<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No.: 0-24694
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Enterprise Federal Bancorp, Inc.
--------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1396726
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7810 Tylersville Square Drive
West Chester, Ohio 45069
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(Address) (Zip Code)
Registrant's telephone number, including area code: (513) 755-4600
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
/X/
As of October 23, 1997, the aggregate value of the 1,554,098 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
431,730 shares held by all directors and officers of the Registrant as a
group, was approximately $41.5 million. This figure is based on the mean of
the bid and asked prices of $26.69 per share of the Registrant's Common Stock
on October 23, 1997.
Number of shares of Common Stock outstanding as of October 23, 1997: 1,985,828
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1997 are incorporated into Part II, Items 5 through 8 of this
Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of September 30, 1997 are
incorporated into Part III, Items 9 through 13 of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
ENTERPRISE FEDERAL BANCORP, INC.
Enterprise Federal Bancorp, Inc. (the "Company") was incorporated in the
State of Ohio in April, 1994 in connection with the conversion of Enterprise
Federal Savings and Loan Association from a mutual savings and loan association
to a stock savings bank to be known as "Enterprise Federal Savings Bank" (the
"Bank"). The Company sold 2,268,596 shares of common stock, $.01 par value per
share, in an offering to certain depositors, borrowers and members of the
general public. The offering was consummated on October 14, 1994 and, as a
result, the Company became a unitary savings and loan holding company. The
Company owns 100% of the issued and outstanding common stock of the Bank, which
is the primary asset of the Company. The Company does not presently own or
operate any subsidiaries except for the Bank.
ENTERPRISE FEDERAL SAVINGS BANK
The Bank is a federally-chartered 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. The Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF"), which
is administered by the Federal Deposit Insurance Corporation ("FDIC"), to the
maximum extent permitted by law.
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. Such loans amounted to $130.0 million or 61.9% of the total loan
portfolio at September 30, 1997. To a significantly lesser extent, the Bank also
focuses its lending activities on commercial real estate loans, residential
construction loans and multi-family real estate loans. The Bank also invests in
securities which are issued by United States ("U.S.") government agencies or
government sponsored enterprises.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also regulated by the FDIC, the administrator
of the SAIF. The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is one
of the 12 regional banks comprising the FHLB System.
MARKET AREA
Enterprise conducts its business through its main office and four branch
offices located in Hamilton, Butler and Warren Counties, Ohio. At September 30,
1997, management believed that most of the Bank's depositors and borrowers were
residents of Hamilton, Butler and Warren Counties.
The Cincinnati metropolitan area is the second largest in Ohio and has a
stable and diversified labor force and economic base. While the principal
industry historically has been manufacturing, in recent years the service and
wholesale/retail trade industries have overtaken manufacturing in terms of
employment. Cincinnati is the headquarters for a number of large companies,
including Proctor & Gamble, E.W. Scripps, Federated Department Stores and
Cincinnati Milacron. In addition to these companies, the largest local employers
include the federal government, General Electric Aircraft, The University of
Cincinnati and the Kroger Co.
<PAGE>
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At September 30, 1997, the Bank's total loan
portfolio before net items ("total loan portfolio"), amounted to $210.0
million or 76.4% of the Company's $274.9 million of total assets at such
time. The Bank has traditionally concentrated its lending activities on
conventional first mortgage loans secured by residential property.
Conventional loans are neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Department of Veterans Affairs
("VA"). Consistent with such approach, at September 30, 1997, $130.0 million
or 61.9% of the Bank's total loan portfolio consisted of one-to-four family
residential loans. To a lesser extent, the Bank also originates equity lines,
multi-family residential loans, commercial real estate and land loans,
construction loans and consumer loans. At September 30, 1997, such loan
categories amounted to $19.8 million, $4.7 million, $38.5 million, $16.0
million and $1.0 million, respectively, or 9.4%, 2.2%, 18.3% 7.6% and .5% of
the total loan portfolio, respectively. The Bank intends to continue its
emphasis on all types mortgage loans. In particular, to the extent permitted
by economic and market conditions, the Bank has increased its emphasis on the
origination of equity lines, smaller commercial real estate and construction
loans.
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995 1994
---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family................ $130,022 61.92% $ 96,605 57.89% $ 81,603 69.86% $ 72,139 67.81%
Equity lines................. 19,781 9.42 12,065 7.23 2,427 2.08 -- --
Multi-family................. 4,693 2.24 6,525 3.91 5,270 4.51 3,546 3.33
Commercial................... 38,516 18.34 35,162 21.07 19,125 16.37 21,531 20.24
Construction................. 15,960 7.60 15,567 9.33 5,579 4.78 8,217 7.72
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans..... 208,972 99.52 165,924 99.43 114,004 97.60 105,433 99.10
Consumer loans................ 1,009 .48 942 .57 2,803 2.40 954 .90
-------- ------ -------- ------ -------- ------ -------- ------
Total loans.................. 209,981 100.00% 166,866 100.00% 116,807 100.00% 106,387 100.00%
-------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------
Less:
Loans in process............. 7,821 9,928 3,403 5,043
Deferred loan fees........... 1,017 874 675 705
Allowance for loan losses.... 575 410 323 323
Undisbursed portion of
equity lines................ 9,472 6,604 1,576
Unearned discounts........... -- -- -- 28
-------- -------- -------- --------
Loans receivable, net....... $191,096 $149,050 $110,830 $100,288
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
---------------
1993
---------------
AMOUNT %
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<S> <C> <C>
Real estate loans:
Single-family................ $69,723 74.48%
Equity lines................. -- --
Multi-family................. 1,535 1.64
Commercial................... 16,603 17.73
Construction................. 4,857 5.19
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Total real estate loans..... 92,718 99.04
Consumer loans................ 900 .96
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Total loans.................. 93,618 100.00%
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Less:
Loans in process............. 2,612
Deferred loan fees........... 603
Allowance for loan losses.... 310
Undisbursed portion of
equity lines................
Unearned discounts........... 66
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Loans receivable, net....... $90,027
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</TABLE>
<PAGE>
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Bank's loan portfolio at September 30, 1997.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Bank's loan portfolio.
<TABLE>
<CAPTION>
REAL ESTATE LOANS
-----------------------------------------------------------
SINGLE- EQUITY MULTI- CONSUMER
FAMILY LINES FAMILY COMMERCIAL CONSTRUCTION LOANS TOTAL
---------- --------- --------- ----------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less..................... $ 1,813 $ -- $ -- $ 3,894 $ 5,267 $ 122 $ 11,096
After one year through two years..... 480 -- 182 1,508 -- 174 2,344
After two years through three
years.............................. 721 -- -- 3,536 -- 179 4,436
After three years through five
years.............................. 1,794 -- 204 972 -- 473 3,443
After five years through ten years... 12,119 19,781 456 3,738 -- 61 36,155
After ten years through twenty
years.............................. 54,658 -- 2,747 9,998 3,529 -- 70,932
Over twenty years.................... 58,437 -- 1,104 14,870 7,164 -- 81,575
---------- --------- --------- ----------- ------------ ---------- ----------
Total(1)......................... $ 130,022 $ 19,781 $ 4,693 $ 38,516 $ 15,960 $ 1,009 $ 209,981
---------- --------- --------- ----------- ------------ ---------- ----------
---------- --------- --------- ----------- ------------ ---------- ----------
Interest rate terms on amounts due
after one year:
Fixed................................ $ 104,791
Adjustable........................... 94,094
----------
$ 198,885
----------
----------
</TABLE>
- ------------------------
(1) Does not include adjustments relating to loans in process, the allowance for
loan losses, unearned discounts and deferred loan origination fees.
<PAGE>
Scheduled contractual repayment of loans does not reflect the expected
term of the Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give Enterprise the right to declare a
conventional loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase
when current mortgage loan rates are higher than rates on existing mortgage
loans and, conversely, decrease when current mortgage loan rates are lower
than rates on existing mortgage loans (due to refinancings of adjustable-rate
and fixed-rate loans at lower rates). Under the latter circumstance, the
weighted-average yield on loans decreases as higher-yielding loans are repaid
or refinanced at lower rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Bank are subject to the written, non-discriminatory underwriting standards
and loan origination procedures established by the Bank's Board of Directors
and management. Loan originations are obtained primarily through existing
customers, walk-in customers, branch managers and real estate brokers.
Property valuations are always performed by independent outside appraisers
approved by the Bank's Board of Directors. Title and hazard insurance are
required on all security property. Substantially all of the Bank's loans are
secured by property located in its market area.
Any two officers are permitted to approve loans up to $350,000, while loans
over $350,000 require the approval of the Board of Directors or the Executive
Committee of the Board. All loans are ratified by the Board, including those
loans approved by the Executive Committee.
Historically, the Bank has not been an active purchaser or seller of loans.
However, as discussed below, the Bank anticipates that it may begin to sell
certain long-term fixed-rate loans in the secondary market to reduce the
percentage of such loans in its loan portfolio.
<PAGE>
The following table shows origination, purchase and sale activity of the
Bank with respect to its loans during the periods indicated.
<TABLE>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loan originations:
Single-family.................................................................. $ 29,818 $ 18,636 $ 17,720
Equity lines................................................................... 4,848 4,610 851
Multi-family................................................................... 1,565 2,969 2,433
Commercial..................................................................... 12,889 17,803 1,900
Construction................................................................... 15,960 15,567 5,579
--------- --------- ---------
Total real estate loan originations.......................................... 65,080 59,585 28,483
Consumer loan originations....................................................... 505 1,793 2,730
--------- --------- ---------
Total loan originations and purchases........................................ 65,585 61,378 31,213
--------- --------- ---------
Less:
Principal loan repayments...................................................... 23,362 23,208 20,802
Transferred to real estate owned............................................... -- 21 --
Other, net..................................................................... (177) (71) (131)
--------- --------- ---------
Net increase................................................................... $ 42,046 $ 38,220 $ 10,542
--------- --------- ---------
--------- --------- ---------
</TABLE>
Although the Bank emphasizes the origination of single-family residential
ARMs, originations of such loans has decreased due to the preference of the
Bank's customers for fixed-rate residential mortgage loans in the low interest
rate environment which has recently prevailed. As a result, in recent years,
fixed-rate single-family residential mortgage loans with terms of 15 or 30 years
have constituted a significant portion of total loan originations. Originations
of fixed-rate single-family residential mortgage loans (including fixed-rate
permanent construction loans) amounted to $23.9 million, $14.9 million and $17.5
million during fiscal 1997, 1996, and 1995, respectively. In order to enhance
the Bank's ability to manage interest rate risk, the Bank is approved by the
Federal Home Loan Mortgage Corporation ("FHLMC") to become a qualified loan
seller/servicer for such agency. However, fixed rate loans are typically
originated for portfolio, frequently under terms and conditions which generally
do not permit the bulk sale of such loans to the FHLMC or the Federal National
Mortgage Association ("FNMA"). See "--Single-Family Residential Real Estate
Loans."
Single-Family Residential Real Estate Loans. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At September 30, 1997,
$130.0 million or 62.0% of the Bank's total loan portfolio consisted of
single-family residential real estate loans. The Bank originated $29.8 million,
$18.6 million and $17.7 million of single-family residential loans in fiscal
1997, 1996, and 1995, respectively, and intends to continue to emphasize the
origination of permanent loans secured by first mortgage liens on single-family
residential properties in the future. Of the $130.0 million of such loans at
September 30, 1997, $38.0 million or 29.2% had adjustable-rates of interest and
$92.0 million or 70.8% had fixed-rates of interest.
<PAGE>
The Bank currently originates for its portfolio single-family residential
mortgage loans which typically provide for an interest rate which adjusts every
year in accordance with a designated index (One Year Constant Maturity Treasury)
plus a margin. Prior to October, 1995, the Bank utilized the National Median
Cost of Funds Index. The Bank also offers such loans with interest rates which
adjust every three years. Such loans are typically based on a 30-year
amortization schedule. The amount of any increase or decrease in the interest
rate is presently limited to 2% per year, with a limit of 6% over the life of
the loan. The Bank's adjustable-rate loans currently being originated are not
assumable and do not contain prepayment penalties. In October 1995, the Bank
began to offer below market initial interest rates. The Bank does not engage in
the practice of using a cap on the payments that could allow the loan balance to
increase rather than decrease, resulting in negative amortization.
Adjustable-rate loans decrease the risks associated with changes in interest
rates but involve other risks, primarily because as interest rates rise, the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding a significant position of fixed-rate loans in an
increasing interest rate environment.
Due to competitive market pressures and historically low interest rates, the
Bank has continued to originate fixed-rate mortgage loans with terms of between
10 and 30 years although substantially all of the Bank's fixed-rate loans in its
portfolio have terms of 15 or 30 years. While the Bank has historically retained
all of its fixed-rate loans in its portfolio, the Bank has developed a secondary
mortgage market capacity and could sell a portion of its fixed-rate loans in the
secondary market.
