<PAGE> 1
ENTERPRISE FEDERAL BANCORP, INC.
1996
ANNUAL REPORT TO STOCKHOLDERS
<PAGE> 2
To Our Stockholders:
While October 14, 1994 was the culmination of the initial public stock
offering by Enterprise, this date marks just the beginning of our
transformation to a publicly held company. During fiscal 1996, the changes we
began implementing to our lending, marketing and retail operations to enhance
earnings and efficiently deploy our capital began to show results.
During fiscal 1996, the Company grew at a record pace. Total assets
increased by $37.3 million, or 18.8%, while net earnings were $1.4 million,
which included a one time charge of $770,000 to re-capitalize the Savings
Association Insurance Fund, without which, 1996 would have been another record
year for net earnings. This growth was accomplished through use of leveraging
and an increase in our deposit base.
Increased marketing efforts and an expansion of loan product types helped
us achieve another record in net loan portfolio growth of $38.2 million from
September 30, 1995 to September 30, 1996. This increase in the loan portfolio
replaced lower yielding investment securities, the impact of which is just
beginning to flow through the Statement of Earnings.
In the spring of 1996, the corporate headquarters and Tylersville branch
were re-located to a new facility. This is intended to increase market share
and, when the tax deferred gain on the sale of the existing Tylersville branch
is taken into account, allow us to keep our overhead to a minimum.
As announced in February 1996, the Board of Directors authorized the
repurchase of another 5% of the number of outstanding shares from time to time
on the open market. Pursuant to such program, Enterprise repurchased a total
of 108,912 shares through September 1996. In October 1996, a third 5%
repurchase program was commenced and continues at the mailing date of this
report. These shares are expected to be retained as treasury stock to be used
for general corporate purposes, including issuance of shares in connection with
the exercise of stock options.
In accordance with our goal of maximizing shareholder return, a $1.00 per
share special dividend was paid on December 26, 1996 to our shareholders of
record on December 16, 1996.
We would like to thank our directors and employees for their dedication to
the Company and the Bank and we look forward to another promising year.
Sincerely,
/s/ OTTO L. KEETON
Otto L. Keeton
President and Chairman of the Board
<PAGE> 3
CORPORATE PROFILE
Enterprise Federal Bancorp, Inc. (the "Company") was incorporated in April
1994 under Ohio law for the purpose of acquiring all of the capital stock
issued by Enterprise Federal Savings and Loan Association in connection with
its conversion from a federally chartered mutual savings and loan association
to a federally chartered stock savings bank (the "Conversion"). The Conversion
was consummated on October 14, 1994 and, as a result, the Company became a
unitary savings and loan holding company for its wholly owned subsidiary,
Enterprise Federal Savings Bank ("Enterprise" or the "Bank"). The Company has
no significant assets other than the shares of the Bank's common stock acquired
in the Conversion, the loan to the Employee Stock Ownership Plan ("ESOP") and a
loan receivable from the Bank, and has no significant liabilities.
The Bank is a federally chartered, SAIF-insured stock savings bank
conducting business from its executive offices located in West Chester, Ohio
and four full-service offices located in Hamilton, Butler and Warren Counties,
Ohio. Enterprise is a community oriented savings bank which has traditionally
offered a wide variety of savings products to its retail customers while
concentrating its lending activities on real estate loans secured by
one-to-four family residential properties located primarily in Hamilton, Butler
and Warren Counties, Ohio. To a lesser extent, the Bank also focuses its
lending activities on non-residential real estate loans, residential
construction loans and multi-family real estate loans. The Bank also invests
in securities which are issued by United States government agencies or
government sponsored enterprises.
At September 30, 1996, the Company had consolidated total assets of $235.2
million, total deposits of $139.4 million and stockholders' equity of $33.1
million. The Company's and the Bank's principal executive offices are located
at 7810 Tylersville Square Drive, West Chester, Ohio 45069, and their telephone
number is (513)755-4600.
2
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
As of or For the Year Ended September 30,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- -------------- --------------- ------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $235,191 $197,938 $167,294 $131,681 $130,579
Loans receivable, net 149,050 110,830 100,288 90,027 87,301
Mortgage-backed securities 65,482 72,022 25,681 26,518 29,248
Cash and cash equivalents 12,938 10,670 36,465 10,510 9,214
Deposit accounts 139,447 127,687 153,709 119,672 119,674
Stockholders' equity(1) 33,056 38,474 12,458 11,176 10,055
SELECTED OPERATIONS DATA:
Net interest income $ 6,268 $ 5,719 $ 4,259 $ 3,966 $ 3,846
Other operating income 994 464 76 79 58
General, administrative and other 2,027
expense 4,973 3,410 2,356 2,091
Net earnings 1,441 1,837 1,282 1,121 1,220
SELECTED OPERATING RATIOS(2):
Average interest rate spread(3) 2.13 % 2.28 % 2.85 % 2.76 % 2.71 %
Net interest margin(3) 2.98 3.38 3.16 3.12 3.09
Ratio of interest-earning assets to
interest-bearing liabilities 119.03 128.46 107.81 107.88 106.71
General, administrative and other
expense as a percent of average
assets 2.31 1.99 1.71 1.59 1.59
Return on average assets .67 1.07 .93 .85 .95
Return on average equity 4.03 4.82 10.85 10.56 12.92
Ratio of average equity to average
assets 16.61 22.27 8.59 8.10 7.39
Full-service offices at end of
period 5 5 5 5 5
ASSET QUALITY RATIOS(2):
Non-performing assets as a
percent of total assets(4) .09 % .23 % .37 % .55 % .69 %
Allowance for loan losses as a
percent of non-performing loans
and troubled debt restructurings 201.97 659.18 60.83 52.19 26.99
CAPITAL RATIOS(5):
Tangible capital ratio 11.68 14.30 7.38 8.39 7.57
Core capital ratio 11.68 14.30 7.38 8.49 8.46
Risk-based capital ratio 22.29 31.00 15.42 16.50 16.91
</TABLE>
- ------------------
(1) Consists of retained earnings as of September 30, 1992 through September
30, 1994.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net margin represents net income as a
percent of average interest-earning assets.
(4) Non-performing assets consist of non-performing loans, troubled debt
restructurings and real estate owned ("REO"). Non-performing loans consist
of non-accrual loans, while REO consists of real estate acquired through
foreclosure and real estate acquired by acceptance of a deed-in-lieu of
foreclosure.
(5) Capital ratios reflect the Bank's capital ratios calculated under
regulations of the Office of Thrift Supervision ("OTS").
3
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest and dividend
income on interest-earning assets, principally loans and mortgage-backed
securities, and interest expense on interest-bearing liabilities, which consist
of deposits and borrowings. The Company's net earnings also is affected by its
provision for loan losses, as well as the level of its other income and its
general, administrative and other expenses, such as employee compensation and
benefits, occupancy and equipment expense, federal deposit insurance premiums
and miscellaneous other expenses, as well as income taxes.
The following discussion provides an overview of the general business,
financial condition, and results of operations of the Company, and should be
read in conjunction with the Company's consolidated financial statements
presented elsewhere herein.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when
the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect.
The lending activities of savings institutions have historically emphasized
long-term, fixed-rate loans secured by single-family residences, and the
primary source of funds of such institutions has been deposits. The deposit
accounts of savings institutions generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This fact, in combination with substantial investments in
long-term, fixed rate loans, has historically caused the income earned by
savings institutions on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company's management has implemented and continues to monitor asset and
liability management policies to better match the maturities and repricing
terms of the Company's interest-earning assets and interest-bearing
liabilities. Such policies have consisted primarily of: (i) emphasizing
investment in adjustable-rate mortgage loans ("ARMs") and adjustable-rate
mortgage-backed securities; (ii) emphasizing
4
<PAGE> 6
the retention of lower-costing savings accounts and other core deposits, and
(iii)utilizing FHLB advances as long-term liabilities.
The Company emphasizes the origination of ARMs and as a consequence of the
Company's efforts, as of September 30, 1996, $61.6 million or 41.3% of the
Company's portfolio of mortgage loans consisted of ARMs. In addition, at
September 30, 1996, $64.9 million or 99.1% of the Company's mortgage-backed
securities provide the Company with an adjustable yield.
The Company prices deposit accounts based upon the availability of prudent
investment opportunities. Pursuant to this pricing policy, the Company has
generally neither engaged in sporadic increases or decreases in interest rates
paid nor offered the highest rates available in its deposit market except upon
specific occasions to control deposit flow or when market conditions have
created opportunities to attract longer-term deposits. In addition, the
Company does not pursue an aggressive growth strategy which would force the
Company to focus exclusively on competitors' rates rather than affordability.
This policy has assisted the Company in controlling its cost of funds.
The implementation of the foregoing asset and liability strategies has
resulted in the Company's interest-earning assets which were estimated to
mature or reprice within one year exceeding its interest-bearing liabilities
with the same characteristics by $8.5 million or 3.6% of the Company's assets
at September 30, 1996. Currently, the Company manages the imbalance between
its interest-earning assets and interest-bearing liabilities within shorter
maturities to ensure that such relationships are within ranges adopted by the
Company's Board of Directors given the Company's business strategies and
objectives and its analysis of market and economic conditions.
