 months to 36 months
1999 - 5.61% 7,446 20.1
1998 - 5.89% 8,085 25.8
Greater than 36 months
1999 - 6.52% 6,598 17.8
1998 - 6.57% 5,954 19.0
------- ----- ------- -----
Total certificates of deposit 21,210 57.2 19,468 62.2
------- ----- ------- -----
Total deposits $37,112 100.0% $31,300 100.0%
======= ===== ======= ====
</TABLE>
At September 30, 1999 and 1998, the Bank had certificate of deposit
accounts with balances greater than $100,000 totaling $1.6 million and
$807,000, respectively.
Interest expense on deposits for the fiscal year ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Passbook $ 185 $ 180 $ 177
NOW accounts 72 76 65
Money market investment accounts 144 41 6
Certificates of deposit 1,140 1,199 1,178
------ ------ ------
$1,541 $1,496 $1,426
====== ====== ======
</TABLE>
37
<PAGE> 38
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Less than one year $12,263 $ 9,518
One year to three years 4,342 5,068
More than three years 4,605 4,882
------- -------
$21,210 $19,468
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1999 by a pledge of certain residential mortgage loans totaling $1.2
million and the Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
INTEREST MATURING IN YEAR
RATE ENDING SEPTEMBER 30, 1999 1998
(Dollars in thousands)
<S> <C> <C> <C>
5.64% - 5.69% 1999 $ -- $1,500
5.51% 2000 500 --
9.25% 2001 300 300
---- ------
$800 $1,800
==== ======
Weighted-average interest rate 6.91% 6.27%
==== ====
</TABLE>
NOTE H - FEDERAL INCOME TAXES
Federal income taxes do not differ materially from the amounts computed at
the statutory corporate tax rate for the fiscal years ended September 30,
1999, 1998 and 1997.
38
<PAGE> 39
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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 1999 1998
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 6 $ 50
Difference between book and tax depreciation -- 3
General loan loss allowance 81 71
Retirement plans 18 16
Unrealized losses on securities designated as
available for sale 11 13
----- -----
Deferred tax assets 116 153
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (53) (55)
Difference between book and tax depreciation (2) -
Percentage of earnings bad debt deduction (43) (53)
Accrual vs. cash basis of accounting (113) (71)
----- -----
Deferred tax liabilities (211) (179)
----- -----
Net deferred tax liability $ (95) $ (26)
===== =====
</TABLE>
The Bank 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, 1999, include approximately $461,000 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, 1999. The Bank 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 Bank
has provided deferred taxes for this amount and will amortize the recapture
of its bad debt reserve over a six year period, which commenced in fiscal
1998.
39
<PAGE> 40
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE I - LOAN COMMITMENTS
The Bank 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
Bank's involvement in such financial instruments.
The Bank'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
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At September 30, 1999, the Bank had unused lines of credit totaling
approximately $1.0 million. Additionally, the Bank had approximately $1.5
million 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, 1999, and will be funded
from normal cash flow from operations.
NOTE J - REGULATORY CAPITAL
The Bank is subject to the regulatory capital requirements of the Federal
Deposit Insurance Corporation (the "FDIC"). 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 Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
During the calendar year, the Bank was notified by its primary regulator
that it was categorized as "well-capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well-capitalized" the
Bank must maintain minimum capital ratios as set forth in the table that
follows.
The FDIC has adopted risk-based capital ratio guidelines to which the Bank
is subject. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet commitments
to four risk-weighting categories, with higher levels of capital being
required for the categories perceived as representing greater risk.
40
<PAGE> 41
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL (continued)
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Banks are required to maintain a
total risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%,
of which 4% must be Tier 1 capital. The FDIC may, however, set higher
capital requirements when particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels.
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for banks that meet certain specified criteria, including that they have
the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier 1
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points.