The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a residential loan; however, if the amount of a residential
loan originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Board of
Directors, the Bank will lend up to 95% of the appraised value of the property
securing a single-family residential loan, and generally requires borrowers to
obtain private mortgage insurance on the portion of the principal amount of the
loan that exceeds 80% of the appraised value of the security property.
Notwithstanding the foregoing, the Bank is permitted to originate loans in an
amount up to 5% of assets which do not otherwise conform to the above-referenced
regulatory requirements. In certain circumstances, the Bank has originated loans
in an amount up to 95% of the property's appraised value without requiring the
borrower to obtain private mortgage insurance. As of September 30, 1997, the
Bank had $1.1 million or .40% of its assets invested in such loans. In addition,
the Bank has also allocated $2.0 million for the origination of low-income,
single-family housing loans. The Bank intends to originate such loans in amounts
up to 95% of the appraised value of the property securing such loans without
requiring the borrower to obtain private mortgage insurance and will provide 5%
of the amount of the loan to its allowance for loan losses.
Certain of the Bank's single-family residential loans do not conform to
particular requirements which must be satisfied to sell such loans in the
secondary market to institutions such as the FHLMC. However, a majority of such
loans have a loan-to-value ratio of less than 80% and the retention of such
loans in the Bank's portfolio has not had a material adverse affect on the
Bank's financial condition or results of operations.
EQUITY LINES. Equity lines increased from $12.1 million or 7.2% of the
total loan portfolio at September 30, 1996 to $19.8 million or 9.4% of the total
loan portfolio at September 30, 1997. Such increase was primarily due to an
increase in line of credit loans primarily secured by individual residences.
Such loans have interest rates which adjust daily based on the prime rate in The
Wall Street Journal. The Bank increased its emphasis on such lending in fiscal
1997 and believes that such lending will increase in the future.
<PAGE>
Multi-Family Residential and Commercial Real Estate Loans. The Bank
originates mortgage loans for the acquisition and refinancing of existing
multi-family residential and commercial real estate properties. At September 30,
1997, $4.7 million or 2.2% of the Bank's total loan portfolio consisted of loans
secured by existing multi-family residential real estate properties and $38.5
million or 18.3% of such loan portfolio consisted of loans secured by existing
commercial real estate properties.
The majority of the Bank's multi-family residential loans are secured by
small apartment buildings, while commercial real estate loans are secured by
office buildings, small retail establishments, gas stations, warehouses, hotels
and restaurants. These types of properties constitute the majority of the Bank's
commercial real estate loan portfolio. All of the Bank's multi-family and
commercial real estate loans are secured by property located in the Bank's
market area.
Multi-family and commercial real estate loans are made on terms up to 25
years. Although the Bank will originate these loans with fixed interest rates,
the majority of these loans have interest rates which adjust in accordance with
a designated index. Loan to value ratios on the Bank's multi-family and
commercial real estate loans are limited to 75%. As part of the criteria for
underwriting multi-family and commercial real estate loans, the Bank generally
imposes a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of not less than 1.1. It is also the
Bank's policy to obtain corporate or personal guarantees, as applicable, on its
multi-family residential and commercial real estate loans from the principals of
the borrower.
Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Such loans typically involve large loan balances to single borrowers or groups
of related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The success of
such projects is sensitive to changes in supply and demand conditions in the
market for multi-family and commercial real estate as well as economic
conditions generally. At September 30, 1997, the Bank did not have any
non-performing multi-family or commercial real estate loans.
CONSTRUCTION LENDING. The Bank presently originates residential
construction loans to individuals to construct their own homes through a
pre-approved builder and to a much lesser extent, to selected local builders.
Although the Bank originates land acquisition and development loans, the Bank
does not anticipate that this type of lending will represent a significant
portion of its construction loan portfolio in the future. The Bank's
construction lending activities are limited to the Bank's primary market area.
At September 30, 1997, construction loans amounted to $16.0 million or 7.6% of
the Bank's total loan portfolio.
The Bank's construction loans are generally made in connection with the
granting of the permanent financing on the property. Residential construction
loans convert to a fixed or adjustable rate loan at the end of the one-year
construction term, while commercial and multi-family construction loans
generally convert to adjustable rate loans. Advances are generally made to the
borrower on a percentage of completion basis.
Upon application, credit review and analysis of personal and corporate
financial statements, the Bank will grant construction loans to local builders
for the purpose of construction of speculative (unsold) residential properties.
All such properties are inspected by outside appraisers and the Bank may conduct
follow-up inspections. Advances are generally made on a percentage of completion
basis. At September 30, 1997, the Bank did not have any of such loans in its
construction loan portfolio.
The Bank's construction loans generally have construction terms of 12
months, with payments being made monthly on an interest-only basis. Residential
construction loans are made with a maximum loan to value ratio of 80.0% of the
projected market value of the completed project, while commercial and multi-
family construction loans are made with maximum loan to value ratios of 75% of
the projected market value of the completed project.
<PAGE>
Construction lending is generally considered to involve a higher level of
risk as compared to single-family residential lending, due to the concentration
of principal in a limited number of loans and borrowers and the effects of
general economic conditions on developers and builders. Moreover, a construction
loan can involve additional risks because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost (including interest) of the project. The nature of these loans is
such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder on properties which are
not necessarily pre-sold pose a greater potential risk to the Bank than
construction loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and adopting
underwriting guidelines which impose stringent loan-to-value, debt service and
other requirements for loans which are believed to involve higher elements of
credit risk, by limiting the geographic area in which the Bank will do business
and by working with builders with whom it has established relationships.
CONSUMER LOANS. To a limited extent, the Bank also offers consumer loans.
Such loans generally have shorter terms and higher interest rates than mortgage
loans. The consumer loans offered by the Bank include automobile, boat,
recreational vehicle and deposit account secured loans. Consumer loans amounted
to $1.0 million or .5% of the total loan portfolio at September 30, 1997.
LOAN FEE INCOME. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments, prepayments and for miscellaneous services related to its loans.
Income from these activities varies from period to period with the volume and
type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. Loan origination and commitment fees and all incremental
direct loan origination costs are deferred and recognized over the contractual
remaining lives of the related loans on a level yield basis. Discounts and
premiums on loans purchased are accreted and amortized in the same manner. In
accordance with SFAS No. 91, the Bank amortized $189,000, $170,000 and $142,000
of deferred loan fees into income during fiscal 1997, 1996 and 1995,
respectively, in connection with loan refinancings, payoffs and ongoing
repayments of outstanding loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or personal
contacts are made. In most cases, deficiencies are cured promptly. While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank institutes foreclosure or
other proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Bank does not
accrue interest on real estate loans past due 90 days or more unless, in the
opinion of management, the value of the property securing the loan exceeds the
outstanding balance of the loan (principal, interest and escrows) and collection
is probable. Loans may be reinstated to accrual status when all payments are
brought current and, in the opinion of management, collection of the remaining
balance can be reasonably expected. The Bank did not have any accruing loans 90
or more days delinquent at September 30, 1997, 1996, or 1995.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
When property is acquired, at the date of acquisition it is recorded at the
lower of carrying
<PAGE>
value or estimated fair value less selling expenses and any writedown
resulting therefrom is charged to the allowance for possible loan losses.
Between the date a loan becomes delinquent and the date it is acquired by the
Bank, all costs incurred in maintaining the Bank's interest in the property
are capitalized in an amount which may not exceed the estimated fair value.
After the date of acquisition, all costs incurred in maintaining the property
are expensed and costs incurred for the improvement or development of such
property are capitalized in an amount which may not exceed the estimated fair
value less the estimated disposition costs.
<PAGE>
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------------------------------------------------- ------------------------------------------
30-59 DAYS 60-89 DAYS 90 OR MORE DAYS 35-59 DAYS 60-89 DAYS 90 OR MORE DAYS
---------------- ----------------- --------------- ----------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans:
Residential:
Single-family.... $ 155 .12% $1 -- $193 .15% $332 .34% $558 .58% $203 .21%
Equity lines..... -- -- 4 .02 -- -- -- -- 16 .13 -- --
Multi-family..... -- -- -- -- -- -- -- -- -- -- --
Commercial....... -- -- -- -- -- -- -- -- -- -- -- --
Construction..... -- -- -- -- -- -- -- -- -- -- --
Consumer loans..... -- -- -- -- -- -- -- -- -- -- --
----- --- ---- ---- ----- ----
Total............ $ 155 $5 $193 $ 322 $574 $203
----- --- ---- ---- ----- ----
----- --- ---- ---- ----- ----
</TABLE>
<PAGE>
The following table sets forth the amounts and categories of the Bank's
non-performing assets and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ----- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential.................................................. $ 193 $ 203 $ 45 $ 114 $ 174
Equity lines............................................................... -- -- -- -- --
Multi-family residential................................................... -- -- -- -- --
Construction............................................................... -- -- -- -- --
Commercial real estate..................................................... -- -- -- -- --
Consumer................................................................... -- -- 4 -- --
------- ------ -------- ------ ------
Total non-performing loans................................................. 193 203 49 114 174
Real estate owned.......................................................... -- -- -- 83 125
------- ------ -------- ------ ------
Total non-performing assets................................................ 193 203 49 197 299
Troubled debt restructurings............................................... -- -- -- 417 420
------- ------ -------- ------ ------
Total...................................................................... $ 193 $ 203 $ 49 $ 614 $ 719
------- ------ -------- ------ ------
------- ------ -------- ------ ------
Total non-performing loans and troubled debt restructurings as a percentage
of total loans........................................................... .10% .14% .04% .50% .63%
------- ------ -------- ------ ------
------- ------ -------- ------ ------
Total non-performing assets and troubled debt restructurings as a
percentage of total assets............................................... .07% .09% .02% .37% .55%
------- ------ -------- ------ ------
------- ------ -------- ------ ------
</TABLE>
Interest income which would have been recognized if the above loans had been
performing pursuant to their contractual terms totaled $3,000 for fiscal 1997.
The $193,000 of non-accruing single-family residential loans at September
30, 1997 consisted of seven loans secured by single-family residential property
located in the Bank's market area. The largest of such loans at such date
amounted to approximately $45,000 and the average loan balance was $28,000. Two
such loans totaling $33,000 were to one borrower.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected.
<PAGE>
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable,
and there is a high possibility of loss. An asset classified loss is
considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Another category designated
"special mention" also must be established and maintained for assets which do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. At September 30,
1997, the Bank had $33,000 of classified assets, none of which were
classified substandard and $33,000 of which were classified special mention.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at
a level that management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan portfolio.
Management's periodic evaluation is based upon examination of the portfolio,
past loan loss experience, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. The allowance is increased by a provision for
loan losses which is charged against income.
Although management uses the best information available to make
determinations with respect to the provision for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the OTS
and the FDIC, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the Bank
to recognize additions to such allowance based on their judgments about
information available to them at the time of their examination.
<PAGE>
The following table summarizes changes in the allowance for possible loan
losses and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans, net..................................... $ 171,519 $ 130,399 $ 102,065 $ 95,658 $ 88,664
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Allowance for loan losses, beginning of period......... $ 410 $ 323 $ 323 $ 310 $ 241
Charged-off loans:
Consumer............................................... -- (3) -- -- --
Commercial............................................. -- -- -- (2) --
---------- ---------- ---------- --------- ---------
Total charged-off loans................................ -- (3) -- (2) --
Recoveries on loans previously charged-off............. -- -- -- -- --
---------- ---------- ---------- --------- ---------
Net loans charged-off.................................. -- (3) -- (2) --
Provision for loan losses.............................. 165 90 -- 15 69
---------- ---------- ---------- --------- ---------
Allowance for loan losses, end of period............... $ 575 $ 410 $ 323 $ 323 $ 310
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Net loans charged-off to average loans, net............ --% --% --% --% --%
Allowance for loan losses to total loans............... .30% .28% .29% .32% .33%
Allowance for loan losses to non-performing loans...... 297.93% 201.97% 659.18% 283.33% 178.17%
Net loans charged-off to allowance for loan losses..... --% .73% --% .62% --%
</TABLE>
<PAGE>
The following table presents the allocation of the allowance for loan losses
to the total amount of loans in each category listed at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ------------------------ ----------------------- -----------------------
% OF LOANS IN % OF LOANS IN % OF LOANS IN % OF LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ------------- --------- ------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential.... $ 130 61.92% $ 140 57.89% $ 91 69.86% $ 91 67.80%
Equity lines................. 190 9.42 55 7.23 24 2.08 -- --
Multi-family residential..... 12 2.23 14 3.91 9 4.51 9 3.33
Commercial real estate....... 193 18.34 180 21.07 109 16.37 109 20.24
Construction................. 40 7.60 12 9.33 10 4.78 10 7.72
Consumer..................... 10 .49 9 .57 28 2.40 9 .91
Unallocated.................. -- -- -- -- 52 -- 95 --
------- ------ ------- ------ ------- ------ ------- ------
Total........................ $ 575 100.00% $ 410 100.00% $ 323 100.00% $ 323 100.00%
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
<CAPTION>
SEPTEMBER 30,
-----------------------
1993
-----------------------
% OF LOANS IN
EACH CATEGORY
TO TOTAL
AMOUNT LOANS
-------- -------------
<S> <C> <C>
Single-family residential.... $ 81 74.48%
Equity lines................. -- --
Multi-family residential..... 4 1.64
Commercial real estate....... 86 17.73
Construction................. 6 5.19
Consumer..................... 9 .96
Unallocated.................. 124 --
------- ------
Total........................ $ 310 100.00%
------- ------
------- ------
</TABLE>
<PAGE>
INVESTMENT ACTIVITIES
Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the Government National
Mortgage Association ("GNMA"). The Bank has also purchased mortgage-backed
securities issued by the Small Business Administration ("SBA").