Although the action taken by management of the Company has reduced the
potential effects of changes in interest rates on the Company's results of
operations, significant increases in interest rates may adversely affect the
Company's net interest income because the Company's adjustable-rate,
interest-earning assets generally are not as responsive to changes in interest
rates as its interest-bearing liabilities due to terms which generally permit
only annual adjustments to the interest rate and which generally limit the
amount which interest rates thereon can adjust at such time and over the life
of the related asset.
NET PORTFOLIO VALUE
Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Bank's portfolio equity and
the level of net interest income on a quarterly basis. The OTS adopted a final
rule in August 1993 incorporating an interest rate risk component into the
risk-based capital rules. Under the rule, an institution with a greater than
"normal" level of interest rate risk will be subject to a deduction of its
interest rate component from total capital for purposes of calculating the
risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value ("NPV") exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease in interest
rates. NPV is the difference between incoming and outgoing discounted cash
flows from assets, liabilities, and off-balance sheet contracts. A resulting
change in NPV of more than 2% of the estimated market value of an institution's
assets will require the institution to deduct from its capital 50% of that
excess change. The rule provides that the OTS will calculate the interest rate
risk component quarterly
5
<PAGE> 7
for each institution. The OTS has recently indicated that no institution will
be required to deduct capital for interest rate risk until further notice.
However, utilizing this measurement concept, at September 30, 1996, there would
have been a decrease in the Bank's NPV of approximately 22% of the present
value of its assets, assuming a 200 basis point increase in interest rates.
Small, highly capitalized institutions, such as the Bank, which have less than
$300 million of assets and a risk-based capital ratio in excess of 12% are not
subject to the interest rate risk component. However, if the director of the
OTS or his designee has reason to be concerned with an institution's
interest-rate risk, he may specifically require that the component be included
in the determination of the institution's risk-based capital.
The following table presents the Bank's NPV and the present value ("PV") of
assets as of September 30, 1996, as calculated by the OTS, based on
information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Net Portfolio Value
- --------------------------------------------------------------------------------------------
Change in Estimated NPV
Interest Rates As A Percentage Amount of Percent
(basis points) Estimated NPV of PV of Assets Change of Change
- --------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $16,698 7.73% $(14,254) (46)
+300 20,315 9.18% (10,637) (34)
+200 24,021 10.59% (6,931) (22)
+100 27,537 11.87% (3,415) (11)
--- 30,952 13.04% --- ---
-100 33,642 13.90% 2,689 9
-200 34,970 14.25% 4,017 13
-300 35,419 14.28% 4,467 14
-400 36,165 14.41% 5,213 17
</TABLE>
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total consolidated assets increased $37.3 million
or 18.8% to $235.2 million at September 30, 1996 compared to $197.9 million at
September 30, 1995. Such increase was funded primarily through increases in
deposits of $11.8 million and $30.0 million in advances from the Federal Home
Loan Bank ("FHLB") of Cincinnati. Such increase in assets was primarily due to
a $38.2 million increase in loans receivable, net, which were partially offset
by a $6.5 million decrease in mortgage-backed securities. Total liabilities
increased $42.7 million or 26.8% to $202.1 million at September 30, 1996
compared to September 30, 1995.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased $2.3
million to $12.9 million at September 30, 1996 compared to September 30, 1995.
Such increase was related to the need to maintain required liquidity levels
corresponding to increases in total assets.
LOANS RECEIVABLE, NET. Loans receivable, net increased $38.2 million or
34.5% to $149.1 million at September 30, 1996 compared to September 30, 1995,
as loan disbursements totaling $61.4 million were partially offset by
repayments of $23.2 million. The increase in loans receivable was primarily
due to increased originations of all types of loans. Loan disbursements
increased by $30.2 million, or 96.6% during fiscal 1996. Growth in the loan
portfolio was
6
<PAGE> 8
comprised of $15.0 million or 18.4% in one-to-four family residential loans,
$10.0 million or $179.0% in construction loans and $16.0 million in
non-residential real estate loans.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased $6.5
million to $65.5 million at September 30, 1996 compared to September 30, 1995
as a result of the use of repayments and proceeds from the sale of
mortgage-backed securities to fund increased lending activity.
FHLB ADVANCES. Advances from the FHLB of Cincinnati amounted to $60.0
million at September 30, 1996. Such advances were incurred in order to
leverage the Company's capital and provide for future anticipated growth in the
Company's loan portfolio. The advances, a significant portion of which are
long-term in nature, were initially used to fund the purchase of long-term
mortgage-backed securities which adjust monthly to changes in interest rates.
The Company experienced increased loan demand in the latter half of 1995 and in
1996 and intends to continue to fund higher rate loans with repayments and
sales proceeds from its mortgage-backed securities portfolio.
DEPOSITS. Deposits increased $11.8 million or 9.2% to $139.4 million at
September 30, 1996 compared to September 30, 1995. The increase in deposits
was comprised of a $6.0 million or 15.6% increase in transaction accounts and a
$5.8 million or 6.5% increase in certificates of deposit. The increase can be
primarily attributed to management's continuing marketing efforts coupled with
growth achieved at the new main office facility which open in fiscal 1996.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $5.4 million to $33.1
million at September 30, 1996 compared to September 30, 1995, as a result of
net cash distributions to stockholders of $6.0 million or $3.00 per share and
open market common stock repurchases totaling $1.6 million which were partially
offset by net earnings of $1.4 million.
7
<PAGE> 9
RESULTS OF OPERATIONS
The following average balance sheet table sets forth for the
periods indicated, information on Enterprise regarding: (i) the total dollar
amount of interest income on interest-earning assets and the resulting average
yields; (ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iii)net interest income;
(iv)interest rate spread; (v) net interest-earning assets; (vi) the net yield
earned on interest-earning assets; and (vii) the ratio of total
interest-earning assets to total interest-bearing liabilities. Information is
based on average monthly balances during the periods presented.
<TABLE>
<CAPTION>
At
September 30, Year Ended September 30,
-----------------------------------------------------------------------------------------
1996 1996 1995
-----------------------------------------------------------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average
Rate Balance Interest Rate Balance Interest Rate Balance
------------ --------- --------- --------- ----------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 8.14 % $130,399 $10,853 8.32 % $102,065 $ 8,444 8.27 % $ 95,658
Mortgage-backed securities 6.38 67,316 4,164 6.19 50,415 3,026 6.00 26,100
Other interest-earning assets 5.02 12,834 643 5.01 16,540 827 5.00 12,886
------- ------ ------- ------ -------
Total interest-earning assets 7.58 % 210,549 15,660 7.44 169,020 12,297 7.28 134,644
====
Noninterest-earning assets 4,721 2,116 3,001
------- ------- -------
Total assets $215,270 $171,136 $137,645
======= ======= =======
Interest-bearing liabilities:
Deposits 5.04 $136,890 6,838 5.00 $120,460 5,837 4.85 $124,474
Borrowings 5.98 40,000 2,554 6.39 11,111 741 6.67 417
------- ------ ------- ------ -------
Total interest-bearing
liabilities 5.32 % 176,890 9,392 5.31 131,571 6,578 5.00 124,891
==== ------ ----- ------ -----
Noninterest-bearing liabilities 2,615 1,452 937
------- ------- -------
Total liabilities 179,505 133,023 125,828
Stockholders' equity 35,765 38,113 11,817
------- ------- -------
Total liabilities and
stockholders' equity $215,270 $171,136 $137,645
======= ======= =======
Net interest-earning assets $ 33,659 $ 37,449 $ 9,753
======= ======= =======
Net interest income/interest
rate spread 2.26 % $ 6,268 2.13 % $ 5,719 2.28 %
==== ====== ===== ====== =====
Net yield on interest-earning
assets(1) 2.98 % 3.38 %
===== =====
Ratio of interest-earning assets
to interest-bearing liabilities 119.03 % 128.46 %
====== ======
<CAPTION>
Year Ended September 30,
------------------------
1994
------------------------
Average
Yield
Interest Rate
------------ -----------
<S> <C> <C>
Interest-earning assets:
Loans receivable $7,978 8.34 %
Mortgage-backed securities 1,279 4.90
Other interest-earning assets 398 3.09
-----
Total interest-earning assets 9,655 7.17
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Deposits 5,380 4.32
Borrowings 16 3.84
-----
Total interest-bearing
liabilities 5,396 4.32
----- -----
Noninterest-bearing liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest-earning assets
Net interest income/interest
rate spread $4,259 2.85 %
===== ====
Net yield on interest-earning
assets(1) 3.16 %
====
Ratio of interest-earning assets
to interest-bearing liabilities 107.81 %
======
</TABLE>
- ------------------
(1) Net interest income divided by interest-earning assets.
