<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENTERPRISE FEDERAL BANCORP, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
OHIO 6711 31-1396726
---------------------- ------------------------- ------------------
(STATE OR OTHER JURIS- (PRIMARY STANDARD (I.R.S.EMPLOYER
DICTION OF INCORPORATION INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
OR ORGANIZATION) CODE NO.)
------------------------
7810 Tylersville Square Drive
West Chester, Ohio 45069
(513) 755-4600
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
------------------------
Otto L. Keeton, President
Enterprise Federal Bancorp, Inc.
7810 Tylersville Square Drive
West Chester, Ohio 45069
(513) 755-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
with a copy to:
<TABLE>
<S> <C> <C>
KEVIN M. HOULIHAN, ESQ. MICHAEL W. KELLEY TERRI REYERING ABARE, ESQ.
Elias, Matz, Tiernan & President Vorys, Sater, Seymour and Pease
Herrick L.L.P. North Cincinnati Savings Suite 2100, Atrium Two
734 15th Street, N.W. Bank 221 East Fourth Street
Washington, D.C. 20005 9477 Kenwood Road Cincinnati, Ohio 45201
(202) 347-0300 Blue Ash, Ohio 45242 (513) 723-4001
(513) 791-4800
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF
SECURITIES AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) SHARE OR UNIT(2) PRICE(2) FEE(2)
<S> <C> <C> <C> <C>
Common Shares, no par value per share 330,355 shares $25.75 $8,506,641 $2,577.51
</TABLE>
(1) This Registration Statement covers the maximum number of common shares of
the Registrant issuable upon consummation of the acquisition of North
Cincinnati Savings Bank ("NCSB") by the Registrant.
(2) Estimated solely for the purpose of calculation of the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, the
registration fee is based on the average of the high and low prices of the
Registrant's Common Stock as reported on The Nasdaq Stock Market's National
Market on November 12, 1997 ($25.75), and computed based on the
maximum number of shares (330,355) that may be exchanged for the securities
being registered.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NORTH CINCINNATI SAVINGS BANK
9477 Kenwood Road
Blue Ash, Ohio 45242
(513) 791-4800
, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
North Cincinnati Savings Bank ("NCSB") on , , 1998 at :00
.m., Eastern Time, at [ ], Ohio [zip code].
At the Special Meeting, shareholders will be asked to adopt the Agreement
and Plan of Reorganization dated as of July 18, 1997 and a related Plan of
Merger (together, the "Merger Agreement"), whereby NCSB will be merged (the
"Merger") into Enterprise Federal Savings Bank (the "Bank"), a federally
chartered stock savings bank and wholly-owned subsidiary of Enterprise
Federal Bancorp, Inc. ("Bancorp"), with the Bank as the surviving corporation
and continuing to operate under the name "Enterprise Federal Savings Bank."
If the Merger is consummated, each share of common stock of NCSB, par value
$1.00 per share ("NCSB Common Stock"), outstanding immediately prior to
consummation of the Merger (other than shares as to which dissenters' rights
have been asserted and duly perfected in accordance with applicable law and
shares held by Bancorp, NCSB or any of their respective subsidiaries, other
than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted) shall be converted into and represent the right to
receive: (i) $18.50 in cash; (ii) a number of Bancorp common shares, par
value $.01 per share ("Bancorp Common Shares"), as determined by applying a
formula set forth in the Merger Agreement and based on the average market
price of Bancorp Common Shares over the 20 trading day period ending at the
close of business on the business day immediately preceding the closing date
of the Merger, subject to the terms, conditions, limitations and procedures
set forth in the Merger Agreement; or (iii) a combination of cash and Bancorp
Common Shares. The Merger Agreement provides that no more than 40% of the
aggregate consideration will consist of cash and no more than 75% will
consist of Bancorp Common Shares, provided, however, that Bancorp may permit
the consideration to consist of a greater percentage of Bancorp Common Shares
in its sole discretion. Thus, the actual form and value of consideration
ultimately received by a shareholder for shares of NCSB Common Stock will
depend upon such shareholder's election, the election of other shareholders,
as well as the allocation and proration procedure as described in the
accompanying materials.
As a result of the Merger, the separate corporate existence of NCSB shall
cease. Approval by NCSB's shareholders of the Merger Agreement is a condition to
consummation of the Merger. The terms of the proposed Merger are explained in
detail in the accompanying Proxy Statement/Prospectus, which we urge you to read
carefully.
Each shareholder entitled to vote at the Special Meeting will have the right
to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Ohio law. For a summary
of the rights of shareholders of NCSB to dissent, see "The Merger--Dissenters'
Rights" in the attached Proxy Statement/Prospectus and Appendix C thereto.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
PROPOSAL TO ADOPT THE MERGER AGREEMENT, WHICH THE BOARD BELIEVES IS IN THE BEST
INTERESTS OF NCSB'S SHAREHOLDERS.
Enclosed is a Notice of Special Meeting of Shareholders, the Proxy
Statement/Prospectus and a proxy card. Your vote is important, regardless of the
number of shares you own. Please complete, sign and date the enclosed proxy card
and return it as soon as possible in the envelope provided. If you decide to
attend the meeting, you may vote your shares in person whether or not you have
previously submitted a proxy. On behalf of the Board, I thank you for your
attention to this important matter.