The FHLMC is a public corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal. The FNMA is a private corporation chartered by
the U.S. Congress with a mandate to establish a secondary market for
conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the
FHLMC and the FNMA are U.S. Government sponsored enterprises, these
securities are considered to be among the highest quality investments with
minimal credit risks. The GNMA is a government agency within the Department
of Housing and Urban Development which is intended to help finance government
assisted housing programs. GNMA securities are backed by FHA-insured and
VA-guaranteed loans, and the timely payment of principal and interest on GNMA
securities are guaranteed by the GNMA and backed by the full faith and credit
of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are
limits to the maximum size of loans that qualify for these programs. For
example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $214,600. To accommodate
larger-sized loans, and loans that, for other reasons, do not conform to the
agency programs, a number of private institutions have established their own
home-loan origination and securitization programs. The SBA is an agency of
the U.S. Government. The SBA issues participation certificates backed
principally by commercial real estate and/or other business collateral. The
SBA was established by the U.S. Congress with a mandate to increase the
ability of small businesses to borrow money thereby expanding and increasing
employment. The timely payment of principal and interest on SBA securities
are guaranteed by the SBA and are backed by the full faith and credit of the
U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly,
the life of a mortgage-backed pass-through security approximates the life of
the underlying mortgages.
The Bank's mortgage-backed securities include collateralized mortgage
obligations ("CMOs"). CMOs have been developed in response to investor
concerns regarding the uncertainty of cash flows associated with the
prepayment option of the underlying mortgagor and are typically issued by
governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by
financial institutions or other similar institutions. A CMO can be
collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders,
the cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the
underlying collateral among the separate CMO classes, different classes of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics. At September 30, 1997, $12.7
million or 20.7% of the Bank's mortgage-backed securities consisted of CMO's.
All of the
<PAGE>
Bank's CMO's at September 30, 1997 are collateralized by loans which are
insured or guaranteed by the FNMA, the FHLMC or the GNMA.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the accounting
for investments in all debt and equity securities, which are to be classified
in one of three categories for fiscal years beginning after December 15,
1993. Securities that an institution has the positive intent and ability to
hold to maturity are to be reported at amortized cost. Securities that are
bought and held principally for the purpose of selling them in the near term
are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Other securities are to be
classified as securities available for sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. The Company adopted SFAS No. 115 in fiscal
1995. At September 30, 1997, the Company had $61.5 million of mortgage-backed
securities classified as available for sale. At such time, stockholders'
equity included $51,000 of unrealized gains on securities designated as
available for sale, net of related tax effects.
<PAGE>
The following table sets forth the purchases and principle repayments of
the Bank's mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Mortgage-backed securities purchased................. $ 55,302 $ 51,493 $ 68,464 $ 4,329
Principal repayments................................. (6,728) (4,178) (4,108) (4,996)
Other, net........................................... (52,599)(1) (53,855)(1) (18,015)(1) (170)
----------- ----------- ----------- ---------
Net................................................ $ (4,025) $ (6,540) $ 46,341 $ (837)
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
- ------------------------
(1) Includes $52,714, $54,552 and $18,776 in net proceeds from the sale of
mortgage-backed securities for 1997, 1996 and 1995, respectively.
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Bank.
The following table sets forth certain information relating to the Bank's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FNMA securities......... $ 33,906 $ 33,832 $ 23,497 $ 23,364 $ 30,299 $ 30,510
CMO securities.......... 12,530 12,704 36,988 37,602 35,931 36,298
FHLMC securities........ 14,943 14,921 3,559 3,398 4,084 4,084
SBA securities.......... -- -- 1,082 1,118 1,120 1,130
----------- --------- ----------- --------- ----------- ---------
Total................. $ 61,379 $ 61,457 $ 65,126 $ 65,482 $ 71,434 $ 72,022
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
At September 30, 1997, the $61.4 million mortgage-backed securities
portfolio had a weighted average yield of 6.30%. Of such amount, $358,000
with a weighted average yield of 6.82% had contractual maturities within ten
years and $61.0 million with a weighted average yield of 6.30% had
contractual maturities over ten years. However, the actual maturity of a
mortgage-backed security may be less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and adversely
<PAGE>
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles,
premiums and discounts are amortized over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and
discounts can significantly affect the yield of the mortgage-backed security,
and these assumptions are reviewed periodically to reflect actual
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates,
the difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the
Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
For additional information relating to the Bank's mortgage-backed
securities, see Notes A-2 and B to the Consolidated Financial Statements.
INVESTMENT SECURITIES. The investment policy of the Bank is designed
primarily to provide and maintain liquidity and to generate a favorable
return on investments without incurring undue interest rate risk, credit
risk, and investment portfolio asset concentrations. Historically, the Bank
has invested excess funds in mortgage-backed securities rather than
investment securities due to the higher yield on mortgage-backed securities.
As a result, investment securities have not comprised a significant portion
of the Bank's assets.
The Bank is authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations,
certain time deposits, negotiable certificates of deposit issued by
commercial banks and other insured financial institutions, investment grade
corporate debt securities and other specified equity investments.
The following table sets forth certain information relating to the Bank's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1996 1995
------------------------ ------------------------ ---------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Marketable equity securities..... $ 698 $ 698 $ -- $ -- $ -- $ --
</TABLE>
At September 30, 1997, the Bank's investment securities consisted
entirely of the common stock of another local financial institution. The
market value of such common stock approximated the Bank's cost at September
30, 1997.
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives
funds from principal repayments and prepayments on loans and mortgage-backed
securities. Repayments on loans and mortgage-backed securities are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
DEPOSITS. The Bank's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
The Bank considers its primary market area to be Hamilton, Warren and Butler
Counties, Ohio. The Bank attracts deposit accounts by offering a wide variety of
accounts, competitive interest rates, and convenient office locations and
service hours. In addition, the Bank maintains automated teller machines at its
Lebanon, Pisgah and Wyoming offices. The Bank does not advertise for deposits
outside of its primary market area or utilize the services of deposit brokers.
Management believes that an insignificant number of deposit accounts were held
by non-residents of Ohio at September 30, 1997.
The Bank has been competitive in the types of accounts and in interest rates
it has offered on its deposit products but does not necessarily seek to match
the highest rates paid by competing institutions. With the significant decline
in interest rates paid on deposit products, the Bank, in fiscal 1994 and 1993
experienced disintermediation of deposits into competing investment products.
Beginning in the second half of fiscal 1995, the Bank began to experience an
inflow of deposits as a result of the Bank's pricing strategies, increased
marketing efforts and new deposit products. Although market demand generally
dictates which deposit maturities and rates will be accepted by the public, the
Bank intends to continue to promote longer term deposits to the extent possible,
consistent with its asset and liability management goals. The following table
shows the increase in net deposits and interest credited on deposits.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995(1)
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Increase before interest credited................................................... $ 1,727 $ 7,721 $ 614
Interest credited................................................................... 5,123 4,039 4,827
--------- --------- ---------
Net deposit increase................................................................ $ 6,850 $ 11,760 $ 5,441
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included.
<PAGE>
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at September 30, 1997 by time remaining to maturity.
<TABLE>
<CAPTION>
AMOUNTS IN
THOUSANDS
-----------
<S> <C>
Three months or less................................................................................. $ 1,876
Over three months through six months................................................................. 4,238
Over six months through 12 months.................................................................... 1,487
Over 12 months....................................................................................... 6,513
-----------
Total............................................................................................... $ 14,114
-----------
-----------
</TABLE>
The following table shows the distribution of, and certain other information
relating to, the Bank's deposits by type of deposit as of the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------------
1997 1996 1995(1)
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ---------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement savings accounts.................. $ 15,949 10.90% $ 17,192 12.33% $ 17,987 14.09%
Money market accounts.................................... 21,694 14.83 18,446 13.23 12,351 9.67
Certificates of deposit.................................. 99,446 67.98 95,431 68.43 89,603 70.17
NOW accounts............................................. 8,308 5.68 6,538 4.69 6,524 5.11
Noninterest-bearing deposits............................. 900 0.61 1,840 1.32 1,222 0.96
---------- --------- ---------- --------- ---------- ---------
Total deposits at end of period.......................... $ 146,297 100.00% $ 139,447 100.00% $ 127,687 100.00%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
- ------------------------
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included.
<PAGE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1997 and 1996, and the
amounts at September 30, 1997 which mature during the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C> <C> <C> <C> <C>
CERTIFICATES OF
DEPOSIT 1997 1996 ONE YEAR TWO YEARS THREE YEARS THEREAFTER
------------------------ --------- --------- ----------- ----------- ----------- -----------
4.0% or less........ $ 88 $ 166 $ 57 $ 10 $ 16 $ 5
4.01% to 6.0%....... 61,721 71,960 45,729 12,458 -- 3,534
6.01% to 8.0%....... 37,637 23,305 6,977 4,280 19,834 6,546
--------- --------- ----------- ----------- ----------- -----------
Total certificate accounts.......... $ 99,446 $ 95,431 $ 52,763 $ 16,748 $ 19,850 $ 10,085
--------- --------- ----------- ----------- ----------- -----------
--------- --------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1997 1996 1995(1)
------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
---------- ------------- ---------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts............................ $ 16,570 3.00% $ 17,590 3.00% $ 17,786 3.00%
Money market accounts........................ 20,079 4.35 15,399 4.06 12,506 3.18
Certificates of deposit...................... 97,439 5.95 95,839 5.82 82,324 5.78
NOW accounts................................. 8,223 1.54 6,531 1.73 6,589 1.75
Noninterest-bearing deposits................. 1,370 -- 1,531 -- 1,255 --
---------- ---- ---------- ---- ---------- ----
Total deposits............................. $ 143,681 5.08% $ 136,890 5.00% $ 120,460 4.85
---------- ---- ---------- ---- ---------- ----
---------- ---- ---------- ---- ---------- ----
</TABLE>
- ------------------------
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included.
<PAGE>
Borrowings. While the Bank has not historically utilized borrowings as a
source of funds, during fiscal 1994, the Bank began borrowing funds from the
FHLB of Cincinnati in order to leverage its capital. At September 30, 1997,
the Bank had $95.0 million in FHLB advances, of which $40.0 million were
long-term in nature.
The following table sets forth certain information relating to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
-------------------------------
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
1997 1996 1995
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding..................................................... $ 77,692 $ 40,000 $ 11,111
Maximum amount outstanding at any month-end during the period................... $ 95,000 $ 60,000 $ 30,000
Weighted average rate:
During the period............................................................... 5.95% 6.39% 6.67%
At end of period................................................................ 5.98% 5.98% 6.58%
</TABLE>
COMPETITION
The Bank faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks
and other savings institutions located in its market area. The Bank faces
additional significant competition for investors' funds from other financial
intermediaries. The Bank competes for deposits principally by offering
depositors a variety of deposit programs, convenient branch locations, hours
and other services. The Bank does not rely upon any individual group or
entity for a material portion of its deposits.
The Bank's competition for real estate loans comes principally from mortgage
banking companies, other savings institutions, commercial banks and credit
unions. The Bank competes for loan originations primarily through the interest
rates and loan fees it charges, the efficiency and quality of services it
provides borrowers and the variety of its products. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
EMPLOYEES
The Bank had 36 full-time employees and four part-time employees at
September 30, 1997. None of these employees is represented by a collective
bargaining agreement, and the Bank believes that it enjoys good relations with
its personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
<PAGE>
REGULATION OF THE COMPANY
GENERAL. The Company, as a savings and loan holding company within the
meaning of the Home Owners' Loan Act ("HOLA"), has registered with the OTS
and is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
association, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
association; (ii) transactions between the savings association and its
affiliates; and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings association subsidiary of such a holding
company fails to meet the qualified thrift lender ("QTL") test, then such
unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association requalifies as a QTL within one year
thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "--The Bank--Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL test, as set forth below, the activities of the Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. No
multiple savings and loan holding company or subsidiary thereof which is not
a savings association shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings association; (iv)
holding or managing properties used or occupied by a subsidiary savings
association; (v) acting as trustee under deeds of trust; (vi) those
activities authorized by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and
loan holding companies, those activities authorized by the Federal Reserve
Board as permissible for bank holding companies. The activities described in
(i) through (vi) above may only be engaged in after giving the OTS prior
notice and being informed that the OTS does not object to such activities. In
addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and
loan holding company.