8
<PAGE> 10
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior period rate), (ii) changes in rate
(change in rate multiplied by prior period volume), (iii) changes in
rate/volume (changes in rate multiplied by changes in volume) and (iv) total
change in rate and volume.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------- ----------------------------
Increase Increase
(Decrease) Due To (Decrease) Due To
------------------------- ----------------------------
Total Total
----- -----
Rate/ Increase Rate/ Increase
----- -------- ----- --------
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
---- ------ ------ ---------- ---- ------ ------ ----------
Interest-earnings assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $51 $2,343 $15 $2,409 $ (66) $ 536 $ (4) $ 466
Mortgage-backed securities 96 1,014 28 1,138 287 1,191 269 1,747
Other interest-earning assets 2 (185) (1) (184) 246 113 70 429
--- ----- --- ----- ---- ------ --- -----
Total interest-earning assets 149 3,172 42 3,363 467 1,840 335 2,642
--- ----- --- ----- ---- ------ --- -----
Interest-bearing liabilities:
Deposits 181 797 23 1,001 654 (175) (22) 457
Borrowings (31) 1,927 (83) 1,813 12 411 302 725
--- ----- --- ----- ---- ------ --- -----
Total interest-bearing
liabilities 150 2,724 (60) 2,814 666 236 280 1,182
--- ----- --- ----- ---- ------ --- -----
Increase (decrease) in net
interest income $(1) $448 $102 $549 $(199) $1,604 $ 55 $1,460
=== ==== ==== ==== ====== ====== ==== ======
</TABLE>
9
<PAGE> 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. The Company's net earnings amounted to $1.4 million for the
year ended September 30, 1996 compared to net earnings of $1.8 million for the
year ended September 30, 1995, a decrease of $396,000, or 21.6%. The decrease
in fiscal 1996 earnings was due primarily to a non recurring charge of $770,000
related to the recapitalization of the SAIF fund which was partially offset by
increases in net interest income and other income.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income amounted to $5.7 million for
the year ended September 30, 1995, a $1.5 million or 34.3% increase over fiscal
1994. This increase in net interest income resulted from a $2.6 million or
27.4% increase in total interest income, due primarily to an increase in
interest income on loans and mortgage-backed securities, which were partially
offset by a $2.8 million or 42.8% increase in total interest expense during
fiscal 1996. The Company's interest rate spread decreased from 2.28% for the
year ended September 30, 1995 to 2.13% for the year ended September 30, 1996.
The Company's net yield on interest-earning assets decreased from 3.38% in
fiscal 1995 to 2.98% in fiscal 1996. The decline in net yield during fiscal
1996 is due primarily to the increase of interest-earning assets through the
Company's use of mortgage-matched FHLB advances.
INTEREST INCOME. Interest income on loans increased $2.4 million or
28.5% during the year ended September 30, 1996 compared to the same period in
1995. Such increase was due primarily to a $28.3 million or 27.8% increase in
the average balance of such assets as a result of increased loan production.
Interest income on the Company's mortgage-backed securities increased
$1.1 million or 37.6% during the year ended September 30, 1996 compared to the
same period in 1995. Such increase was primarily due to a $16.9 million or
33.5% increase in the average balance of such assets, as well as an increase in
the average yield to 6.19% for fiscal 1996 compared to 6.00% for fiscal 1995.
The increase in the average balance was due to the use of borrowings to fund
purchases of such assets. The increase in the average yield reflects the
general rise in market interest rates in fiscal 1996.
Interest income on investment securities and other interest-earning
assets decreased by $184,000 or 22.2% due to a decrease in the average balance
of such assets during the year ended September 30, 1996 compared to fiscal
1995.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $2.8 million or 42.8% during the year ended September
30, 1996 compared to the same period in 1995. Interest expense on deposits
increased $1.0 million or 17.1% during fiscal 1996 as a result of a $16.4
million or 13.6% increase in the average balance of deposits as well as an
increase in the average rate paid to 5.00% for fiscal 1996 compared to 4.85%
for fiscal 1995. The increase in deposits was primarily due to increased
funding needs related to increased loan volume, while the increase in the
average yield reflects the general increase in market interest rates. Interest
10
<PAGE> 12
expense on borrowings increased to $2.6 million during the year ended September
30, 1996 compared to $741,000 during the year ended September 30, 1995 as a
result of an increase in the average balance of borrowings outstanding in order
to assist in funding the Company's lending and investment activities.
POVISION FOR LOAN LOSSES. The Company establishes a provision for loan
losses, which is charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, economic conditions in the
Company's market area generally and other factors related to the collectability
of the Company's loan portfolio. For the year ended September 30, 1996 the
Company established a provision for loan losses totaling $90,000. For the year
ended September 30, 1995 the Company did not establish any provision for loan
losses. At September 30, 1996, the Company's allowance for loan losses totaled
$410,000, which represented 202% of non-performing loans and .28% of total
loans.
Although management utilizes its best judgment in providing for losses
on loans, there can be no assurance that the Company will not have to increase
its provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons, which could adversely affect the
Company's results of operations. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the adequacy
of the Company's allowance for loan losses and the carrying value of its other
non-performing assets based on their judgments about information available to
them at the time of their examination.
OTHER INCOME. Total other income increased $530,000 to $994,000 for the
year ended September 30, 1996 compared to $464,000 for the same period in 1995,
as a result of a $554,000 increase in gains on sales of securities during
fiscal 1996.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For the year ended September
30, 1996, general, administrative and other expense increased by $1.6 million
or 45.8% to $5.0 million, compared to $3.4 million for the comparable period in
1995. Such increase was due primarily to increases of $619,000 or 33.3% in
employee compensation and benefits and a $797,000 or 293% increase in federal
deposit insurance premiums. The increase in employee compensation and benefits
was due primarily to increase in staffing, normal salary increases and
approximately $368,000 of expense recognized in connection with employee stock
benefit plans modified during the year. The increase in federal deposit
insurance premiums was primarily due to a one time charge of $770,000 to
re-capitalize the Savings Association Insurance Fund. See "Recent
Legislation."
INCOME TAXES. The Company incurred income tax expense of $758,000 and
$936,000 during the years ended September 30, 1996 and 1995, respectively. The
effective tax rates were 34.5% and 33.8% during fiscal 1996 and 1995,
respectively. The decrease in income tax expense in fiscal 1996 was primarily
due to a $574,000 or 20.7% decline in pre-tax earnings.
11
<PAGE> 13
COMPARISON OF RESULTS OF OPERATIONS FOR
THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL. The Company's net earnings amounted to $1.8 million for the
year ended September 30, 1995 compared to net earnings of $1.3 million for the
year ended September 30, 1994, an increase of $555,000, or 43.3%. The increase
in fiscal 1995 was due primarily to increases in net interest income and other
income which were partially offset by an increase in operating expenses.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income amounted to $5.7 million for
the year ended September 30, 1995, a $1.5 million or 3.43% increase over fiscal
1994. This increase in net interest income resulted from a $2.6 million or
27.4% increase in total interest income, due primarily to an increase in
interest income on mortgage-backed securities, which were partially offset by a
$1.2 million or 21.9% increase in total interest expense during fiscal 1995.
The Company's interest rate spread decreased from 2.85% for the year ended
September 30, 1994 to 2.28% for the year ended September 30, 1995. The
Company's net yield on interest-earning assets increased from 3.16% in fiscal
1994 to 3.38% in fiscal 1995.
INTEREST INCOME. Interest income on loans increased $466,000 or 5.8%
during the year ended September 30, 1995 compared to the same period in 1994.
Such increase was due primarily to a $6.4 million or 6.7% increase in the
average balance of such assets as a result of increased loan demand.
Interest income on the Company's mortgage-backed securities increased
$1.7 million or 136.6% during the year ended September 30, 1995 compared to the
same period in 1994. Such increase was primarily due to a $24.3 million or
93.2% increase in the average balance of such assets, as well as an increase in
the average yield to 6.00% for fiscal 1995 compared to 4.90% for fiscal 1994.
The increase in the average balance was due to the investment of a portion of
the net Conversion proceeds in such assets as well as the use of borrowings to
fund purchases of such assets. The increase in the average yield reflects the
general rise in market interest rates in fiscal 1995.
Interest income on other interest-earning assets decreased by $429,000
or 107.8% due to an increase in both the yield earned and the average balance
of such assets during the year ended September 30, 1995 compared to fiscal
1994.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $1.2 million or 21.9% during the year ended September
30, 1995 compared to the same period in 1994. Interest expense on deposits
increased $457,000 million or 8.5% during fiscal 1995 as a result of an
increase in the average rate paid to 4.85% for fiscal 1995 compared to 4.32%
for fiscal 1994, reflecting the general increase in market interest rates.
Interest expense on borrowings increased to $741,000 during the year ended
September 30, 1995 compared to $16,000 during the
12
<PAGE> 14
year ended September 30, 1994 as a result of an increase in the average balance
of borrowings in order to assist in funding the Company's lending and
investment activities.
PROVISION FOR LOAN LOSSES. The Company establishes a provision for loan
losses, which is charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. For the year ended September 30, 1995 the
Company did not establish any provision for loan losses. For the year ended
September 30, 1994 such provisions amounted to $15,000. At September 30, 1995,
the Company's allowance for loan losses totaled $323,000, which represented
659.18% of non-performing loans and .28% of total loans.