As of September 30, 1999 and 1998, management believes that the Bank met all
capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
TO BE "WELL-CAPITALIZED"
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- -------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $4,947 17.9% Greater than $2,245 Greater than 8.0% Greater than $2,806 Greater than 10.0%
Tier I capital
(to risk-weighted assets) $4,709 16.8% Greater than $1,122 Greater than 4.0% Greater than $1,683 Greater than 6.0%
Tier I leverage $4,709 10.9% Greater than $1,733 Greater than 4.0% Greater than $2,166 Greater than 5.0%
</TABLE>
41
<PAGE> 42
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL (continued)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
TO BE "WELL-CAPITALIZED"
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- -------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $4,474 19.8% Greater than $1,808 Greater than 8.0% Greater than $2,260 Greater than 10.0%
Tier I capital
(to risk-weighted assets) $4,273 18.9% Greater than $ 904 Greater than 4.0% Greater than $1,356 Greater than 6.0%
Tier I leverage $4,273 11.3% Greater than $1,526 Greater than 4.0% Greater than $1,907 Greater than 5.0%
</TABLE>
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Bank,
such as increased interest rates or a downturn in the economy in the Bank's
market area, could adversely affect future earnings and, consequently, the
ability to meet future minimum regulatory capital requirements.
NOTE K - STOCK OPTION PLAN
The Board of Directors adopted a Stock Option Plan during fiscal 1997 that
provided for the issuance of 52,900 shares of authorized, but unissued
shares of common stock at fair value at the date of grant. 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.
The Corporation accounts for its stock option plan in accordance with 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.
42
<PAGE> 43
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE K - STOCK OPTION PLAN (continued)
The Corporation applies APB 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>
1999 1998 1997
<S> <C> <C> <C>
Net earnings (In thousands) As reported $325 $386 $385
==== ==== ====
Pro-forma $325 $386 $377
==== ==== ====
Earnings per share
Basic As reported $.72 $.84 $.81
==== ==== ====
Pro-forma $.72 $.84 $.79
==== ==== ====
Diluted As reported $.70 $.80 $.81
==== ==== ====
Pro-forma $.70 $.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.
43
<PAGE> 44
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE K - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of
September 30, 1999, 1998 and 1997, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 52,900 $10.00 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 $10.00 52,900 $15.00
====== ====== ====== ====== ====== ======
Options exercisable at year-end 21,160 $10.00 10,580 $10.00 -- $ --
====== ====== ====== ====== ====== ======
Weighted-average fair value of
options granted during the year N/A N/A $ 1.68
=== === ======
</TABLE>
The following information applies to options outstanding at September 30,
1999:
Number outstanding 52,900
Range of exercise prices $10.00
Weighted-average exercise price $10.00
Weighted-average remaining contractual life 7.3 years
44
<PAGE> 45
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of London Financial Corporation as of September 30, 1999 and 1998,
and the results of its operations and its cash flows for the years ended
September 30, 1999, 1998 and 1997.
LONDON FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 91 $ 138
Investment securities designated as available for sale - at market 127 121
Loan receivable from ESOP 296 339
Investment in The Citizens Bank of London 4,709 4,273
Accrued interest receivable 17 16
Prepaid expenses and other assets 25 40
------- -------
Total assets $ 5,265 $ 4,927
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 55 $ 64
Shareholders' equity
Common stock -- --
Additional paid-in capital 2,086 2,010
Retained earnings 4,163 3,946
Shares acquired by Management Recognition Plan (214) (264)
Treasury shares - at cost (803) (803)
Unrealized losses on securities designated as available
for sale, net of related tax effects (22) (26)
------- -------
Total shareholders' equity 5,210 4,863
------- -------
Total liabilities and shareholders' equity $ 5,265 $ 4,927
======= =======
</TABLE>
45
<PAGE> 46
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
(continued)
LONDON FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Years ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenue
Interest income $ 30 $ 48 $ 108
Equity in earnings of subsidiary 360 396 387
Gain on investment securities transactions -- 71 40
----- ----- -----
Total revenue 390 515 535
Expenses
Interest expense on borrowings -- 20 --
General and administrative expenses 85 115 151
----- ----- -----
Total expenses 85 135 151
----- ----- -----
Earnings before income tax credits 305 380 384
Federal income tax credits (20) (6) (1)
----- ----- -----
NET EARNINGS $ 325 $ 386 $ 385
===== ===== =====
</TABLE>
46
<PAGE> 47
LONDON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - CONDENSED FINANCIAL STATEMENTS OF LONDON FINANCIAL CORPORATION
(continued)