<PAGE>
FEDERAL LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of either, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At September 30, 1997, the Bank was in compliance with
the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act, or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
FIRREA amended provisions of the Bank Holding Company Act of 1956 ("BHCA")
to specifically authorize the Federal Reserve Board to approve an application by
a bank holding company to acquire control of a savings association. FIRREA also
authorized a bank holding company that controls a savings association to merge
or consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
Bank Insurance Fund ("BIF") with the approval of the appropriate federal
<PAGE>
banking agency and the Federal Reserve Board. As a result of these
provisions, there have been a number of acquisitions of savings associations
by bank holding companies in recent years.
REGULATION OF THE BANK
GENERAL. The OTS has extensive regulatory authority over the operations
of savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings associations and may also apply to
state-chartered savings associations. Such regulation and supervision is
primarily intended for the protection of depositors.
The OTS' enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. ** Recent
Legislation part--see p. 34 in the 10-k of first financial **
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured up to $100,000
per insured member (as defined by law and regulation) by the SAIF administered
by the FDIC and are backed by the full faith and credit of the U. S. Government.
As insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action.
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.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals,
<PAGE>
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. Management is aware of no existing circumstances
which would result in termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Current OTS capital standards require
savings associations to satisfy three different capital requirements. Under
these standards, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to 3% of adjusted total
assets and "total" capital (a combination of core and "supplementary" capital)
equal to 8% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets.
Both core and tangible capital are further reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies).
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirement, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighting system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans. Off-
balance sheet items also are adjusted to take into account certain risk
characteristics.
The following is a reconciliation of the Bank's equity determined in
accordance with GAAP to regulatory tangible, core, and risk-based capital at
September 30, 1997.
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------
Tangible Core Risk- based
Capital Capital Capital
--------- --------- -----------
<S> <C> <C> <C>
(Dollars in Thousands)
GAAP equity.................................................................... $ 28,761 $ 28,761 $ 28,761
Unrealized gain on securities.................................................. (51) (51) (51)
Goodwill....................................................................... (20) (20) (20)
General valuation allowances................................................... -- -- 575
--------- --------- -----------
Total regulatory capital....................................................... 28,690 28,690 29,265
Minimum capital requirements................................................... 4,112 8,224 12,295
--------- --------- -----------
Excess regulatory capital...................................................... $ 24,578 $ 20,466 $ 16,970
--------- --------- -----------
--------- --------- -----------
</TABLE>
<PAGE>
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 5%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at September 30, 1997, had a liquidity ratio of 6.4%.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank is a
domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and educational loans may now be made by savings associations
without regard to any percentage-of-assets limit, and commercial loans may be
made in an amount up to 10 percent of total assets, plus an additional 10
percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate, may account for
up to 20% of total assets. At September 30, 1997, under the expanded QTL test,
approximately 87.0% of the Bank's portfolio assets were qualified thrift
investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval. See "--Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination. The Bank
currently is a Tier 1 institution for purposes of the regulation dealing with
capital distributions.
<PAGE>
OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
POLICY STATEMENT ON NATIONWIDE BRANCHING. Effective May 11, 1992, the OTS
amended and codified its policy statement on branching by federally-chartered
savings associations to delete then-existing regulatory restrictions on the
branching authority of such associations and to permit nationwide branching to
the extent allowed by federal statute. (Prior OTS policy generally permitted
interstate branching for federally-chartered savings associations only to the
extent allowed state-chartered savings associations in the states where the
association's home office was located and where the branch was sought or if the
branching resulted from OTS approval of a supervisory interstate acquisition of
a troubled institution.) Current OTS policy generally permits a
federally-chartered savings association to establish branch offices outside of
its home state if the association meets the domestic building and loan test in
Section 7701(a)(19) of the Code or the asset composition test of subparagraph
(c) of that section, and if, with respect to each state outside of its home
state where the association has established branches, the branches, taken alone,
also satisfy one of the two tax tests. An association seeking to take advantage
of this authority would have to have a branching application approved by the
OTS, which would consider the regulatory capital of the association and its
record under the Community Reinvestment Act of 1977, as amended, among other
things.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Cincinnati,
whichever is greater. At September 30, 1997, the Bank had $5.5 million in FHLB
stock, which was in compliance with this requirement.
<PAGE>
TAXATION
TAXATION
FEDERAL TAXATION. The Company and the Bank are both subject to the
federal tax laws and regulations which apply to corporations generally. Prior
to the enactment of the Small Business Jobs Protection Act (the "Act"), which
was signed into law on August 21, 1996, certain thrift institutions, such as
the Bank, were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method
of Section 166 of the Code or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the
greater of (i) an amount based on its actual average experience for losses in
the current and five preceding taxable years, or (ii) an amount necessary to
restore the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad
debt reserves for qualifying loans either under the experience method of the
percentage of taxable income method. For tax years 1995 and 1994, the Bank
used the percentage of taxable income method because such method provided a
higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for
bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, like the Bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or, (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be
<PAGE>
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax
year, the principal amount of residential loans made by the thrift during the
year is not less than its base amount. The "base amount" generally is the
average of the principal amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case
of certain excessive distributions to shareholders. The pre-1988 reserves may
not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first,
out of the institution's post-1951 accumulated earnings and profits; second,
out of the pre-1988 reserves; and third, out of such other accounts as may be
proper. To the extent a distribution by the Bank to the Company is deemed
paid out of its pre-1988 reserves under these rules, the pre-1988 reserves
would be reduced and the Bank's gross income for tax purposes would be
increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of September 30, 1997,
The Bank's pre-1988 reserves for tax purposes totaled approximately $2.5
million. The Bank believes it had approximately $12.1 million of accumulated
earnings and profits for tax purposes as of September 30, 1997, which would
be available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made
as to whether the Bank will have current or accumulated earnings and profits
in subsequent years.
In addition to the regular income tax, the Company and the Bank are subject
to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986 and before 1996, the
Company and the Bank are also subject to environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2.0 million.
The tax returns of the Bank have been audited or closed without audit
through fiscal year 1993. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
OHIO TAXATION. The Company is subject to the Ohio corporation franchise
tax, which, as applied to the Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, The Company may exclude
100% of its investment in the capital stock of the Bank after the Conversion, as
reflected on the balance sheet of the Company, in computing its taxable net
worth as long as it owns at least 25% of the issued and outstanding capital
stock of the Bank. The
<PAGE>
calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, the Bank may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of the computed Ohio taxable income in excess of $50,000. If the franchise
tax is paid on the net worth basis, the litter tax is equal to .014% times
taxable net worth.
The Bank is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the Bank's book
net worth determined in accordance with generally accepted accounting
principles. As a "financial institution," the Bank is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.
<PAGE>
ITEM 2. PROPERTIES.
OFFICES AND PROPERTIES
At September 30, 1997, the Bank conducted its business from its executive
offices in West Chester, Ohio and four full service offices, all of which are
located in southwestern Ohio.
The following table sets forth certain information with respect to the
Bank's office properties at September 30, 1997.
<TABLE>
<CAPTION>
NET BOOK
LEASED/ VALUE OF AMOUNT OF
DESCRIPTION/ADDRESS OWNED PROPERTY DEPOSITS
- ----------------------------------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Lockland--117 Mill Street.................................................... Owned $ 123 $ 50,541
Lebanon--718 E. Main Street.................................................. Owned 443 25,050
Kingsgate--7810-7820 Tylersville Square Drive................................ Owned(1) 2,195 21,166
Pisgah--9235 Cincinnati--Columbus Road....................................... Owned 323 31,466
Wyoming--401 Wyoming Avenue.................................................. Owned 328 18,074
---------- -----------
$ 3,412 $ 146,297
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) The Bank closed its branch office at 7731 Tylersville Road and moved its
main office to 7810-7820 Tylersville Square Drive during April, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein, to the extent applicable, is
incorporated by reference from page 49 of the Corporation's 1997 Annual
Report to Stockholders ("1997 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from
page three of the 1997 Annual Report.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from
pages 4 to 18 of the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages 20 to 47 of the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
the definitive proxy statement of the Corporation for the Annual Meeting of
Stockholders to be held on January 16, 1998 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at
September 30, 1997 and 1996.
Consolidated Statements of Earnings for Each of the Three Years
in the Period Ended September 30, 1997.
Consolidated Statements of Changes in Stockholders' Equity for
<PAGE>
Each of the Three Years in the Period Ended September 30, 1997.
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period ended September 30, 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in
the financial statements and related notes thereto.
<PAGE>
(3) The following exhibits are filed as part of this Form 10-K and this list
includes the Exhibit Index.
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
2.1 Plan of Conversion............................................................. *
3.1 Amended Articles of Incorporation of Enterprise Federal Bancorp, Inc........... **
3.2 Code of Regulations of Enterprise Federal Bancorp, Inc......................... *
3.3 Bylaws of Enterprise Federal Bancorp, Inc...................................... *
4.0 Stock Certificate of Enterprise Federal Bancorp, Inc........................... ***
10.1 Enterprise Federal Bancorp, Inc. Recognition and Retention Plan................ ***
10.2 Enterprise Federal Bancorp, Inc. 1994 Stock Option Plan........................ ***
10.3 Enterprise Federal Bancorp, Inc. Employee Stock Ownership Plan and Trust....... *
10.4 Employment Agreement between Enterprise Federal Bancorp, Inc. and Otto L.
Keeton....................................................................... ***
10.5 Employment Agreement between Enterprise Federal Bancorp, Inc. and Michael P.
Meister...................................................................... ***
10.6 Employment Agreement between Enterprise Federal Bancorp, Inc. and Thomas J.
Noe.......................................................................... ***
10.7 Employment Agreement between Enterprise Federal Bancorp, Inc. and Steven M.
Pomeroy...................................................................... ***
13.0 1997 Annual Report to Stockholders............................................. E-1
22.0 Subsidiaries of the Registrant--Reference is made to "Item 1
Business--Subsidiaries" for the required information
</TABLE>
- ------------------------
(*) Incorporated herein by reference from the Corporation's Registration
Statement on Form S-1 filed with the SEC on April 21, 1994.
(**) Incorporated herein by reference from the Corporation's Registration
Statement on Form 8-A filed with the SEC on August 15, 1994.
(***) Incorporated herein by reference from the Corporation's Form 10-K filed
with the SEC on December 29, 1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENTERPRISE FEDERAL BANCORP, INC.
By: /s/ Otto L. Keeton
-------------------------------------
Otto L. Keeton
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Otto L. Keeton
- ----------------------------------
Otto L. Keeton October 31, 1997
Chairman of the Board, President
and Chief Executive Officer
/s/ Michael R. Meister
- ----------------------------------
Michael R. Meister October 31, 1997
Vice President, Chief Operating
Officer and Director
/s/ Thomas J. Noe
- ----------------------------------
Thomas J. Noe October 31, 1997
Vice President, Treasurer and
Chief Financial Officer
/s/William H. Kreeger
- ----------------------------------
William H. Kreeger October 31, 1997
Director
<PAGE>
/s/ Terrell G. Marty
- ----------------------------------
Terrell G. Marty October 31, 1997
Director
/s/ Edith P. Mayer
- ----------------------------------
Edith P. Mayer October 31, 1997
Director
/s/ Steven A. Wilson
- ----------------------------------
Steven A. Wilson October 31, 1997
Director
<PAGE>
Exhibit 13.0
1997 Annual Report
to
Shareholders
<PAGE>
To Our Stockholders:
The record financial results achieved during fiscal 1997 reflect our
continued emphasis on expanding our lending and retail operations to enhance
earnings, efficiently leverage our capital and, above all, enhance shareholder
value. We are proud to report record earnings of $2.4 million and an increase
in assets to $274.9 million. During the last five years, we have more than
doubled our size reflecting significant growth in the loan portfolio with the
expansion of our loan products. In addition, our strong capital position
enabled us to pay $1.50 per share in cash dividends during fiscal 1997. Since
our conversion to a public company on October 14, 1997, we have paid dividends
aggregating $4.50 per share, including a $3.00 return of capital paid in fiscal
1996. Our significant capital base also permitted us to commence a third 5%
repurchase program in October 1997.
While we are pleased with our progress to date, we intend to continue our
efforts to expand our asset base by further leveraging our capital. In addition
to the growth in our loan portfolio and the expansion of our loan products, we
have continually sought other opportunities to expand. This is evidenced by the
announcement in July 1997 of the proposed acquisition by Enterprise Federal of
North Cincinnati Savings Bank for a combination of common stock and cash. With
offices in the communities of Blue Ash and North College Hill, this acquisition
solidifies and expands our core market area.
We look forward to building on our success to date and believe that fiscal
1998 will be another promising year. We would like to thank our directors and
employees for their dedication to Enterprise along with our stockholders for
their continued support.
SINCERELY,
/s/ Otto L. Keeton
------------------
Otto L. Keeton
President and Chairman of the Board
<PAGE>
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 minority interest in North Cincinnati
Savings Bank and has no significant liabilities other than dividends payable.