Although management utilizes its best judgment in providing for losses,
there can be no assurance that the Company will not have to increase its
provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons, which could adversely affect the
Company's results of operations. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's provision for loan losses and the carrying value of its other
non-performing assets based on their judgments about information available to
them at the time of their examination.
OTHER INCOME. Total other income increased $388,000 to $464,000 for the
year ended September 30, 1995 compared to $76,000 for the same period in 1994,
as a result of $331,000 gain on sale of securities during fiscal 1995 and a
$39,000 gain on sale of real estate acquired through foreclosure. There were
no such sales in fiscal 1994.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For the year ended September
30, 1995, general, administrative and other expense increased by $1.1 million
or 44.7% to $3.4 million, compared to $2.3 million for the comparable period in
1994. Such increase was due primarily to increases of $606,000 or 48.3% in
employee compensation and benefits and $230,000 or 137.7% in state franchise
taxes and $207,000 or 71.4% in other operating expenses. The increase in
employee compensation and benefits was due primarily to normal salary increases
and approximately $430,000 of expense recognized in connection with employee
stock benefit plans adopted during the year. The increase in franchise taxes
was the result of increased equity following the Conversion. The increase in
other operating expense resulted primarily from increased professional and
other costs related to reporting requirements of public companies, as well as,
increases in advertising and office supplies expenses.
INCOME TAXES. The Company incurred income tax expense of $936,000 and
$682,000 during the years ended September 30, 1995 and 1994, respectively. The
effective tax rates were 33.8% and 34.7% during fiscal 1995 and 1994,
respectively. The increase in income tax expense in fiscal 1995 was primarily
due to an $809,000 or 41.2% increase in pre-tax earnings.
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans and mortgage-backed securities
and funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by the movement of interest
rates in general, economic conditions and competition. The Bank manages the
pricing of its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Bank invests excess funds in FHLB overnight
deposits and other short-term interest-earning assets which provide liquidity
to meet lending requirements. The Bank has been able to generate cash through
the retail deposit market, its traditional funding source, to partially offset
the cash utilized in investing activities. As an additional source of funds,
the Bank may borrow from the FHLB of Cincinnati and has access to the Federal
Reserve Bank discount window. At September 30, 1996, the Company had $60.0
million of FHLB advances outstanding.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various mortgage-backed securities and lending
products. During the year ended September 30, 1996, the Bank used its sources
of funds primarily to meet its ongoing commitments to pay maturing savings
certificates and savings withdrawals, fund loan commitments and maintain its
portfolio of mortgage-backed securities. At September 30, 1996, the total
approved loan commitments outstanding amounted to $3.8 million. At the same
date, the Bank had approximately $6.6 million of commitments under unused lines
and letters of credit and the unadvanced portion of construction loans
approximated $9.9 million. Management of the Bank believes that the Bank has
adequate resources, including principal prepayments and repayments of loans and
mortgage-backed securities, to fund all of its commitments to the extent
required. In addition, although the Bank has extended commitments to fund
loans or lines and letters of credit, historically, the Bank has not been
required to fund all of its outstanding commitments. Certificates of deposit
scheduled to mature in one year or less at September 30, 1996 totaled $52.8
million. Management believes that a significant portion of maturing deposits
will remain with the Bank.
The Bank is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets (as defined) in amounts equal to 5%
and 1%, respectively, of net withdrawable deposits and borrowings payable in
one year or less to assure its ability to meet demand for withdrawals and
repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Bank generally maintains a liquidity ratio of between 5%
and 10% of its net withdrawable deposits and borrowings payable in one year or
less. The Bank's average monthly liquidity ratio and short-term liquid assets
ratio were each 8.6% for September 1996.
14
<PAGE> 16
As set forth below, as of September 30, 1996, the Bank's regulatory
capital substantially exceeded applicable limits.
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
GAAP equity $27,735 $27,735 27,735
Unrealized gain on securities (235) (235) (235)
Goodwill (50) (50) (50)
General valuation allowances -- -- 410
------- ------- -------
Total regulatory capital 27,450 27,450 27,860
Minimum capital requirements 3,526 7,052 9,997
------- ------- -------
Excess capital $23,924 $20,398 $17,863
======= ======= =======
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Bank's assets and liabilities are
critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1991, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value of Financial Instruments," which became effective
for fiscal years ending after December 15, 1992, for institutions with assets
of more than $150 million. For institutions with less than $150 million in
assets, SFAS No. 107 became effective for fiscal years ending after December
15, 1995. SFAS No. 107 requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not recognized in the
statement of financial condition, for which it is practical to estimate fair
value. SFAS No. 107 only requires disclosure of fair values and has no impact
on the Company's consolidated net earnings or financial condition.
15
<PAGE> 17
In May 1993, FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114, which is effective for fiscal years
beginning after December 15, 1994, requires that impaired loans be measured
based on 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. The Bank's loans which might be
affected by SFAS No. 114 are generally collateral dependent, and the Bank's
current procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value. The Company adopted SFAS No. 114 on
October 1, 1995, as required, without material effect on consolidated financial
condition or results of operations.
In October 1994, the FASB issued SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments."
SFAS No. 119 requires financial statement disclosure of certain derivative
financial instruments, defined as futures, forwards, swaps, option contracts,
or other financial instruments with similar characteristics. In the opinion of
management, SFAS No. 119 will have no material effect on the Company's
consolidated financial condition or results of operations, as the Company does
not invest in derivative financial instruments, as defined. As a result, the
applicability of SFAS No. 119 relates solely to disclosure requirements
pertaining to fixed-rate and adjustable-rate loan commitments.
In June 1994, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that the Company recognize as separate
assets, rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the cost of
the loans to the mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be
accounted for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is measured based on fair value.
SFAS No. 122 would be applied prospectively to fiscal years beginning
after December 15, 1995, (October 1, 1996, as to the Company) to transactions
in which an entity acquires mortgage servicing rights and to impairment
evaluations of all capitalized mortgage servicing rights and capitalized excess
servicing receivables whenever acquired. Retroactive application is
prohibited. Management adopted SFAS No. 122 effective October 1, 1996 without
material effect on the Company's consolidated financial position or results of
operations.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities
to adopt a new method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue
to measure compensation cost for those plans using the intrinsic value based
method of
16
<PAGE> 18
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting
are required to disclose in a footnote to the financial statements pro forma
net earnings and, if presented, earnings per share, as if SFAS No. 123 has been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards
granted in their first fiscal year beginning after December 15, 1994.
Management has determined that the Company will continue to account for
stock-based compensation pursuant to Accounting Principles Board Opinion No.
25, and therefore SFAS No. 123 will have no effect on its consolidated
financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces
an approach to accounting for transfers of financial assets that provides a
means of dealing with more complex transactions in which the seller disposes of
only a partial interest in the assets, retains rights or obligations, makes use
of special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred
to as the financial components approach, provides that the carrying amount of
the financial assets transferred be allocated to components of the transaction
based on their relative fair values. SFAS No. 125 provides criteria for
determining whether control of assets has been relinquished and whether a sale
has occurred. If the transfer does not qualify as a sale, it is accounted for
as a secured borrowing. Transactions subject to the provisions of SFAS No. 125
include among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring
arrangements and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and
over the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe that adoption of SFAS No. 125 will have
a material adverse effect on the Company's consolidated financial position or
results of operations.
RECENT LEGISLATION
17
<PAGE> 19
The deposits of the Bank are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund
("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits. The BIF had achieved a fully funded status in
contrast to the SAIF and, therefore, the Federal Deposit Insurance Corporation
("FDIC") substantially reduced the average deposit insurance premium paid by
commercial banks to a level approximately 75% below the average premium paid by
savings institutions.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity. On September 30, 1996, The Omnibus
Appropriations Act was signed into law. The legislation authorized a one-time
charge on SAIF insured deposits at a rate of $.657 per $100.00 of March 31,
1995 deposits. As a result, the Bank's assessment amounted to $770,000
($508,000 net of tax). Additional provisions of the Act include new BIF and
SAIF premiums and the merger of BIF and SAIF. The new BIF and SAIF premiums
will include a premium for repayment of the Financing Corporation ("FICO")
bonds plus any regular insurance assessment, currently nothing for the lowest
risk category institutions. Until full pro-rata FICO sharing is in effect, the
FICO premiums for BIF and SAIF will be 1.3 and 6.4 basis points, respectively,
beginning January 1, 1997. Full pro-rata FICO sharing is to begin no later
than January 1, 2000. BIF and SAIF are to be merged on January 1, 1999,
provided the bank and savings association charters are merged by that date.
While the one-time special assessment had a significant impact on the current
year earnings, the resulting lower annual premiums will benefit future
earnings.
18
<PAGE> 20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Enterprise Federal Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Enterprise Federal Bancorp, Inc. as of September 30, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years ended September 30, 1996, 1995 and 1994.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Enterprise
Federal Bancorp, Inc. as of September 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years ended
September 30, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
As more fully explained in Note A-2, the Corporation changed its method of
accounting for certain securities during the year ended September 30, 1995, in
accordance with SFAS No. 115.