LONDON FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Years ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 325 $ 386 $ 385
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (360) -- (387)
Distributions from subsidiary in excess of earnings -- 1,551 --
Gain on investment securities transactions -- (71) (40)
Amortization expense of stock benefit plans 50 107 --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 13 (27) (13)
Accrued interest receivable (1) (3) 18
Other liabilities (9) 9 21
----- ------- -------
Net cash provided by (used in) operating activities 18 1,952 (16)
Cash flows from investing activities:
Purchase of investment securities designated as available
for sale -- (248) --
Proceeds from repayment of loan to ESOP 43 42 42
Proceeds from maturities of investment securities -- 502 1,000
Proceeds from sale of investment securities -- 266 145
----- ------- -------
Net cash provided by investing activities 43 562 1,187
Cash flows from financing activities:
Purchase of shares for Management Recognition Plan -- -- (315)
Purchase of treasury shares -- (521) (282)
Distributions paid on common stock (108) (2,656) (118)
----- ------- -------
Net cash used in financing activities (108) (3,177) (715)
----- ------- -------
Net increase (decrease) in cash and cash equivalents (47) (663) 456
Cash and cash equivalents at beginning of year 138 801 345
----- ------- -------
Cash and cash equivalents at end of year $ 91 $ 138 $ 801
===== ======= =======
</TABLE>
47
<PAGE> 48
LONDON FINANCIAL CORPORATION
AND
THE CITIZENS BANK OF LONDON
DIRECTORS AND OFFICERS
================================================================================
John J. Bodle President
President
The Citizens Bank of London
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
Treasurer of Dispatch Printing Co.
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 Bank of London
Joyce E. Bauerle Vice President and Treasurer
Vice President
The Citizens Bank of London
Rebecca A. Lohr Secretary
Secretary
The Citizens Bank of London
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 2000 Annual Meeting of Shareholders of
London Financial Corporation ("LFC") will be held at the office of The Citizens
Bank of London, 2 East High Street, London, Ohio 43140, on January 27, 2000, at
10:00 a.m., Eastern Time (the "Annual Meeting"), for the following purposes, all
of which are more completely set forth in the accompanying Proxy Statement:
1. To re-elect four directors of LFC for terms expiring in 2002;
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
10, 1999, 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, 1999
<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 2000
Annual Meeting of Shareholders of LFC to be held at the office of The Citizens
Bank of London ("Citizens"), 2 East High Street, London, Ohio 43140, on January
27, 2000, at 10:00 a.m., Eastern Time, and at any adjournments thereof (the
"Annual Meeting"). Without affecting any vote previously taken, the Proxy may be
revoked by a shareholder by execution of a later dated proxy which is received
by LFC before the Proxy is exercised or by giving notice of revocation to LFC in
writing or in open meeting before the Proxy is exercised. Attendance at the
Annual Meeting will not, of itself, revoke a proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the re-election of John I. Andrix, Rodney A. Bell, John J.
Bodle and Shirley C. Hansgen as directors of LFC for terms
expiring in 2002; 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 10,
1999 (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, 1999.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and LFC's Code of Regulations (the "Regulations"), the
four nominees receiving the greatest number of votes will be elected as
directors. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified in the enclosed Proxy. If the enclosed Proxy is signed and
dated by the shareholder, but no vote is specified thereon, the shares held by
such shareholder will be voted FOR the re-election of the four nominees.
Shareholders may not cumulate their votes in the election of directors.
- 1 -
<PAGE> 3
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares of LFC
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of LFC for the current fiscal
year. Generally, shares which are held by a nominee for a beneficial owner and
which are represented in person or by proxy at the Annual Meeting, but not voted
with respect to the ratification of the selection of Grant Thornton
("Non-votes"), will have the same effect as votes against the approval of such
ratification, as will abstentions. If, however, shares are represented at the
Annual Meeting by a shareholder who signed and dated 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, 1999:
<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) 14,401 8.8%
John J. Bodle
76 Flax Drive
London, Ohio 43140 22,730 (2) 6,706 6.0
Edward D. Goodyear
1776 E. Choctaw Drive
London, Ohio 43140 12,466 (3) 12,482 5.2
Kennison A. Sims
1418 Old Xenia Road
London, Ohio 43140 36,096 (3)(4) 6,775 8.9
</TABLE>
- -----------------------------
(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 7,935 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").