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, 1997, the Company had consolidated total assets of
$274.9 million, total deposits of $146.3 million and stockholders' equity of
$31.4 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>
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets......................................... $ 274,888 $ 235,191 $ 197,938 $ 167,294 $ 131,681
Loans receivable, net................................ 191,096 149,050 110,830 100,288 90,027
Mortgage-backed securities........................... 61,457 65,482 72,022 25,681 26,518
Cash and cash equivalents............................ 11,141 12,938 10,670 36,465 10,510
Deposit accounts..................................... 146,297 139,447 127,687 153,709 119,672
FHLB advances........................................ 95,000 60,000 30,000 -- --
Stockholders' equity(1).............................. 31,424 33,056 38,474 12,458 11,176
Selected Operations Data:
Net interest income.................................. $ 7,130 $ 6,268 $ 5,719 $ 4,259 $ 3,966
Other operating income............................... 726 994 464 76 79
General, administrative and other expense............ 4,066 4,973 3,410 2,356 2,091
Net earnings......................................... 2,369 1,441 1,837 1,282 1,121
Selected Operating Ratios(2):
Average interest rate spread(3)...................... 2.21% 2.13% 2.28% 2.85% 2.76%
Net interest margin(3)............................... 2.84 2.98 3.38 3.16 3.12
Ratio of interest-earning assets to
interest-bearing liabilities....................... 113.44 119.03 128.46 107.81 107.88
General, administrative and other expense as a
percent of average assets.......................... 1.59 2.31 1.99 1.71 1.59
Return on average assets............................. .93 .67 1.07 .93 .85
Return on average equity............................. 7.35 4.03 4.82 10.85 10.56
Ratio of average equity to average assets............ 12.64 16.61 22.27 8.59 8.10
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) .07% .09% .23% .37% .55%
Allowance for loan losses as a percent of
non-performing loans and troubled debt
restructurings..................................... 297.93 201.97 659.18 60.83 52.19
Capital Ratios(5):
Tangible capital ratio............................... 10.46 11.68 14.30 7.38 8.39
Core capital ratio................................... 10.46 11.68 14.30 7.38 8.49
Risk-based capital ratio............................. 19.04 22.29 31.00 15.42 16.50
</TABLE>
- ------------------------
(1) Consists of retained earnings as of September 30, 1993 and 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 interest margin represents net
interest 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>
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 are 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.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and the Company's general
market area. The forward-looking statements contained herein include, but are
not limited to, those with respect to the following matters:
1. Management's determination of the amount of and adequacy of the
allowance for loan losses;
2. The effect of changes in interest rates;
3. Management's opinion as to the effects of recent accounting
pronouncements on the Company's consolidated financial statements.
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.
4
<PAGE>
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; and (ii) emphasizing 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, 1997, $72.3 million or 37.9% of
the Company's portfolio of mortgage loans consisted of ARMs. In addition, at
September 30, 1997, $61.3 million or 99.8% of the Company's mortgage-backed
securities provide the Company with an adjustable yield. As a result, as of
September 30, 1997, $133.6 million or 48.6% of the Company's assets had
adjustable rate features.
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 a 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 $5.6 million or 2.0% of the Company's assets
at September 30, 1997. 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. While a significant
portion of the Company's assets have adjustable-rate features, such assets
are generally not as responsive to increases in interest rates 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.
5
<PAGE>
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 risk 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 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 June 30, 1997, 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 most recently available estimated
NPV and the estimated NPV as a percentage of the present value ("PV") of
assets as of June 30, 1997, as calculated by the OTS, based on information
provided to the OTS by the Bank.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NET PORTFOLIO VALUE
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
CHANGE IN ESTIMATED NPV
INTEREST RATES AS A PERCENTAGE AMOUNT PERCENT
BASIS POINTS) ESTIMATED NPV OF PV OF ASSETS OF CHANGE OF CHANGE
------------- ------------- --------------- ---------- ---------
<S> <C> <C> <C> <C>
+400 $20,417 8.32% $(16,388) (45)
+300 24,314 9.68% (12,491) (34)
+200 28,707 11.14% (8,098) (22)
+100 32,983 12.50% (3,822) (10)
--- 36,805 13.64% -- --
-100 39,467 14.37% 2,662 7
-200 40,694 14.63% 3,889 11
-300 41,920 14.88% 5,115 14
-400 43,801 15.32% 6,996 19
</TABLE>
6
<PAGE>
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total consolidated assets increased $39.7 million
or 16.9% to $274.9 million at September 30, 1997 compared to $235.2 million
at September 30, 1996. Such increase was funded primarily through increases
in deposits of $6.9 million and $35.0 million in advances from the Federal
Home Loan Bank ("FHLB") of Cincinnati. Such increase in assets was primarily
due to a $42.0 million increase in loans receivable, net, which was partially
offset by a $4.0 million decrease in mortgage-backed securities. Total
liabilities increased $41.3 million or 20.4% to $243.5 million at September
30, 1997 compared to September 30, 1996.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased $1.8
million to $11.1 million at September 30, 1997 compared to September 30,
1996, as excess liquidity was utilized to fund growth in the loan portfolio.
LOANS RECEIVABLE, NET. Loans receivable, net increased $42.0 million or
28.2% to $191.1 million at September 30, 1997 compared to September 30, 1996,
as loan disbursements totaling $65.6 million were partially offset by
repayments of $23.4 million. The increase in loans receivable was primarily
due to increased originations of all types of loans. Loan disbursements
increased by $4.2 million, or 6.9% during fiscal 1997. Growth in the loan
portfolio was comprised of $33.4 million or 34.6% in one-to-four family
residential loans, $7.7 million or 64.0% in equity lines and $3.4 million or
9.5% in non-residential real estate loans.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased $4.0
million to $61.5 million at September 30, 1997 compared to September 30, 1996
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 $95.0
million at September 30, 1997 compared to $60.0 million at September 30,
1996, an increase of 58.3%. 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
fixed rate and 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 1997 and in
1996 and intends to continue to fund higher rate loans with repayments and
sales proceeds from its mortgage-backed securities portfolio and future
advances from the FHLB.
DEPOSITS. Deposits increased $6.9 million or 4.9% to $146.3 million at
September 30, 1997 compared to September 30, 1996. The increase in deposits
was comprised of a $2.8 million or 6.4% increase in transaction accounts and
a $4.1 million or 4.2% increase in certificates of deposit. The increase was
primarily attributable to management's continuing marketing efforts coupled
with growth achieved at the new main office facility which opened in fiscal
1996.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $1.6 million to
$31.4 million at September 30, 1997 compared to September 30, 1996, as a
result of net cash distributions to stockholders of $3.4 million or $1.75 per
share and open market common stock repurchases totaling $1.3 million which
were partially offset by fiscal 1997 net earnings of $2.4 million.
7
<PAGE>
RESULTS OF OPERATIONS
The following average balance sheet table sets forth for the periods
indicated, information on the Company 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,
--------------------------------------------------------------------------------------------------------
1997 1997 1996 1995
--------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
------------- -------- --------- ------ ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
Loans receivable....... 8.08% $171,519 $14,067 8.20% $130,399 $10,853 8.32% $102,065 $ 8,444
Mortgage-backed
securities........... 6.30 64,100 4,147 6.47 67,316 4,164 6.19 50,415 3,026
Other interest-earning
assets............... 5.28 15,516 835 5.38 12,834 643 5.01 16,540 827
-------- ------- ------- ------- -------- ------
Total interest-earning
assets............... 7.51 251,135 19,049 7.59 210,549 15,660 7.44 169,020 12,297
Noninterest-earning
assets............... 3,905 4,721 2,116
-------- -------- --------
Total assets........... $255,040 $215,270 $171,136
-------- -------- --------
-------- -------- --------
Interest-bearing
liabilities:
Deposits............... 5.13 $143,681 7,299 5.08 $136,890 6,838 5.00 $120,460 5,837
Borrowings............. 5.98 77,692 4,620 5.95 40,000 2,554 6.39 11,111 741
-------- ------- -------- ------- -------- --------
Total interest-bearing
liabilities.......... 5.46 221,373 11,919 5.38 176,890 9,392 5.31 131,571 6,578
---- ------- ------ ------- ------ --------
Noninterest-bearing
liabilities.......... 1,427 2,615 1,452
-------- -------- --------
Total liabilities...... 222,800 179,505 133,023
Stockholders' equity... 32,240 35,765 38,113
-------- -------- --------
Total liabilities and
stockholders'
equity............... $255,040 $215,270 $171,136
-------- -------- --------
-------- -------- --------
Net interest-earning
assets............... $ 29,762 $ 33,659 $ 37,449
-------- -------- --------
-------- -------- --------
Net interest income/
interest rate
spread............... 2.05% $ 7,130 2.21% $ 6,268 2.13% $ 5,719
---- ------- ------- ------- ------ -------
---- ------- ------- ------- ------ -------
Net yield on
interest-earning
assets(1)............ 2.84% 2.98%
------ ------
------ ------
Ratio of interest-
earning assets to
interest-bearing
liabilities.......... 113.44% 119.03%
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
YIELD/
RATE
--------
<S> <C>
Interest-earning
assets:
Loans receivable....... 8.27%
Mortgage-backed
securities........... 6.00
Other interest-earning
assets............... 5.00
Total interest-earning
assets............... 7.28
Noninterest-earning
assets...............
Total assets...........
Interest-bearing
liabilities:
Deposits............... 4.85
Borrowings............. 6.67
Total interest-bearing
liabilities.......... 5.00
------
Noninterest-bearing
liabilities..........
Total liabilities......
Stockholders' equity...
Total liabilities and
stockholders'
equity...............
Net interest-earning
assets...............
Net interest income/
interest rate
spread............... 2.28%
------
------
Net yield on
interest-earning
assets(1)............ 3.38%
-------
-------
Ratio of interest-
earning assets to
interest-bearing
liabilities.......... 128.46%
-------
-------
</TABLE>
- ------------------------
(1) Net interest income divided by total average interest-earning assets.
8
<PAGE>
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,
----------------------------------------- --------------------------------------
1997 VS. 1996 1996 VS. 1995
----------------------------------------- --------------------------------------
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
----------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
TOTAL TOTAL
RATE/ INCREASE RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
------- ------- -------- ---------- ---- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable........ $(156) $3,421 $( 51) $3,214 $ 51 $2,343 $ 15 $2,409
Mortgage-backed
securities............ 188 (199) (6) (17) 96 1,014 28 1,138
Other interest-earning
assets................ 47 134 11 192 2 (185) (1) (184)
---- ------ ----- ------ ---- ----- ---- ------
Total interest-earnings
assets.............. 79 3,356 (46) 3,389 149 3,172 42 3,363
---- ------ ----- ------ ---- ----- ---- ------
Interest-bearing
liabilities:
Deposits................ 110 340 11 461 181 797 23 1,001
Borrowings.............. (176) 2,409 (167) 2,066 (31) 1,927 (83) 1,813
---- ------ ----- ------ ---- ----- ---- ------
Total interest-bearing
liabilities......... (66) 2,749 (156) 2,527 150 2,724 (60) 2,814
---- ------ ----- ------ ---- ----- ---- ------
Increase (decrease) in net
interest income......... $145 $ 607 $ 110 $ 862 $ (1) $ 448 $102 $ 549
---- ------ ----- ------ ---- ----- ---- ------
---- ------ ----- ------ ---- ----- ---- ------
</TABLE>
9
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1997 AND 1996
GENERAL. The Company's net earnings amounted to $2.4 million for the
year ended September 30, 1997 compared to net earnings of $1.4 million for
the year ended September 30, 1996, an increase of $928,000, or 64.4%. The
increase in fiscal 1997 earnings was due primarily to an $862,000 increase in
net interest income and the absence of a fiscal 1996 non recurring charge of
$770,000 related to the recapitalization of the Savings Association Insurance
Fund ("SAIF") fund, which were partially offset by decreases in other income
and increased federal income taxes.
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
$7.1 million for the year ended September 30, 1997, an $862,000 or 13.8%
increase over fiscal 1996. This increase in net interest income resulted from
a $3.4 million or 21.6% increase in total interest income, due primarily to
an increase in interest income on loans and interest-bearing deposits, which
were partially offset by a $2.5 million or 26.9% increase in total interest
expense during fiscal 1997. The Company's interest rate spread increased from
2.13% for the year ended September 30, 1996 to 2.21% for the year ended
September 30, 1997. The Company's net interest margin decreased from 2.98% in
fiscal 1996 to 2.84% in fiscal 1997. The decline in net interest margin
during fiscal 1997 was due primarily to the increase of the loan portfolio
through the Company's use of long term, fixed rate FHLB advances.
INTEREST INCOME. Interest income on loans increased $3.2 million or
29.6% during the year ended September 30, 1997 compared to the same period in
1996. Such increase was due primarily to a $41.1 million or 31.5% increase in
the average balance of such assets as a result of increased loan production
in fiscal 1997.
Interest income on the Company's mortgage-backed securities decreased
$17,000 or .4% during the year ended September 30, 1997 compared to the same
period in 1996. Such decrease was primarily due to a $3.2 million or 4.8%
decrease in the average balance of such assets, which was partially offset by
an increase in the average yield to 6.47% for fiscal 1997 compared to 6.19%
for fiscal 1996. The decrease in the average balance was primarily due to the
use of repayments and sales proceeds to fund loan originations.