Cincinnati, Ohio
December 18, 1996
<PAGE> 21
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 736 $ 588
Federal funds sold 7,225 9,000
Interest-bearing deposits in other financial institutions 4,977 1,082
------- -------
Cash and cash equivalents 12,938 10,670
Mortgage-backed securities available for sale - at market 65,482 72,022
Loans receivable - net 149,050 110,830
Office premises and equipment - at depreciated cost 3,603 2,054
Federal Home Loan Bank stock - at cost 3,000 1,545
Accrued interest receivable on loans 360 83
Accrued interest receivable on mortgage-backed securities 371 417
Accrued interest receivable on interest-bearing deposits 44 2
Goodwill and other intangible assets 50 80
Prepaid expenses and other assets 256 220
Prepaid federal income taxes - 15
Deferred federal income tax asset 37 -
------- -------
Total assets $235,191 $197,938
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $139,447 $127,687
Advances from the Federal Home Loan Bank 60,000 30,000
Escrow deposits 208 190
Accrued interest payable 488 376
Other liabilities 1,703 825
Accrued federal income taxes 289 -
Deferred federal income taxes - 386
------- -------
Total liabilities 202,135 159,464
Commitments - -
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.01 par value, 4,000,000 shares authorized,
2,268,596 issued at September 30, 1996 and 1995 23 23
Additional paid-in capital 22,713 28,633
Less 199,268 and 90,356 shares of treasury stock - at cost (3,058) (1,413)
Less shares acquired by employee stock benefit plans (2,593) (3,452)
Retained earnings - restricted 15,736 14,295
Unrealized gains on securities designated as available for sale, net
of related tax effects 235 388
------- -------
Total stockholders' equity 33,056 38,474
------- -------
Total liabilities and stockholders' equity $235,191 $197,938
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 22
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED SEPTEMBER 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income
Loans $10,853 $8,444 $7,978
Mortgage-backed securities 4,164 3,026 1,279
Investment securities - 114 40
Interest-bearing deposits and other 643 713 358
------ ------ -----
Total interest income 15,660 12,297 9,655
Interest expense
Deposits 6,838 5,837 5,380
Borrowings 2,554 741 16
------ ------ -----
Total interest expense 9,392 6,578 5,396
------ ------ -----
Net interest income 6,268 5,719 4,259
Provision for losses on loans 90 - 15
------ ------ -----
Net interest income after provision for losses on loans 6,178 5,719 4,244
Other income
Gain on sale of investment and mortgage-backed securities 885 331 -
Gain on sale of real estate acquired through foreclosure - 39 -
Other operating 109 94 76
------ ------ -----
Total other income 994 464 76
General, administrative and other expense
Employee compensation and benefits 2,479 1,860 1,254
Occupancy and equipment 307 223 211
Federal deposit insurance premiums 1,069 272 273
Franchise taxes 461 397 167
Data processing 137 131 131
Amortization of goodwill and other intangible assets 30 30 30
Other operating 490 497 290
------ ------ -----
Total general, administrative and other expense 4,973 3,410 2,356
------ ------ -----
Earnings before income taxes 2,199 2,773 1,964
Federal income taxes
Current 1,102 877 625
Deferred (344) 59 57
------ ------ -----
Total federal income taxes 758 936 682
------ ------ -----
NET EARNINGS $ 1,441 $1,837 $1,282
====== ====== =====
EARNINGS PER SHARE $.66 $.90 N/A
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 23
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
EMPLOYEE ON SECURITIES
ADDITIONAL STOCK DESIGNATED AS
COMMON PAID-IN TREASURY BENEFIT AVAILABLE RETAINED
STOCK CAPITAL STOCK PLANS FOR SALE EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1993 $- $ - $ - $ - $ - $11,176 $11,176
Net earnings for the year ended
September 30, 1994 - - - - - 1,282 1,282
----- --------- ------- ------- ------- ------ ------
Balance at September 30, 1994 - - - - - 12,458 12,458
Designation of securities as available for
sale upon adoption of SFAS No. 115 - - - - (9) - (9)
Net proceeds from issuance of common stock 23 28,633 - (2,359) - - 26,297
Purchase of treasury shares - - (1,413) - - - (1,413)
Stock acquired for employee stock benefit plans - - - (1,329) - - (1,329)
Transfer of securities to an available for sale
classification - - - - (788) - (788)
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - - 1,185 - 1,185
Principal repayment on loan to ESOP - - - 236 - - 236
Net earnings for the year ended September 30, 1995 - - - - - 1,837 1,837
----- --------- ------- ------- ------- ------ ------
Balance at September 30, 1995 23 28,633 (1,413) (3,452) 388 14,295 38,474
Capital distribution of $3.00 per share - (5,986) - - - - (5,986)
Purchase of treasury shares - - (1,645) - - - (1,645)
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - - (153) - (153)
Principal repayment on loan to ESOP/amortization
of expense related to employee stock benefit plans - 66 - 859 - - 925
Net earnings for the year ended September 30, 1996 - - - - - 1,441 1,441
----- --------- ------- ------- ------- ------ ------
Balance at September 30, 1996 $ 23 $ 22,713 $ (3,058) $ (2,593) $ 235 $15,736 $33,056
===== ========= ======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 24
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,441 $ 1,837 $ 1,282
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net (34) 78 73
Amortization of deferred loan origination fees (170) (142) (152)
Amortization of expense related to employee stock
benefit plans 925 236 -
Depreciation and amortization 121 112 92
Provision for losses on loans 90 - 15
Gain on sale of securities designated as available for sale (885) (331) -
Gain on sale of real estate acquired through foreclosure - (39) -
Federal Home Loan Bank stock dividends (148) (78) (51)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (272) (176) (26)
Prepaid expenses and other assets (36) 219 (220)
Accrued interest payable 112 267 15
Other liabilities 878 131 224
Federal income taxes
Current 304 (6) 21
Deferred (344) 59 57
------- -------- --------
Net cash provided by operating activities 1,982 2,167 1,330
Cash flows provided by (used in) investing activities:
Purchase of investment securities - (7,427) -
Proceeds from sale of investment securities designated
as available for sale - 8,518 -
Purchase of mortgage-backed securities (51,493) (68,464) (4,329)
Proceeds from sale of mortgage-backed securities designated
as available for sale 54,552 18,776 -
Principal repayments on mortgage-backed securities 4,178 4,108 4,996
Loans purchased - - (1,110)
Loan principal repayments 23,208 20,802 25,808
Loan disbursements (61,378) (31,213) (34,807)
Purchase of office premises and equipment (1,640) (253) (92)
Proceeds from sale of real estate acquired
through foreclosure 19 122 124
Purchase of Federal Home Loan Bank stock (1,307) (457) -
------- -------- --------
Net cash used in investing activities (33,861) (55,488) (9,410)
------- -------- --------
Net cash used in operating and investing activities
(subtotal carried forward) (31,879) (53,321) (8,080)
------- -------- --------
</TABLE>
<PAGE> 25
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $(31,879) $(53,321) $ (8,080)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 11,760 (26,022) 34,037
Proceeds from Federal Home Loan Bank advances 40,000 30,000 -
Repayment of Federal Home Loan Bank advances (10,000) - -
Escrow deposits 18 (7) (2)
Net proceeds of issuance of common stock - 26,297 -
Purchase of treasury shares (1,645) (1,413) -
Purchase of shares for employee stock benefit plans - (1,329) -
Return of capital distribution (5,986) - -
------- -------- -------
Net cash provided by financing activities 34,147 27,526 34,035
------- -------- -------
Net increase (decrease) in cash and cash equivalents 2,268 (25,795) 25,955
Cash and cash equivalents at beginning of year 10,670 36,465 10,510
------- -------- -------
Cash and cash equivalents at end of year $ 12,938 $ 10,670 $ 36,465
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 361 $ 883 $ 604
======= ======= =======
Interest on deposits and borrowings $ 9,280 $ 6,311 $ 5,381
======= ======= =======
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired
through foreclosure $ 21 $ - $ 83
======= ======= =======
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (153) $ 388 $ -
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 26
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During fiscal 1994, the Board of Directors of Enterprise Federal Savings
Bank (the Savings Bank) adopted an overall plan of conversion and
reorganization (the Plan) whereby the Savings Bank would convert to the
stock form of ownership (the Conversion), followed by the issuance of all of
the Savings Bank's outstanding stock to a newly formed holding company,
Enterprise Federal Bancorp, Inc. (the Corporation), and the issuance of
common shares of the Corporation to subscribing members of the Savings Bank.
The conversion to the stock form of ownership was completed on October 14,
1994, culminating in the Corporation's issuance of 2,268,596 common shares.
Condensed financial statements of the Corporation as of and for the period
ended September 30, 1996 and 1995 are presented in Note L. Future
references are made to either the Corporation or the Savings Bank as
applicable.