- 2 -
<PAGE> 4
(3) Includes 1,587 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 14,572 shares held by the MRP, with respect to which Mr. Sims
has sole voting power as Trustee.
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, 1999:
<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 22,823 (2) -- 4.7%
Rodney A. Bell 1,799 (2) 20,224 4.6
John J. Bodle 22,730 (3) 6,706 6.0
Donovan D. Forrest 3,482, (4) -- 0.7
Edward D. Goodyear 12,466 (2) 12,482 5.2
Shirley C. Hansgen 4,417 (2) 460 1.0
Kennison A. Sims 36,096 (2) (5) 6,775 8.9
All directors and executive officers
as a group (10 persons) 107,669 (6) 49,534 31.6
</TABLE>
- -----------------------------
(1) Each of the persons listed on this table may be contacted at the
address of LFC.
(2) Includes 1,587 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 7,935 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 1,058 shares that may be acquired upon the exercise of an
option awarded pursuant to the Stock Option Plan.
(5) Includes 14,572 shares held by the MRP, with respect to which Mr. Sims
has sole voting power as Trustee.
(6) Includes 18,728 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.
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
- 3 -
<PAGE> 5
proposed only by the directors or by a shareholder entitled to vote for
directors if such shareholder has submitted a written nomination to the
Secretary of LFC by the later of the December 1st immediately preceding the
annual meeting of shareholders or the sixtieth day before the first anniversary
of the most recent annual meeting of shareholders held for the election of
directors. Each such written nomination must state the name, age, business or
residence address of the nominee, the principal occupation or employment of the
nominee, the number of common shares of LFC owned either beneficially or of
record by each such nominee and the length of time such shares have been so
owned.
The Board of Directors proposes the re-election of the following
persons to serve until the Annual Meeting of Shareholders in 2002 and until
their successors are duly elected and qualified or until their earlier
resignation, removal from office or death:
<TABLE>
<CAPTION>
Director of
Name Age (1) Positions Held LFC Since (2)
- ---- ------- -------------- -------------
<S> <C> <C> <C>
John I. Andrix 52 Director 1995
Rodney A. Bell 80 Director 1995
John J. Bodle 52 Director and President 1995
Shirley C. Hansgen 48 Director 1997
</TABLE>
- ------------------------------
(1) As of December 10, 1999.
(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.
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>
Donovan D. Forrest 50 Director 1997 2001
Edward D. Goodyear 52 Director 1995 2001
Kennison A. Sims 47 Director 1996 2001
</TABLE>
- -----------------------------
(1) As of December 10, 1999.
(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.
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.
- 4 -
<PAGE> 6
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.
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 the 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.
MEETINGS OF DIRECTORS
The Board of Directors of LFC met seven times for regularly scheduled
and special meetings during the fiscal year ended September 30, 1999. Each
director of LFC is also a director of Citizens. The Board of Directors of
Citizens met 12 times for regularly scheduled and special meetings during the
fiscal year ended September 30, 1999.
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 met once during the fiscal year ended September 30, 1999.
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 met once during the fiscal year ended September
30, 1999.
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, 1999.
The members of the Executive Committee are Messrs. Andrix, Goodyear and
Sims. The Executive Committee has the authority to approve individual loans in
amounts less than $150,000, sets
- 5 -
<PAGE> 7
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, 1999.
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, 1999.
- 6 -
<PAGE> 8
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 42 Executive Vice President of Citizens
Joyce E. Bauerle 47 Vice President and Treasurer of
Citizens and Treasurer of LFC
Rebecca A. Lohr 42 Secretary of LFC and Citizens
</TABLE>
- -----------------------------
(1) As of December 10, 1999.