Interest income on investment securities and other interest-earning
assets increased by $190,000 or 29.9% primarily due to an increase in the
average balance of such assets during the year ended September 30, 1997
compared to fiscal 1996.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $2.5 million or 26.9% during the year ended
September 30, 1997 compared to fiscal 1996. Interest expense on deposits
increased $461,000 or 6.7% during fiscal 1997 as a result of a $6.8 million
or 5.0% increase in the average balance of deposits as well as an increase in
the average rate paid to 5.08% for fiscal 1997 compared to 5.00% for fiscal
1996. 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 expense on
borrowings increased to $4.6 million during the fiscal year ended September
30, 1997 compared to $2.6 million during the fiscal year ended September 30,
1996 primarily as a result of an increase in the average balance of
borrowings outstanding in order to assist in funding the Company's lending
activities.
10
<PAGE>
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
collectability of the Company's loan portfolio. For fiscal 1997 the Company
established a provision for loan losses totaling $165,000. For fiscal 1996
the Company established a provision for loan losses totaling $90,000. At
September 30, 1997, the Company's allowance for loan losses totaled $575,000,
which represented 298% of non-performing loans and .30% of total loans at
such time.
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 decreased $268,000 to $726,000 for the
year ended September 30, 1997 compared to $994,000 for the same period in
1996, primarily as a result of a $288,000 decrease in gains on sales of
securities during fiscal 1997.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For fiscal 1997, general,
administrative and other expense decreased by $907,000 or 18.2% to $4.1
million, compared to $5.0 million for 1996. Such decrease was due primarily
to a $947,000 or 88.6% decrease in federal deposit insurance premiums. The
decrease in federal deposit insurance premiums was primarily due to
legislation enacted in 1996 that authorized a one time charge to
re-capitalize the SAIF in fiscal 1996. 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 next of tax). While the one-time special assessment had a
significant impact on fiscal 1996 earnings, the resulting lower annual
premiums had a positive impact on fiscal 1997 earnings and will continue to
benefit future earnings. A $69,000 or 2.8% increase in employee compensation
and benefits and a $78,000 or 25.4% increase in occupancy and equipment
expenses were partially offset by a $96,000 or 19.6% decrease in other
operating expenses. The increase in occupancy and equipment expenses reflects
the first full year of occupancy for the new Corporate Headquarters while the
decrease in other operating expenses was primarily due to lower professional
fees.
INCOME TAXES. The Company incurred income tax expense of $1.3 million
and $758,000 during fiscal 1997 and 1996, respectively. The effective tax
rates were 34.6% and 34.5% during fiscal 1997 and 1996, respectively. The
increase in income tax expense in fiscal 1997 was primarily due to a $1.4
million or 64.8% increase in pre-tax earnings.
11
<PAGE>
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
fiscal year ended September 30, 1996 compared to net earnings of $1.8 million
for the fiscal year ended September 30, 1995, a decrease of $396,000, or
21.6%. The decrease in fiscal 1996 earnings was due primarily to a charge of
$770,000 related to the recapitalization of the SAIF which was partially
offset by increases in net interest income and other income.
NET INTEREST INCOME. The Company's net interest income amounted to $6.3
million for the fiscal year ended September 30, 1996, a $549,000 or 9.6%
increase over fiscal 1995. This increase in net interest income resulted from
a $3.4 million or 27.3% 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 fiscal 1995 to 2.13% for fiscal 1996. The Company's net interest
margin decreased from 3.38% in fiscal 1995 to 2.98% in fiscal 1996. The
decline in net interest margin during fiscal 1996 was due primarily to the
increase of the loan portfolio through the Company's use of long term, fixed
rate FHLB advances.
INTEREST INCOME. Interest income on loans increased $2.4 million or
28.5% during fiscal 1996 compared to fiscal 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 during fiscal 1996.
Interest income on the Company's mortgage-backed securities increased
$1.1 million or 37.6% during fiscal 1996 compared to fiscal 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 fiscal 1996 compared to fiscal 1995.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $2.8 million or 42.8% during fiscal 1996 compared
to fiscal 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 expense on borrowings increased
to $2.6 million during fiscal 1996 compared to $741,000 during fiscal 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.
PROVISION FOR LOAN LOSSES. For fiscal 1996, the Company established a
provision for loan losses totaling $90,000. For fiscal 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 at such time.
12
<PAGE>
OTHER INCOME. Total other income increased $530,000 to $994,000 for
fiscal 1996 compared to $464,000 for fiscal 1995, as a result of a $554,000
increase in gains on sales of securities during fiscal 1996.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For fiscal 1996, general,
administrative and other expense increased by $1.6 million or 45.8% to $5.0
million, compared to $3.4 million for fiscal 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 the Company's employee
stock benefit plans. The increase in federal deposit insurance premiums was
primarily due to a charge of $770,000 to recapitalize the SAIF.
INCOME TAXES. The Company incurred income tax expense of $758,000 and
$936,000 during fiscal 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.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, repayments, prepayments
and maturities of outstanding loans and mortgage-backed securities, sales of
mortgage-backed and investment securities, FHLB advances 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, 1997, the Company had $95.0
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, 1997, 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, 1997, the total
approved loan commitments outstanding amounted to $3.3 million. At the same
date, the Bank had approximately $9.5 million of commitments under unused
lines and letters of credit and the unadvanced portion of construction loans
approximated $7.8 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, 1997 totaled $52.8
million. Management believes that a significant portion of maturing deposits
will remain with the Bank.
13
<PAGE>
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 6.6% for September 1997.
As set forth below, as of September 30, 1997, the Bank's regulatory
capital substantially exceeded applicable limits.
SEPTEMBER 30, 1997
---------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(IN THOUSANDS)
GAAP equity............................ $28,761 $28,761 $28,761
Unrealized gain on securities.......... (51) (51) (51)
Goodwill............................... (20) (20) (20)
General valuation allowances........... -- -- 575
-------- ------- ----------
Total regulatory capital............... 28,690 28,690 29,265
Minimum capital requirements........... 4,112 8,224 12,295
-------- ------- ----------
Excess capital......................... $24,578 $20,466 $16,970
-------- ------- ----------
-------- ------- ----------
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.
14
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1994, the Financial Accounting Standards Board ("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 is 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 compensation plans. SFAS No. 123 encourages all entities to adopt
a new method of accounting to measure compensation cost of all stock
compensation plans based on the estimated fair value of the award at the date
it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No.
123 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,
15
<PAGE>
transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and
over the period of estimated net servicing income or net servicing loss and
are subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management 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.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS No. 128 requires restatement of all
prior-period EPS data presented.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." Statement No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. Specifically, the
Statement requires all entities to provide the capital structure disclosures
previously required by Opinion 15. Companies that were exempt from the
provisions of Opinion 15 will now need to make those disclosures.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure
of all changes in equity of an enterprise that result from transactions and
other
16
<PAGE>
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997 with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." Statement No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. The
Statement is effective for fiscal years beginning after December 15, 1997
with earlier application permitted.
17
<PAGE>
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, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years ended September 30, 1997,
1996 and 1995. 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 principals 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years ended September 30, 1997, 1996, and 1995, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton L.L.P.
- -------------------------
Cincinnati, Ohio
October 24, 1997
18
<PAGE>
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks............................................... $ 811 $ 736
Federal funds sold.................................................... 8,000 7,225
Interest-bearing deposits in other financial institutions............. 2,330 4,977
---------- ----------
Cash and cash equivalents......................................... 11,141 12,938
Investment securities available for sale--at market................... 698 --
Mortgage-backed securities available for sale--at market.............. 61,457 65,482
Loans receivable--net................................................. 191,096 149,050
Office premises and equipment-at depreciated cost..................... 3,544 3,603
Federal Home Loan Bank stock--at cost................................. 5,500 3,000
Accrued interest receivable on loans.................................. 608 360
Accrued interest receivable on mortgage-backed securities............. 409 371
Accrued interest receivable on interest-bearing deposits.............. 96 44
Goodwill and other intangible assets.................................. 20 50
Prepaid expenses and other assets..................................... 290 256
Prepaid federal income taxes.......................................... 29 --
Deferred federal income tax asset..................................... -- 37
---------- ----------
Total assets...................................................... $ 274,888 $ 235,191
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.............................................................. $ 146,297 $ 139,447
Advances from the Federal Home Loan Bank.............................. 95,000 60,000
Escrow deposits....................................................... -- 208
Accrued interest payable.............................................. 636 488
Other liabilities..................................................... 1,365 1,703
Accrued federal income taxes.......................................... -- 289
Deferred federal income taxes......................................... 166 --
---------- ----------
Total liabilities................................................. 243,464 202,135
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, 1997 and 1996..................... 23 23
Additional paid-in capital............................................ 23,082 22,713
Less 282,768 and 199,268 shares of treasury stock--at cost............ (4,386) (3,058)
Less shares acquired by stock benefit plans........................... (1,927) (2,593)
Retained earnings--restricted......................................... 14,581 15,736
Unrealized gains on securities designated as available for sale,
net of related tax effects.......................................... 51 235
---------- ----------
Total stockholders' equity........................................ 31,424 33,056
---------- ----------
Total liabilities and stockholders' equity........................ $ 274,888 $ 235,191
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income
Loans....................................................... $ 14,067 $ 10,853 $ 8,444
Mortgage-backed securities.................................. 4,147 4,164 3,026
Investment securities....................................... 3 -- 114
Interest-bearing deposits and other......................... 832 643 713
--------- --------- ---------
Total interest income................................... 19,049 15,660 12,297
Interest expense
Deposits.................................................. 7,299 6,838 5,837
Borrowings................................................ 4,620 2,554 741
--------- --------- ---------
Total interest expense.................................. 11,919 9,392 6,578
--------- --------- ---------
Net interest income..................................... 7,130 6,268 5,719
Provision for losses on loans................................. 165 90 --
--------- --------- ---------
Net interest income after provision for losses on loans. 6,965 6,178 5,719
Other income
Gain on sale of investment and mortgage backed securities... 597 885 331
Gain on sale of real estate acquired through foreclosure.... -- -- 39
Other operating............................................. 129 109 94
--------- --------- ---------
Total other income...................................... 726 994 464
General, administrative and other expense
Employee compensation and benefits.......................... 2,548 2,479 1,860
Occupancy and equipment..................................... 385 307 223
Federal deposit insurance premiums.......................... 122 1,069 272
Franchise taxes............................................. 447 461 397
Data processing............................................. 140 137 131
Amortization of goodwill and other intangible assets........ 30 30 30
Other operating............................................. 394 490 497
--------- --------- ---------
Total general, administrative and other expense......... 4,066 4,973 3,410
--------- --------- ---------
Earnings before income taxes............................ 3,625 2,199 2,773
Federal income taxes
Current..................................................... 959 1,102 877
Deferred.................................................... 297 (344) 59
--------- --------- ---------
Total federal income taxes.............................. 1,256 758 936
--------- --------- ---------
NET EARNINGS............................................ $ 2,369 $ 1,441 $ 1,837
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE...................................... $ 1.23 $ .73 $ .90
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
SHARES GAINS (LOSSES)
ACQUIRED BY 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, 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 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 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
Dividends paid of $1.75 per share............ -- 170 -- -- -- (3,524) (3,354)
Purchase of treasury shares.................. -- -- (1,328) -- -- -- (1,328)
Unrealized losses on securities designated as
available for sale, net of related
tax effects................................. -- -- -- -- (184) -- (184)
Principal repayment on loan to
ESOP/amortization of expense related
to stock benefit plans...................... -- 199 -- 666 -- -- 865
Net earnings for the year ended
September 30, 1997.......................... -- -- -- -- -- 2,369 2,369
------ -------- -------- --------- --------- -------- --------
Balance at September 30, 1997................. $ 23 $ 23,082 $ (4,386) $ (1,927) $ 51 $ 14,581 $ 31,424
------ -------- -------- --------- --------- -------- --------
------ -------- -------- --------- --------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year...................................................... $ 2,369 $ 1,441 $ 1,837
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........................... 24 (34) 78
Amortization of deferred loan origination fees.............................. (189) (170) (142)
Amortization of expense related to stock benefit plans...................... 865 925 236
Depreciation and amortization............................................... 263 121 112
Provision for losses on loans............................................... 165 90 --
Gain on sale of securities designated as available for sale................. (597) (885) (331)
Gain on sale of real estate acquired through foreclosure.................... -- -- (39)
Federal Home Loan Bank stock dividends...................................... (297) (148) (78)
Increase (decrease) in cash due to changes in:
Accrued interest receivable............................................... (338) (272) (176)
Prepaid expenses and other assets......................................... (34) (36) 219
Accrued interest payable.................................................. 148 112 267
Other liabilities......................................................... (546) 878 131
Federal income taxes
Current................................................................... 1,053 304 (6)
Deferred.................................................................. 297 (344) 59
--------- --------- ---------
Net cash provided by operating activities............................... 3,183 1,982 2,167
Cash flows provided by (used in) investing activities:
Purchase of investment securities.............................................. (968) -- (7,427)
Proceeds from sale of investment securities designated
as available for sale......................................................... 356 -- 8,518
Purchase of mortgage-backed securities......................................... (55,302) (51,493) (68,464)
Proceeds from sale of mortgage-backed securities designated
as available for sale......................................................... 52,714 54,552 18,776
Principal repayments on mortgage-backed securities............................. 6,728 4,178 4,108
Loan principal repayments...................................................... 22,664 23,208 20,802
Loan disbursements............................................................. (65,585) (61,378) (31,213)
Purchase of office premises and equipment...................................... (174) (1,640) (253)
Proceeds from sale of real estate acquired through foreclosure................. -- 19 122
Purchase of Federal Home Loan Bank stock....................................... (2,203) (1,307) (457)
--------- --------- ---------
Net cash used in investing activities.................................. (41,770) (33,861) (55,488)
--------- --------- ---------
Net cash used in operating and investing activities
(subtotal carried forward)........................................... (38,587) (31,879) (53,321)
--------- --------- ---------
</TABLE>
22
<PAGE>
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward).......................................... $ (38,587) $ (31,879) $ (53,321)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts.................................... 6,850 11,760 (26,022)
Proceeds from Federal Home Loan Bank advances.................................. 65,000 40,000 30,000
Repayment of Federal Home Loan Bank advances................................... (30,000) (10,000) --
Escrow deposits................................................................ (208) 18 (7)
Net proceeds from issuance of common stock..................................... -- -- 26,297
Purchase of treasury shares.................................................... (1,328) (1,645) (1,413)
Purchase of shares for employee stock benefit plans............................ -- -- (1,329)
Return of capital distribution................................................. -- (5,986) --
Payment of dividends........................................................... (3,524) -- --
---------- ---------- ----------
Net cash provided by financing activities............................. 36,790 34,147 27,526
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............................. (1,797) 2,268 (25,795)
Cash and cash equivalents at beginning of year................................... 12,938 10,670 36,465
---------- ---------- ----------
Cash and cash equivalents at end of year......................................... $ 11,141 $ 12,938 $ 10,670
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes....................................................... $ 895 $ 361 $ 883
---------- ---------- ----------
---------- ---------- ----------
Interest on deposits and borrowings........................................ $ 11,771 $ 9,280 $ 6,311
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure............... $ -- $ 21 $ --
---------- ---------- ----------
---------- ---------- ----------
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects............................... $ (184) $ (153) $ 388
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
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 the periods ended September 30, 1997, 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 consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the 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 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 its subsidiary, the Savings Bank. All significant intercompany
balances and transactions have been eliminated.