The Corporation conducts a general banking business in southwestern 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 Corporation's profitability is significantly
dependent on its 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 Corporation
can be significantly influenced by a number of environmental factors, such
as governmental monetary policy, that are outside of management's control.
The 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 consolidated financial statements and
revenues and expenses during the reporting period. Actual results could
differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which, with the exception of the policy described in Note A-2, have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and the Savings Bank. All significant intercompany balances and
transactions have been eliminated.
<PAGE> 27
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
Prior to October 1, 1994, investment securities and mortgage-backed
securities were carried at cost, adjusted for amortization of premiums and
accretion of discounts. The investments and mortgage-backed securities were
carried at cost, as it was management's intent and the Savings Bank had the
ability to hold the securities until maturity. Investment securities and
mortgage-backed securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held for sale at the point of purchase and carried at the lower of cost
or market.
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
that investments in debt and equity securities be categorized as
held-to-maturity, trading, or available for sale. Securities classified as
held-to-maturity are to be carried at cost only if the Savings Bank 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 stockholders' equity, respectively. The Savings Bank adopted SFAS No.
115 for the fiscal year beginning October 1, 1994. The initial effect of
adoption was a decrease to retained earnings of approximately $9,000,
representing the unrealized market value decline on securities designated as
available for sale, net of applicable tax effects. During fiscal 1995, the
Corporation transferred all securities to an available for sale
classification and recorded a $788,000 net unrealized loss to stockholders'
equity. At September 30, 1996 and 1995, the Corporation's stockholders'
equity reflected net unrealized gains totaling $235,000 and $388,000,
respectively.
Realized gains or losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans are stated at the principal amount outstanding, adjusted for deferred
loan origination fees, the allowance for loan losses and premiums and
discounts on purchased loans. Premiums and discounts on loans purchased are
amortized and accreted to operations using the interest method over the life
of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible 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.
<PAGE> 28
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loan Origination Fees
The Savings 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 interest 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 Savings Bank's
experience with similar commitments, are deferred and amortized over the
life of the loan using the level-yield method.
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, 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 primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a loan loss provision equal to the
difference between the fair value of the property securing the loan and the
loan's carrying value. Major loans (including development projects) and
major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, which was amended by SFAS No. 118 as
to certain income recognition and financial statement disclosure provisions,
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loan's observable market price or fair value
of the collateral. The Corporation adopted SFAS No. 114 effective October
1, 1995, without material effect on consolidated financial condition or
results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings 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
Savings Bank's investment in impaired nonresidential and multi-family
residential real estate loans, such loans are generally collateral dependent
and, as a result, are carried as a practical expedient at the lower of cost
or fair value.
<PAGE> 29
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans (continued)
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At September 30, 1996, the Corporation had no loans that would be defined as
impaired under SFAS No. 114.
6. 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 and
accelerated methods over the useful lives of the assets, estimated to be
forty to fifty years for buildings, ten to forty years for building
improvements, and five to ten years for furniture and equipment. An
accelerated method is used for tax reporting purposes.
7. 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
amount 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.
8. Goodwill and Other Intangible Assets
Goodwill and specifically identifiable intangible assets related to branch
acquisitions are amortized over a ten year estimated useful life using the
straight line method.
Goodwill represents the unidentified intangible assets resulting from the
Savings Bank's purchase of branch offices from other financial institutions.
Management periodically evaluates the carrying value of these intangible
assets in relation to the continuing earnings capacity of such offices.
<PAGE> 30
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Income Taxes
The Corporation accounts for federal income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". SFAS No. 109 established financial
accounting and reporting standards for the effects of income taxes that
result from the Corporation's activities within the current and previous
years. Pursuant to the provisions of SFAS No. 109, a deferred tax liability
or deferred tax asset is computed by applying the current statutory tax
rates to net taxable or deductible differences between the tax basis of an
asset or liability and its reported amount in the consolidated financial
statements that will result in 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.
Deferral of income taxes results primarily from different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, certain components of retirement expense, the SAIF
recapitalization assessment, the general loan loss allowance and the
percentage of earnings bad debt deduction. Temporary differences are also
recognized for depreciation utilizing accelerated methods for federal income
tax purposes.
10. Retirement and Incentive Plans
The Corporation has several retirement and incentive plans covering the
directors and substantially all employees. Such plans are more fully
described as follows.
In conjunction with the Conversion, the Corporation implemented an Employee
Stock Ownership Plan (ESOP). The ESOP provides retirement benefits for 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 changed the measure of compensation expense recorded by
employers from the cost of allocated ESOP shares to the fair value of ESOP
shares allocated to participants during a fiscal year. The Corporation
recognized expense related to the ESOP totaling $652,000 and $252,000 for
the fiscal years ended September 30, 1996 and 1995, respectively.
<PAGE> 31
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Retirement and Incentive Plans (continued)
Additionally, the Corporation adopted a Management Recognition Plan (MRP).
The MRP purchased 90,744 shares of the Corporation's common stock during
fiscal 1995 at an average price per share of $14.64. All of the shares
available under the plan were granted to executive officers of the Savings
Bank. Common stock granted under the MRP vests ratably over a five-year
period, commencing in November 1994. A provision of $234,000 and $199,000
was charged to expense for the MRP for the fiscal years ended September 30,
1996 and 1995, respectively.
The Savings Bank is a participant in a multi-employer defined benefit
pension plan that covers substantially all employees. The Savings Bank
funds it pension plan through participation in the Financial Institutions
Retirement Fund (the Fund). The provision for pension expense totaled
$99,000, $105,000 and $75,000 for the fiscal years ended September 30, 1996,
1995 and 1994, respectively. Pension expense is computed by the Fund's
actuaries utilizing the frozen initial liability method and assuming a 7.5%
return on Fund assets. The Savings Bank is not required to disclose
separate actuarial information due to the Fund's classification as a
multi-employer pension plan.
11. Stock Option Plan
The Corporation has a Stock Option Plan (the "Plan") that provides for the
issuance of 226,860 shares of authorized, but unissued shares of common
stock. The Board of Directors granted options to purchase all shares of
stock at an exercise price equal to the adjusted fair value of the shares on
the date of the grant. The Plan provides for one-fifth of the shares
granted to be exercisable on each of the first five anniversaries of the
date of the Plan, commencing in November 1994. As of September 30, 1996,
none of the stock options granted had been exercised.
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the 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.
<PAGE> 32
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September
30, 1996:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statement of financial condition for cash and
cash equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential and
nonresidential real estate. These loan categories were
further delineated into fixed-rate and adjustable-rate loans.
The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current
interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit
accounts and consumer and other loans, fair values were deemed
to equal the historic carrying values. The historical
carrying amount of accrued interest on loans is deemed to
approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented
in the consolidated statement of financial condition is
deemed to approximate fair value.
Deposits: The fair value of NOW accounts, passbook accounts,
money market and escrow 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 Federal Home Loan Bank: The fair value of these
advances is estimated using the rates currently offered for
similar advances of similar remaining maturities.
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. At September 30, 1996, the
difference between the fair value and notional amount of loan
commitments was not material.
<PAGE> 33
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30, 1996, are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
(In thousands)
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 12,938 $ 12,938
Mortgage-backed securities 65,482 65,482
Loans receivable 149,050 148,178
Stock in Federal Home Loan Bank 3,000 3,000
------- -------
$230,470 $229,598
======= =======
Financial liabilities
Deposits $139,447 $140,209
Advances from Federal Home Loan Bank 60,000 59,792
Escrow deposits 208 208
------- -------
$199,655 $200,209
======= =======
</TABLE>
13. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold, and interest-bearing deposits due
from other financial institutions with original maturities of less than
ninety days.
14. Earnings Per Share and Dividends Per Share
Primary earnings per share for the years ended September 30, 1996 and 1995
is based upon the weighted-average shares outstanding during the period,
less 113,714 and 181,488 shares, respectively, in the ESOP that are
unallocated and not committed to be released. Weighted-average common
shares deemed outstanding totaled 2,167,359 and 2,046,991 for the years
ended September 30, 1996 and 1995, respectively. There was no material
dilutive effect related to the Corporation's stock option plan.
The provisions of Accounting Principles Board Opinion No. 15 "Earnings Per
Share" are not applicable to the fiscal year ended September 30, 1994, as
the Corporation completed its conversion from mutual to stock form in
October 1994.
<PAGE> 34
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Earnings Per Share and Dividends Per Share (continued)
During fiscal 1996, the Corporation declared a dividend of $3.00 per common
share, which was paid in October 1995 from funds retained by the Corporation
in the conversion and was deemed by management to constitute a return of
excess capital. Accordingly, the Corporation charged the return of capital
dividend to additional paid-in-capital. Management has obtained a Private
Letter Ruling from the Internal Revenue Service which states that the
Corporation's dividend payments in excess of accumulated earnings and
profits are considered a tax-free return of capital for federal income tax
purposes. As a result, management believes that approximately $2.95 of the
current fiscal year dividend constitutes a tax-free return of capital.