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 $100,000 during the fiscal year ended September 30, 1999. The following table
sets forth the compensation paid to John J. Bodle, the President of LFC and
Citizens, for the fiscal years ended September 30, 1999, 1998 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Annual compensation Long term compensation All other
compensation
(1)
- ----------------------------------------------------------------------------------------------------------------------
Awards
--------------------------------------------
Name and
principal Fiscal Restricted Securities underlying
position Year Salary ($) Bonus ($) stock awards ($) options/SARs (#)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John J. Bodle 1999 $75,000 $ -- $ -- -- $ 8,050
President 1998 68,250 -- -- -- 7,300
1997 59,500 11,500 79,350 (2) 13,225 (3) 14,414 (4)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
- 7 -
<PAGE> 9
30, 1997, 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, 1999, the shares
which have been awarded to Mr. Bodle under the MRP had an aggregate
market value of approximately $58,851 based on the $11.125 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.
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, 1999:
<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 5,290/7,935 N/A
</TABLE>
- ---------------------------
- 8 -
<PAGE> 10
(1) On September 30, 1999, the fair market value of the unexercised options
granted pursuant to the Stock Option Plan did not exceed the $15.00
exercise price of the option.
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.
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 $600 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, $300 and
$200 for each committee meeting attended.
EMPLOYMENT AGREEMENT
In April 1999, Citizens entered into an employment agreement with Mr.
Bodle (the "Employment Agreement"). Citizens has not entered into an employment
agreement with any other officer.
- 9 -
<PAGE> 11
The Employment Agreement provides for a term of three years, a salary
of not less than $75,000 and performance review by the Board of Directors not
less often than annually. The Employment Agreement also provides for the
inclusion of Mr. Bodle in any formally established employee benefit, bonus,
pension and profit-sharing plans for which senior management personnel are
eligible.
The Employment Agreement is terminable by Citizens at any time. In the
event of termination by Citizens for "just cause," as defined in the Employment
Agreement, Mr. Bodle will have no right to receive any compensation or other
benefits for any period after such termination. In the event of termination by
Citizens other than for just cause, at the end of the term of the Employment
Agreement or in connection with a "change of control," as defined in the
Employment Agreement, Mr. Bodle will be entitled to a continuation of salary
payments for a period of time equal to the term of the Employment Agreement and
a continuation of benefits substantially equal to those being provided at the
date of termination of employment until the earliest to occur of the end of the
term of the Employment Agreement or the date on which Mr. Bodle becomes employed
full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence of the following within one year of a "change of control": (1) the
termination of employment of Mr. Bodle for any reason other than just cause,
retirement or termination at the end of the term of the Employment Agreement and
(2) a constructive termination resulting from a change in the capacity or
circumstances in which Mr. Bodle is employed or from a material reduction in his
responsibilities, authority, compensation or other benefits provided under the
Employment Agreement without Mr. Bodle's written consent. In the event of any
such occurrence, Mr. Bodle will be entitled to receive an amount equal to three
times his average annual compensation for the three taxable years immediately
preceding the termination of employment, 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.
- 10 -
<PAGE> 12
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, 2000. 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, 2000, 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.
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, 1999
- 11 -
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 709
<INT-BEARING-DEPOSITS> 2,748
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127
<INVESTMENTS-CARRYING> 1,829
<INVESTMENTS-MARKET> 1,822
<LOANS> 36,700
<ALLOWANCE> 238
<TOTAL-ASSETS> 43,323
<DEPOSITS> 37,112
<SHORT-TERM> 800
<LIABILITIES-OTHER> 201
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 5,210
<TOTAL-LIABILITIES-AND-EQUITY> 43,323
<INTEREST-LOAN> 2,937
<INTEREST-INVEST> 140
<INTEREST-OTHER> 100
<INTEREST-TOTAL> 3,177
<INTEREST-DEPOSIT> 1,541
<INTEREST-EXPENSE> 1,600
<INTEREST-INCOME-NET> 1,577
<LOAN-LOSSES> 38
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,134
<INCOME-PRETAX> 490
<INCOME-PRE-EXTRAORDINARY> 490
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325
<EPS-BASIC> .72
<EPS-DILUTED> .70
<YIELD-ACTUAL> 4.01
<LOANS-NON> 0
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 201
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 238
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 238
</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 1999 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 Bank of London, 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.