24
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried at
cost only if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available for sale are
carried at fair value with resulting unrealized gains or losses charged to
operations or stockholders' equity, respectively.
At September 30, 1997 and 1996, the Corporation's stockholders' equity
reflected an unrealized gain on securities designated as available for sale, net
of applicable tax effects, totaling $51,000 and $235,000 respectively.
Realized gains or losses on sales of securities are recognized using the
specific identification method.
3. LOANS RECEIVABLE
Loans receivable 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.
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 level-yield method, giving effect to actual loan prepayments. Additionally,
SFAS No. 91 generally limits the definition of loan origination costs to the
direct costs attributable to originating a loan, i.e. principally actual
personnel
25
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. LOAN ORIGINATION FEES (continued)
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. Fees
for other loan commitments are deferred and amortized over the loan
commitment period on a straight-line basis.
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 its 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 and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
In June 1993, the 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 Savings Bank's current procedures for evaluating impaired loans
result in carrying such loans at the lower of cost or fair value. As a result,
the Corporation adopted SFAS No. 114 effective October 1, 1995, without material
financial statement effect.
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
nonresidential and multi-family residential real estate loans, and its
evaluation of impairment thereof, such loans are generally collateral dependent
and, as a result, are carried as a practical expedient at the lower of cost or
fair value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
26
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. ALLOWANCE FOR LOSSES ON LOANS (continued)
At September 30, 1997 and 1996, the Savings Bank 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.
9. INCOME TAXES
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the current
and previous years. Pursuant to the provisions of SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible differences between the tax basis of an
asset or liability and
27
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. INCOME TAXES (continued)
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.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from different methods of accounting
for deferred loan origination fees, Federal Home Loan Bank stock dividends,
certain components of retirement expense, the general loan loss allowance and
the percentage of earnings bad debt deduction. Additional differences result
from depreciation computed utilizing accelerated methods for 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 requires that compensation expense recorded by employers be based on
the fair value of ESOP shares allocated to participants during a fiscal year.
The Corporation recognized expense related to the ESOP totaling $545,000,
$652,000 and $252,000 for the fiscal years ended September 30, 1997, 1996 and
1995, respectively.
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 $472,000, $234,000 and $199,000 was charged to
expense for the MRP for the fiscal years ended September 30, 1997, 1996 and
1995, respectively.
28
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. RETIREMENT AND INCENTIVE PLANS (continued)
The Savings Bank is a participant in a multi-employer defined benefit
pension plan that covers substantially all employees. The Savings Bank funds its
pension plan through participation in the Pentegra Fund (the Fund). The
provision for pension expense totaled $22,000, $99,000 and $105,000 for the
fiscal years ended September 30, 1997, 1996 and 1995 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 the Fund's
classification as a multi-employer pension plan.
11. 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.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September 30,
1997 and 1996:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash equivalents
are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted market
price.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates offered for
loans with similar terms to borrowers of similar credit quality. For
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.
29
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate fair
value.
Deposits: The fair value of NOW accounts, passbook accounts, 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, 1997
and 1996, the difference between the fair value and notional amount of loan
commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents...................................... $ 11,141 $ 11,141 $ 12,938 $ 12,938
Investment securities.......................................... 698 698 -- --
Mortgage-backed securities..................................... 61,457 61,457 65,482 65,482
Loans receivable............................................... 191,096 190,597 149,050 148,178
Stock in Federal Home Loan Bank................................ 5,500 5,500 3,000 3,000
---------- ---------- ---------- ----------
$ 269,892 $ 269,393 $ 230,470 $ 229,598
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Financial liabilities
Deposits....................................................... $ 146,297 $ 147,136 $ 139,447 $ 140,209
Advances from Federal Home Loan Bank........................... 95,000 94,936 60,000 59,792
Escrow deposits................................................ -- -- 208 208
---------- ---------- ---------- ----------
$ 241,297 $ 242,072 $ 199,655 $ 200,209
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
30
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. 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.
13. EARNINGS PER SHARE AND DIVIDENDS PER SHARE
Primary earnings per share for the years ended September 30, 1997, 1996 and
1995 is based upon the weighted-average shares outstanding during the period
plus those stock options that are dilutive, less 85,518, 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 1,920,482,
1,984,616 and 2,046,991 for the years ended September 30, 1997, 1996 and 1995,
respectively. There was no material dilutive effect attendant to the
Corporation's stock option plan during the years ended September 30, 1997, 1996
and 1995.
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
determined that approximately $2.95 of the fiscal 1996 distribution constitutes
a tax-free return of capital.
14. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
31
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE B--INVESTMENTS AND MORTGAGE-BACKED SECURITIES
At September 30, 1997, the Corporation's investment securities consisted
entirely of equity securities of another financial institution totaling
$698,000. At September 30, 1997, the cost and carrying value of such securities
approximated market value.
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at September 30, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
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.................................................... $ 14,943 $ 53 $ 75 $ 14,921
Federal National Mortgage Association participation certificates.. 33,906 48 122 33,832
Collateralized mortgage obligations............................... 12,530 178 4 12,704
----------- --------- --------- ---------
$ 61,379 $ 279 $ 201 $ 61,457
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
<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>
32
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE B--INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost of mortgage-backed securities at September 30, 1997, 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......................................... $ 358
Due after ten years.......................................... 61,021
----------
$ 61,379
----------
----------
</TABLE>
Federal funds sold with an approximate carrying value of $2.5 million were
pledged to secure public deposits at September 30, 1997.
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio is as follows at September 30:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate
One-to-four family................................. $ 130,022 $ 96,605
Equity lines....................................... 19,781 12,065
Multi-family....................................... 4,693 6,525
Construction....................................... 15,960 15,567
Nonresidential real estate and land.................. 38,516 35,162
Consumer and other................................... 1,009 942
---------- ----------
209,981 166,866
Less:
Undisbursed portion of loans in process............ 7,821 9,928
Deferred loan origination fees..................... 1,017 874
Allowance for loan losses.......................... 575 410
Undisbursed portion of equity lines................ 9,472 6,604
---------- ----------
$ 191,096 $ 149,050
---------- ----------
---------- ----------
</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 $141.3 million, or 74%, of the total loan portfolio at September
30, 1997, and $107.5 million, or 72%, of the total loan portfolio at September
30, 1996. Generally, such loans have been underwritten
33
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE C -- LOANS RECEIVABLE (Continued)
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 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............. $ 410 $ 323 $ 323
Provision for losses on loans.............. 165 90 --
Charge-offs of loans....................... -- (3) --
--------- --------- ---------
Balance at end of period................... $ 575 $ 410 $ 323
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of September 30, 1997, 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 $33,000, $203,000 and $454,000 at September 30, 1997, 1996
and 1995, respectively. Interest income which would have been recognized if such
loans had been performing pursuant to contractual terms totaled approximately
$3,000, $12,000 and $6,000 for the years ended September 30, 1997, 1996, and
1995, respectively.
NOTE E--OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements................................. $ 839 $ 839
Office buildings and improvement...................... 3,110 3,089
Furniture, fixtures and equipment..................... 1,009 932
--------- ---------
4,958 4,860
Less accumulated depreciation and amortization........ 1,414 1,257
--------- ---------
$ 3,544 $ 3,603
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE F--DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
AMOUNT % AMOUNT %
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposit type and weighted-
average interest rate
Now accounts
1997--1.44%......................................................... $ 9,208 6.29%
1996--1.35%......................................................... $ 8,378 6.01%
Passbook
1997--3.00%......................................................... 15,949 10.90
1996--3.00%......................................................... 17,192 12.33
Money market deposit accounts
1997--4.35%......................................................... 21,694 14.83
1996--4.06%......................................................... 18,446 13.23
---------- --------- ---------- ---------
Total demand, transaction and passbook deposits....................... 46,851 32.02 44,016 31.57
Certificates of deposit
Original maturities of:
12 months or less
1997--5.59%......................................................... 36,902 25.23
1996--5.33%......................................................... 39,106 28.04
Over 12 months to 36 months
1997--5.96%......................................................... 32,655 22.32
1996--5.94%......................................................... 29,583 21.21
More than 36 months
1997--6.42%......................................................... 29,889 20.43
1996--6.43%......................................................... 26,742 19.18
---------- --------- ---------- ---------
Total certificates of deposit......................................... 99,446 67.98 95,431 68.43
---------- --------- ---------- ---------
Total deposits........................................................ $ 146,297 100.00% $ 139,447 100.00%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The Savings Bank had deposit accounts with balances greater than $100,000
totaling $19.3 million and $16.0 million at September 30, 1997 and 1996,
respectively.