On December 6, 1996, the Board of Directors declared a dividend of $1.00 per
share payable December 26, 1996, to stockholders of record on December 16,
1996.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
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 mortgage-backed securities at September 30, 1996
and 1995, are summarized as follows:
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
participation certificates $ 3,559 $- $161 $ 3,398
Federal National Mortgage Association
participation certificates 23,497 82 215 23,364
Small Business Administration participation
certificates 1,082 36 - 1,118
Collateralized mortgage obligations 36,988 655 41 37,602
------ ---- --- -------
$65,126 $ 773 $417 $ 65,482
====== ==== === =======
</TABLE>
<PAGE> 35
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
participation certificates $ 4,084 $- $- $ 4,084
Federal National Mortgage Association
participation certificates 30,299 211 - 30,510
Small Business Administration participation
certificates 1,120 10 - 1,130
Collateralized mortgage obligations 35,931 522 155 36,298
------ --- --- ------
$71,434 $743 $155 $72,022
====== === === ======
</TABLE>
The amortized cost of mortgage-backed securities at September 30, 1996, by
contractual term to maturity, is shown below. Expected maturities will
differ from contractual maturities because borrowers may generally prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST
(In thousands)
<S> <C>
Due within ten years $ 542
Due after ten years 64,584
------
$65,126
======
</TABLE>
Mortgage-backed securities with an approximate carrying value of $4.2
million were pledged to secure public deposits and pension plan deposits at
September 30, 1996.
<PAGE> 36
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio is as follows at September 30:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $ 96,605 $ 81,603
Multi-family 6,525 5,270
Construction 15,567 5,579
Nonresidential real estate and land 35,162 19,125
Consumer and other 6,403 3,654
------- -------
160,262 115,231
Less:
Undisbursed portion of loans in process 9,928 3,403
Deferred loan origination fees 874 675
Allowance for loan losses 410 323
------- -------
$149,050 $110,830
======= =======
</TABLE>
The Savings Bank's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans, which comprise
approximately $107.5 million, or 72%, of the total loan portfolio at
September 30, 1996, and $88.1 million, or 79%, of the total loan portfolio
at September 30, 1995. Generally, such loans have been underwritten on the
basis of no more than an 80% loan-to-value ratio, which has historically
provided the Savings Bank with adequate collateral coverage in the event of
default. Nevertheless, the Savings Bank, as with any lending institution,
is subject to the risk that real estate values could deteriorate in its
primary lending area of southwestern Ohio, thereby impairing collateral
values. However, management is of the belief that residential real estate
values in the Savings Bank's primary lending area are presently stable.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses at September 30 is summarized
as follows :
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period $323 $323 $310
Provision for losses on loans 90 - 15
Charge-offs of loans (3) - (2)
--- --- ---
Balance at end of period $410 $323 $323
=== === ===
</TABLE>
<PAGE> 37
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
As of September 30, 1996, the Savings Bank's allowance for loan losses was
solely general in nature, and is includible as a component of regulatory
risk-based capital.
Nonperforming and renegotiated loans for which interest has been reduced
totaled approximately $203,000, $454,000 and $531,000 at September 30, 1996,
1995 and 1994, respectively. Interest income which would have been
recognized if such loans had been performing pursuant to contractual terms
totaled approximately $12,000, $6,000 and $4,000 for the years ended
September 30, 1996, 1995 and 1994, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Land and improvements $ 839 $ 839
Office buildings and improvements 3,089 1,492
Furniture, fixtures and equipment 932 889
----- -----
4,860 3,220
Less accumulated depreciation and
amortization 1,257 1,166
----- -----
$3,603 $2,054
===== =====
</TABLE>
On August 8, 1995, the Corporation entered into a contract for the
construction of a new main office and branch facility. The facility is
located in West Chester, Ohio, and was substantially completed, at a cost of
approximately $1.7 million, during fiscal 1996.
<PAGE> 38
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
1996 1995
AMOUNT % AMOUNT %
DEPOSIT TYPE AND WEIGHTED-AVERAGE INTEREST RATE (In thousands)
<S> <C> <C> <C> <C>
NOW accounts
1996 - 1.35% $ 8,378 6.01%
1995 - 1.47% $ 7,746 6.07%
Passbook
1996 - 3.00% 17,192 12.33
1995 - 3.00% 17,987 14.09
Money market deposit accounts
1996 - 4.06% 18,446 13.23
1995 - 3.18% 12,351 9.67
------- ------ ------- ------
Total demand, transaction and
passbook deposits 44,016 31.57 38,084 29.83
Certificates of deposit
Original maturities of:
12 months or less
1996 - 5.33% 39,106 28.04
1995 - 4.56% 34,752 27.22
Over 12 months to 36 months
1996 - 5.94% 29,583 21.21
1995 - 5.05% 30,047 23.52
More than 36 months
1996 - 6.43% 26,742 19.18
1995 - 5.56% 24,804 19.43
------- ------ ------- ------
Total certificates of deposit 95,431 68.43 89,603 70.17
------- ------ ------- ------
Total deposits $139,447 100.00% $127,687 100.00%
======= ====== ======= ======
</TABLE>
The Savings Bank had deposit accounts with balances greater than $100,000
totaling $16.0 million and $12.1 million at September 30, 1996 and 1995,
respectively.
<PAGE> 39
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Passbook $ 528 $ 564 $ 735
NOW and money market deposit
accounts 738 513 496
Certificates of deposit 5,572 4,760 4,149
----- ----- -----
$6,838 $5,837 $5,380
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Less than one year $52,810 $51,917
One to three years 25,820 21,235
Over three years 16,801 16,451
------ ------
$95,431 $89,603
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1996 by certain residential mortgage loans totaling $90.0 million and the
Savings Bank's investment in Federal Home Loan Bank stock are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE MATURING IN FISCAL SEPTEMBER 30,
INTEREST RATE YEAR ENDING IN 1996 1995
(In thousands)
<S> <C> <C> <C>
6.75% 1996 $ - $10,000
5.38% 1997 10,000 -
5.51% 1998 20,000 -
6.25% 2000 10,000 10,000
6.75% 2005 10,000 10,000
6.50% 2006 10,000 -
------ ------
$60,000 $30,000
====== ======
Weighted-average interest rate 5.98% 6.58%
==== ====
</TABLE>
<PAGE> 40
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate as follows at September 30:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $748 $943 $668
Increase (decrease) in taxes resulting from:
Amortization of goodwill 10 10 10
Other - (17) 4
-- --- ---
Federal income tax provision per consolidated
financial statements $758 $936 $682
=== === ===
</TABLE>
The composition of the Corporation's net deferred tax asset (liability) is
as follows at September 30:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY 1996 1995
DIFFERENCES AT STATUTORY RATE: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $(245) $(195)
Difference between book and tax depreciation (151) (145)
Percentage of earnings bad debt deduction (386) (379)
Unrealized gain on securities designated as available for sale (121) (200)
Other - (9)
---- ----
Total deferred tax liabilities (903) (928)
Deferred tax assets:
General loan loss allowance 139 110
Deferred loan origination fees 297 237
Deferred compensation 157 127
Employee stock benefit plans 65 68
SAIF recapitalization assessment 262 -
Other 20 -
---- ----
Total deferred tax assets 940 542
---- ----
Net deferred tax asset (liability) $ 37 $(386)
==== ====
</TABLE>
<PAGE> 41
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES (continued)
The Savings 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, 1996, include approximately $2.5 million 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 $470,000 at
September 30, 1996. See Note K for additional information regarding future
percentage of earnings bad debt deductions.
NOTE I - LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the statement of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Savings
Bank's involvement in such financial instruments.
The Savings 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
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At September 30, 1996, the Savings Bank had outstanding commitments of
approximately $3.8 million to originate loans, consisting of $3.6 million of
fifteen year fixed rate loans at interest rates ranging from 7.5% to 9.5%
and $200,000 in adjustable rate loans. Additionally, the Savings Bank had
commitments under unused lines of credit totaling $6.6 million. In the
opinion of management all loan commitments equaled or exceeded prevalent
market interest rates as of September 30, 1996, and will be funded from
existing excess liquidity and normal cash flow from operations.
<PAGE> 42
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE J - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Savings Bank is subject to regulatory capital requirements promulgated
by the Office of Thrift Supervision (OTS). The minimum capital standards
generally require the maintenance of regulatory capital sufficient to meet
each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for minimum tangible
capital (defined as stockholders' equity less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted
total assets. An OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4.0% - 5.0% of adjusted total
assets for substantially all savings institutions. Management anticipates
no material change to the Savings Bank's present excess regulatory capital
position as a result of this change to the regulatory capital requirement.
The risk-based capital requirement provides for the maintenance of core
capital plus general loan loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighted assets, the Savings Bank multiplies the
value of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one-to-four family residential loans carry a
risk-weighted factor of 50%.
As of September 30, 1996, the Savings Bank's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $27,735 $27,735 $27,735
Unrealized gains on securities designated
as available for sale (235) (235) (235)
Goodwill and other intangible assets (50) (50) (50)
General valuation allowances - - 410
------ ---- ------ ---- ------ ----
Regulatory capital computed 27,450 11.7 27,450 11.7 27,860 22.3
Minimum capital requirement 3,526 1.5 7,052 3.6 9,997 8.0
------ ---- ------ ---- ------ ----
Regulatory capital - excess $23,924 10.2 $20,398 8.1 $17,863 14.3
====== ==== ====== ==== ====== ====
</TABLE>
The Savings Bank met the regulatory requirements of a "well-capitalized"
institution; i.e., a risk-based capital ratio of 10.0% or greater, a core
capital to risk-based ratio of 6.0% or greater and a tangible capital ratio
of 5.0% or greater. The Savings Bank's regulatory capital exceeded these
requirements at September 30, 1996 by $15.4 million, $20.0 million and $15.7
million, respectively.
<PAGE> 43
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE K - RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC in the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF
assessments are required for healthy commercial banks except for a $2,000
minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The
Savings Bank had $115.9 million in deposits at March 31, 1995, resulting in
an assessment of approximately $770,000, or $508,000 after tax, which was
charged to operations in fiscal 1996.
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1999. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Savings Bank would be regulated as a bank
under Federal laws which would subject it to the more restrictive activity
limits imposed on national banks. Under separate legislation related to the
recapitalization plan, the Savings Bank is required to recapture as taxable
income approximately $1.1 million 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
Savings Bank has provided deferred taxes for this amount and will be
permitted to amortize the recapture of its bad debt reserve over six years.
<PAGE> 44
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE L - CONDENSED FINANCIAL STATEMENTS OF ENTERPRISE FEDERAL BANCORP, INC.
The following condensed financial statements summarize the financial
position of Enterprise Federal Bancorp, Inc. as of September 30, 1996 and
1995 and the results of its operations for the period ended September 30,
1996 and 1995.
ENTERPRISE FEDERAL BANCORP, INC.
STATEMENT OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 91 $ 622
Loan receivable from Enterprise Federal
Savings Bank 3,572 7,000
Loan receivable from Employee Stock
Ownership Plan 1,520 2,123
Investment in Enterprise Federal Savings Bank 27,735 28,728
Prepaid expense and other assets 138 1
------ ------
Total assets $33,056 $38,474
====== ======
STOCKHOLDERS' EQUITY
Common stock $ 23 $ 23
Additional paid-in capital 32,638 39,028
Treasury stock (3,058) (1,413)
Employee stock benefit plan - (1,329)
Unrealized gains on securities designated
as available for sale 235 388
Retained earnings 3,218 1,777
------ ------
Total stockholders' equity $33,056 $38,474
====== ======
</TABLE>
ENTERPRISE FEDERAL BANCORP, INC.
STATEMENT OF EARNINGS
Period ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Revenue
Interest income $ 165 $ 422
Equity in earnings of subsidiary 1,541 1,632
----- -----
Total revenue 1,706 2,054
General and administrative expenses 265 277
----- -----
NET EARNINGS $1,441 $1,777
===== =====
</TABLE>
<PAGE> 45
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE L - CONDENSED FINANCIAL STATEMENTS OF ENTERPRISE FEDERAL BANCORP, INC.
(continued)
ENTERPRISE FEDERAL BANCORP, INC.
STATEMENTS OF CASH FLOWS
Period ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $1,441 $ 1,777
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary - (1,632)
Dividend received from subsidiary in excess of earnings 436 -
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (137) (1)
----- -------
Net cash provided by operating activities 1,740 144
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 603 236
Purchase of common shares of Enterprise Federal Savings Bank - (13,954)
Issuance of loan to ESOP - (2,359)
Issuance of loan to Enterprise Federal Savings Bank - (7,000)
Repayment of loan to Enterprise Federal Savings Bank 3,428 -
----- -------
Net cash provided by (used in) investing activities 4,031 (23,077)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common shares - 26,297
Payment of dividends on common stock (5,986) -
Purchase of treasury stock (1,645) (1,413)
Purchase of stock for employee benefit plan - (1,329)
Sale of stock for employee benefit plan 1,329 -
----- -------
Net cash provided by (used in) financing activities (6,302) 23,555
----- -------
Net increase (decrease) in cash and cash equivalents (531) 622
Cash and cash equivalents at beginning of year 622 -
----- -------
Cash and cash equivalents at end of year $ 91 $ 622
===== =======
</TABLE>
<PAGE> 46
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE M - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On December 10, 1993, the Savings Bank's Board of Directors adopted an
overall plan of conversion and reorganization (the Plan) whereby the Savings
Bank would convert to the stock form of ownership, followed by the issuance
of all of the Savings Bank's outstanding common stock to a newly formed
holding company, Enterprise Federal Bancorp, Inc. (the Corporation).
On October 14, 1994, the Savings Bank completed its conversion to the stock
form of ownership, and issued all of the Savings Bank's outstanding common
shares to the Corporation.
In connection with the conversion, the Corporation sold 2,268,596 shares to
depositors of the Savings Bank at a price of $13.00 per share which, after
consideration of offering expenses totaling $836,000, and shares purchased
by employee benefit plans, resulted in net cash proceeds of $26.3 million.
At the date of the conversion, the Savings Bank established a liquidation
account in an amount equal to retained earnings reflected in the statement
of financial condition used in the conversion offering circular. The
liquidation account will be maintained for the benefit of eligible savings
account holders who maintained deposit accounts in the Savings Bank after
conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation
distribution may be made with respect to the common shares. Except for the
repurchase of stock and payment of dividends by the Savings Bank, the
existence of the liquidation account will not restrict the use or further
application of such retained earnings.
The Savings Bank may not declare or pay a cash dividend on, or repurchase
any of its common shares, if the effect thereof would cause the Savings
Bank's stockholders' equity to be reduced below either the amount required
for the liquidation account or the regulatory capital requirements for
insured institutions.
<PAGE> 47
ENTERPRISE FEDERAL BANCORP, INC.
ENTERPRISE FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C>
OTTO L. KEETON OTTO L. KEETON
Chairman of the Board, President and Chairman of the Board, President and
Chief Executive Officer Chief Executive Officer
MICHAEL R. MEISTER MICHAEL R. MEISTER
Vice President and Chief Vice President and Chief
Operating Officer Operating Officer
TERRELL G. MARTY THOMAS J. NOE
Owner, Terry G. Marty Vice President, Chief
CLU & Associates Financial Officer and
Cincinnati, Ohio Treasurer
EDITH P. MAYER STEVEN M. POMEROY
Corporate Secretary, Retired Vice President and Loan Officer
STEVEN A. WILSON
President and Chief Operating Officer,
The Bases Group
Covington, Kentucky
WILLIAM H. KREEGER
Retired
</TABLE>
BANKING LOCATIONS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CORPORATE HEADQUARTERS
----------------------
7810 Tylersville Square Drive
West Chester, Ohio 45069
BRANCH OFFICES
--------------
718 E. Main Street 9235 Cincinnati Columbus Road 117 Mill Street
Lebanon, Ohio Pisgah, Ohio Cincinnati, Ohio
7820 Tylersville Square Drive 401 Wyoming Avenue
West Chester, Ohio Wyoming, Ohio
</TABLE>
46
<PAGE> 48
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Enterprise Federal Bancorp Inc. is a unitary savings and loan holding
company conducting business through its wholly-owned subsidiary, Enterprise
Federal Savings Bank. The Bank is a federally-chartered, SAIF-insured savings
institution operating through its five full-service offices. The Company's
headquarters is located at 7810 Tylersville Square Drive, West Chester, Ohio
45069.
TRANSFER AGENT/REGISTRAR:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
STOCKHOLDER REQUESTS:
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Corporate Secretary, Enterprise Federal
Bancorp, Inc., 7810 Tylersville Square Drive, West Chester, Ohio 45069.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Registrar and
Transfer Company.
COMMON STOCK INFORMATION:
Shares of Enterprise Federal Bancorp, Inc.'s common stock are traded
nationally under the symbol "EFBI" on the Nasdaq National Market System. At
December 31, 1996, the Company had 2,025,828 shares of common stock outstanding
and had 680 stockholders of record. Such holdings do not reflect the number of
beneficial owners of common stock.
47
<PAGE> 49
The following table sets forth the reported high and low sale prices of a
share of the Company's common stock as reported by Nasdaq (the common stock
commenced trading on the Nasdaq National Market System on October 17, 1994). A
$3.00 per share capital distribution was paid on the common stock during the
quarter ended December 31, 1995. A $1.00 per share dividend was declared on
December 6, 1996, payable to stoc kholders of record as of December 16, 1996.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Quarter ended
December 31, 1994 $14.00 $11.25
Quarter ended
March 31, 1995 14.00 12.25
Quarter ended
June 30, 1995 15.00 13.25
Quarter ended
September 30, 1995 16.75 14.25
Quarter ended
December 31, 1995 18.00 13.75
Quarter ended
March 31, 1996 15.75 14.25
Quarter ended
June 30, 1996 15.00 14.00
Quarter ended
September 30, 1996 14.75 12.75
</TABLE>
48