35
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE F -- DEPOSITS (continued)
Interest expense on deposits for the years ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook..................................... $ 497 $ 528 $ 564
NOW and money market deposit
accounts................................... 1,000 738 513
Certificates of deposit...................... 5,802 5,572 4,760
---------- --------- ---------
$ 7,299 $ 6,838 $ 5,837
---------- --------- ---------
---------- --------- ---------
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Less than one year..................................... $ 52,763 $ 52,810
One to three years..................................... 36,598 25,820
Over three years....................................... 10,085 16,801
--------- ---------
$ 99,446 $ 95,431
--------- ---------
--------- ---------
</TABLE>
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1997 by certain residential mortgage loans totaling $130.0 million, certain
mortgage-backed securities totaling $30.0 million and the Savings Bank's
investment in Federal Home Loan Bank stock are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
WEIGHTED AVERAGE MATURING IN FISCAL ---------------------
INTEREST RATE YEAR ENDING IN 1997 1996
- ---------------------------------------------- ---------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
5.38%........................................... 1997 $ -- $ 10,000
5.51%-5.60%..................................... 1998 25,000 20,000
5.60%........................................... 1999 30,000 --
6.25%........................................... 2000 10,000 10,000
6.75%........................................... 2005 10,000 10,000
6.50%........................................... 2006 10,000 10,000
6.51%........................................... 2007 10,000 --
--------- ---------
$ 95,000 $ 60,000
--------- ---------
--------- ---------
Weighted-average interest rate.................. 5.98% 5.98%
--------- ---------
--------- ---------
</TABLE>
36
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE H--FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate as follows at September 30:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Federal income taxes computed at
statutory rate............................... $1,233 $748 $943
Increase (decrease) in taxes resulting from:
Amortization of goodwill.................... 10 10 10
Other....................................... 13 -- (17)
------ ---- ----
Federal income tax provision per
consolidated financial statements............ $1,256 $758 $936
------ ---- ----
------ ---- ----
The composition of the Corporation's net deferred tax asset (liability) is
as follows at September 30:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT STATUTORY RATE: 1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Federal Home Loan Bank stock dividends......................................................... $ (346) $ (245)
Difference between book and tax depreciation................................................... (167) (151)
Percentage of earnings bad debt deduction...................................................... (386) (386)
Unrealized gain on securities designated as available for sale................................. (27) (121)
--------- ---------
Total deferred tax liabilities........................................................... (926) (903)
Deferred tax assets:
General loan loss allowance.................................................................... 195 139
Deferred loan origination fees................................................................. 346 297
Deferred compensation.......................................................................... 72 157
Employee stock benefit plans................................................................... 130 65
SAIF recapitalization assessment............................................................... -- 262
Other.......................................................................................... 17 20
--------- ---------
Total deferred tax assets................................................................ 760 940
--------- ---------
Net deferred tax asset (liability)....................................................... $ (166) $ 37
--------- ---------
--------- ---------
</TABLE>
37
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE H--FEDERAL INCOME TAXES (continued)
In prior years, 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, 1997, includes 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, 1997. See Note K for additional information
regarding the Savings Bank's 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 its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of the
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, 1997, the Savings Bank had outstanding commitments of
approximately $3.3 million to originate loans, consisting of $345,000 of
fifteen year fixed rate loans at interest rates ranging from 7.25% to 8.50%,
$522,000 of thirty year fixed rate loans at interest rates ranging from 8.00%
to 8.50%, and $2.4 million in adjustable rate loans. Additionally, the
Savings Bank had commitments under unused lines of credit totaling $9.5
million. In the opinion of management all loan commitments equaled or
exceeded prevalent market interest rates as of September 30, 1997, and will
be funded from existing excess liquidity and normal cash flow from operations.
38
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE J--REGULATORY CAPITAL
The Savings Bank is subject to regulatory capital requirements promulgated by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Such 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
such as capitalized mortgage servicing rights) equal to 3.0% of adjusted
total assets. A recent 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%.
During the 1997 fiscal year, the Savings Bank was notified from its regulator
that it was categorized as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized" the
Savings Bank must maintain minimum capital ratios as set forth in the
following table.
As of September 30, 1997, management believes that the Savings Bank met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------- --------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
------- ----- -------------------------------- ----------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Risk-based capital..... $29,265 19.0% GREATER THAN OR EQUAL TO $12,295 GREATER THAN OR EQUAL TO 8.0%
Core capital........... $28,690 10.5% GREATER THAN OR EQUAL TO $8,224 GREATER THAN OR EQUAL TO 3.0%
Tangible capital....... $28,690 10.5% GREATER THAN OR EQUAL TO $4,112 GREATER THAN OR EQUAL TO 1.5%
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
---------------------------------------------------------------
AMOUNT RATIO
-------------------------------- -----------------------------
<S> <C> <C>
Risk-based capital.... GREATER THAN OR EQUAL TO $15,369 GREATER THAN OR EQUAL TO 10.0%
Core capital.......... GREATER THAN OR EQUAL TO $16,448 GREATER THAN OR EQUAL TO 6.0%
Tangible capital...... GREATER THAN OR EQUAL TO $13,707 GREATER THAN OR EQUAL TO 5.0%
</TABLE>
39
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE J--REGULATORY CAPITAL (continued)
The Corporation's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the management, such as a protracted increase in interest rates or
a downturn in the economy in the Savings Bank's market areas, could adversely
affect future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
NOTE K--LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund
("SAIF"). The reserves of the SAIF were below the level required by law,
because a significant portion of the assessments paid into the fund were used
to pay the cost of prior thrift failures. The deposit accounts of commercial
banks are insured by the FDIC through the Bank Insurance Fund ("BIF"), except
to the extent such banks have acquired SAIF deposits. The reserves of the BIF
met the level required by law in May, 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996 and 1997, no BIF
assessments were required for healthy commercial banks except for a $2,000
minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The 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 provided 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. In the opinion of management, such activity
limit restrictions would not have a material effect on the Corporation's
financial position or results of operations.
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.
40
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
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, 1997 and 1996 and the
results of its operations for the periods ended September 30, 1997, 1996 and
1995.
Enterprise Federal Bancorp, Inc.
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks..................................................................... $ 1,357 $ 91
Loan receivable from Enterprise Federal Savings Bank........................................ -- 3,572
Loan receivable from Employee Stock Ownership Plan.......................................... 1,114 1,520
Investment in Enterprise Federal Savings Bank............................................... 28,761 27,735
Investment in North Cincinnati Savings Bank................................................. 698 --
Prepaid expense and other assets............................................................ 110 138
--------- ---------
Total assets............................................................................ $ 32,040 $ 33,056
--------- ---------
--------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
Other liabilities........................................................................... $ 616 $ --
Common stock................................................................................ 23 23
Additional paid-in capital.................................................................. 33,503 32,638
Treasury stock.............................................................................. (4,386) (3,058)
Unrealized gains on securities designated as available for sale............................. 51 235
Retained earnings........................................................................... 2,233 3,218
--------- ---------
Total liabilities and stockholders' equity.............................................. $ 32,040 $ 33,056
--------- ---------
--------- ---------
</TABLE>
Enterprise Federal Bancorp, Inc.
STATEMENTS OF EARNINGS
Periods ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Interest and dividend income........................................................ $ 143 $ 165 $ 422
Gain on sale of investments......................................................... 86 -- --
Equity in earnings of subsidiary.................................................... 2,334 1,541 1,632
--------- --------- ---------
Total revenue..................................................................... 2,563 1,706 2,054
General and administrative expenses.................................................. 194 265 277
--------- --------- ---------
NET EARNINGS...................................................................... $ 2,369 $ 1,441 $ 1,777
--------- --------- ---------
--------- --------- ---------
</TABLE>
41
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995
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>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the period.................................................... $ 2,369 $ 1,441 $ 1,777
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities
Undistributed earnings of consolidated subsidiary.......................... (175) -- (1,632)
Dividend received from subsidiary in excess of earnings.................... -- 436 --
Gain on sale of investments................................................ (86) -- --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets.......................................... 28 (137) (1)
Other liabilities.......................................................... 616 -- --
--------- --------- ----------
Net cash provided by operating activities.............................. 2,752 1,740 144
Cash flows provided by (used in) investing activities:
Purchase of investments........................................................ (270) -- --
Proceeds from sale of investments.............................................. 356 -- --
Proceeds from repayment of loan to ESOP........................................ 406 603 236
Purchase of common shares of Enterprise Federal Savings Bank................... -- -- (13,954)
Issuance of loan to ESOP....................................................... -- -- (2,359)
Purchase of common shares of North Cincinnati Savings Bank..................... (698) -- --
Issuance of loan to Enterprise Federal Savings Bank............................ -- -- (7,000)
Repayment of loan to Enterprise Federal Savings Bank........................... 3,572 3,428 --
--------- --------- ----------
Net cash provided by (used in) investing activities.................... 3,366 4,031 (23,077)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock......................................... -- -- 26,297
Payment of dividends and distributions on common stock......................... (3,524) (5,986) --
Purchase of treasury stock..................................................... (1,328) (1,645) (1,413)
Purchase of stock for stock benefit plan....................................... -- -- (1,329)
Sale of stock for stock benefit plan........................................... -- 1,329 --
--------- --------- ----------
Net cash provided by (used in) financing activities.................... (4,852) (6,302) 23,555
Net increase (decrease) in cash and cash equivalents............................. 1,266 (531) 622
Cash and cash equivalents at beginning of period................................. 91 622 --
--------- --------- ----------
Cash and cash equivalents at end of period....................................... $ 1,357 $ 91 $ 622
--------- --------- ----------
--------- --------- ----------
</TABLE>
42
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995
Regulations of the Office of Thrift Supervision (OTS) impose limitations
on the payment of dividends and other capital distributions by savings
associations. Under such regulations a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal
to or greater than the amount of its fully phased-in capital requirement is
generally permitted without OTS approval (but subsequent to 30 days prior
notice to the OTS of the planned dividend) to make capital distributions
during a calendar year in the amount of (i) up to 100% of its net earnings to
date during the year plus an amount equal to one-half of the amount by which
its total capital to assets ratio exceeded its fully phased-in capital to
assets ratio at the beginning of the year (ii) or 75% of its net earnings for
the most recent four quarters. Pursuant to such OTS dividend regulations, the
Savings Bank had the ability to pay dividends of approximately $5.5 million
to the Corporation at September 30, 1997.
NOTE M--STOCK OPTION PLAN
During fiscal 1995, the Board of Directors adopted a Stock Option Plan that
provided for the issuance of 226,860 shares of authorized, but unissued shares
of common stock. The Board of Directors granted options to purchase shares of
stock at an exercise price equal to the fair value of the shares on the date of
the grant, as subsequently adjusted for return of capital distribution. 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, 1997 none of the stock options granted had been exercised.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the Corporation's stock option plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the accounting method
utilized in SFAS No. 123, the Corporation's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
1997 1996 1995
Net earnings........... As reported $ 2,369 $ 1,441 $ 1,837
------- ------- -------
------- ------- -------
Pro-forma $ 2,333 $ 1,403 $ 1,816
------- ------- -------
------- ------- -------
Earnings per share..... As reported $ 1.23 $ .73 $ .90
------- ------- -------
------- ------- -------
Pro-forma $ 1.21 $ .71 $ .89
------- ------- -------
------- ------- -------
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, respectively;
dividend yield of 7.0% and expected volatility of 20.0% for all years; risk-free
interest rates of 6.5% in fiscal 1997 and 6.0% in each of fiscal 1996 and 1995,
expected lives of ten years.
43
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE M--STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's fixed stock option plans as of
September 30, 1997, 1996 and 1995 and changes during the periods ending on those
dates is presented below:
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- -------- ------ --------
Outstanding at
beginning of year..... 222,324 $ 9.25 217,788 $ 9.25 -- --
Granted................. 4,536 $ 9.25 4,536 $ 9.25 217,788 $ 9.25
Exercised............... -- $ -- -- $ -- -- $ --
Forfeited............... -- $ -- -- $ -- -- $ --
------- ------ ------- ------ ------- ------
Outstanding at end
of year............... 226,860 $ 9.25 222,324 $ 9.25 217,788 $ 9.25
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Options exercisable
at year-end ........... 88,015 $ 9.25 43,554 $ 9.25 -- $N/A
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Weighted-average fair
value of options
granted during the
year.................. $ 1.77 $ 1.75 $.96
------ ------ ------
------ ------ ------
The following information applies to options outstanding at September 30,
1997:
Number outstanding................................. 226,860
Exercise price..................................... $9.25
Weighted-average exercise price.................... $9.25
Weighted-average remaining contractual life........ 7.3 years
NOTE N--CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
During fiscal 1994, 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.
44
<PAGE>
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995 (CONTINUED)
NOTE N--CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
(continued)
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 stock 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.
NOTE O--PENDING BUSINESS COMBINATION
In July 1997, the Corporation entered into a definitive agreement to acquire
all the outstanding shares of North Cincinnati Savings Bank for consideration of
cash and common shares aggregating approximately $7.6 million. The acquisition
will be accounted for using the purchase method of accounting. Consummation of
the pending combination is anticipated in January 1998 following the receipt of
required regulatory and stockholder approval.
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<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
ENTERPRISE FEDERAL SAVINGS BANK
- -------------------------------------------------------------------------------
DIRECTORS OFFICERS
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
BANKING LOCATIONS
- -------------------------------------------------------------------------------
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 401 Wyoming Avenue
Drive West Chester, Ohio Wyoming Ohio
46
<PAGE>
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
September 30, 1997, the Company had 1,985,828 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>
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 $.25 per share dividend was declared on September 30, 1997, payable to
stockholders of record as of October 15, 1997.
HIGH LOW DIVIDENDS PAID*
Quarter ended
December 31, 1994............... $ 14.00 $11.25 N/A
Quarter ended
March 31, 1995.................. 14.00 12.25 N/A
Quarter ended
June 30, 1995................... 15.00 13.25 N/A
Quarter ended
September 30, 1995.............. 16.75 14.25 N/A
Quarter ended
December 31, 1995............... 18.00 13.75 $ 3.00*
Quarter ended
March 31, 1996.................. 15.75 14.25 N/A
Quarter ended
June 30, 1996................... 15.00 14.00 N/A
Quarter ended
September 30, 1996.............. 14.75 12.75 N/A
Quarter ended
December 31, 1996............... 16.00 13.75 $ 1.00
Quarter ended
March 31, 1997.................. 17.00 14.00 N/A
Quarter ended
June 30, 1997................... 19.25 15.25 $ .25
Quarter ended
September 30, 1997.............. 25.13 18.25 $ .25
*A $3.00 per share capital distribution was paid on the common stock
during the quarter ended December 31, 1995 of which $2.95 was a return of
capital and $.05 was a taxable dividend.
48