Very truly yours,
Michael W. Kelley
President
2
<PAGE>
NORTH CINCINNATI SAVINGS BANK
9477 Kenwood Road
Blue Ash, Ohio 45242
(513) 791-4800
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of North
Cincinnati Savings Bank ("NCSB") will be held at [ ], Ohio, [zip code] on
, , 1998 at :00 .m., Eastern Time, for the
following purposes, all of which are more completely set forth in the
accompanying Proxy Statement/Prospectus:
1. To consider and vote upon the adoption of the Agreement and Plan of
Reorganization dated as of July 18, 1997 by and among Enterprise Federal
Bancorp, Inc. ("Bancorp"), Enterprise Federal Savings Bank (the "Bank") and
NCSB, and a related Plan of Merger (together, the "Merger Agreement"),
pursuant to which (i) NCSB will be merged into the Bank which is a
wholly-owned subsidiary of Bancorp (the "Merger"), with the Bank as the
surviving corporation of the Merger and continuing to operate under the name
"Enterprise Federal Savings Bank" and (ii) each share of common stock of
NCSB, par value $1.00 per share ("NCSB Common Stock"), outstanding
immediately prior to consummation of the Merger (other than shares as to
which dissenters' rights have been asserted and duly perfected in
accordance with applicable law and shares held by Bancorp, NCSB or any of
their respective subsidiaries, other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted) shall be
converted into and represent the right to receive either: (i) $18.50 in
cash; (ii) a number of Bancorp common shares, par value $.01 per share
(the "Bancorp Common Shares"), as determined by applying a formula set
forth in the Merger Agreement and based on the average market price of
Bancorp Common Shares over the 20 trading day period ending at the close
of business on the business day immediately preceding the closing date of
the Merger, subject to the terms, conditions, limitations and procedures
set forth in the Merger Agreement; or (iii) a combination of cash and
Bancorp Common Shares, as described in the Proxy Statement/Prospectus and
the Merger Agreement which is attached as Appendix A thereto. The Merger
Agreement provides that no more than 40% of the aggregate consideration
will consist of cash and no more than 75% will consist of Bancorp Common
Shares, provided, however, that Bancorp may permit the consideration to
consist of a greater percentage of Bancorp Common Shares in its sole
discretion. Thus, the actual form and value of consideration ultimately
received by a shareholder for shares of NCSB Common Stock will depend upon
such shareholder's election, the election of other shareholders, as well as
the allocation and proration procedure as described therein;
2. If necessary, to consider and vote upon a proposal to adjourn the Special
Meeting to solicit additional proxies; and
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only holders of record of the NCSB Common Stock at the close of business on
, 1997 are entitled to notice of and to vote at the Special Meeting
and any adjournments thereof.
Any shareholder entitled to vote at the Special Meeting will have the right
to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Ohio law. For a summary
of the rights of shareholders of NCSB to dissent, see "The Merger--Dissenters'
Rights" in the attached Proxy Statement/Prospectus and Appendix C thereto.
BY ORDER OF THE BOARD OF DIRECTORS
Eileen M. Davis
Secretary
Blue Ash, Ohio
, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN
IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU
MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY
YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
3
<PAGE>
PROXY STATEMENT
for
Special Meeting of Shareholders of North Cincinnati Savings Bank.
to be held on , 1998
-------------------------------------------------------------
ENTERPRISE FEDERAL BANCORP, INC.
PROSPECTUS
for
up to 330,355 Common Shares of
Enterprise Federal Bancorp, Inc. to be issued in connection with the
acquisition of North Cincinnati Savings Bank by
Enterprise Federal Bancorp, Inc.
-------------------------------------------------------------
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of North Cincinnati Savings
Bank ("NCSB") to be used at a special meeting of its shareholders to be held
on , , 1998 (the "Special Meeting"). The purpose of the
Special Meeting is to consider and vote upon the adoption of the Agreement
and Plan of Reorganization, dated as of July 18, 1997, by and among
Enterprise Federal Bancorp, Inc. ("Bancorp"), Enterprise Federal Savings Bank
(the "Bank"), a wholly-owned subsidiary of Bancorp, and NCSB, and a related
Plan of Merger among Bancorp, the Bank and NCSB, (together, the "Merger
Agreement"). A copy of the Merger Agreement is attached as Appendix A to this
Proxy Statement/Prospectus. At the Special Meeting, shareholders may also be
asked to consider a proposal to adjourn the meeting to solicit additional
proxies, if necessary.
In accordance with the terms of the Merger Agreement, upon adoption of
the Merger Agreement by the shareholders of NCSB and receipt of all requisite
regulatory approvals and the satisfaction or waiver of all conditions, NCSB
shall be merged into the Bank (the "Merger"), with the Bank as the surviving
corporation of the Merger operating under the name "Enterprise Federal
Savings Bank." In connection with the Merger, each share of common stock of
NCSB, par value $1.00 per share (the "NCSB Common Stock"), outstanding
immediately prior to consummation of the Merger (other than shares as to
which dissenters' rights have been asserted and duly perfected in accordance
with Ohio law and shares held by Bancorp, NCSB or any of their respective
subsidiaries, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted) shall be converted into and
represent the right to receive, at the election of the holder thereof,
either: (i) $18.50 in cash, (ii) a number of Bancorp common shares, par value
$.01 per share (the "Bancorp Common Shares"), as determined by applying a
formula set forth in the Merger Agreement and based on the average market
price of Bancorp Common Shares over the 20 trading day period ending at the
close of business on the business day immediately preceding the closing date
of the Merger (the "Closing Date"), subject to the terms, conditions,
limitations and procedures set forth in the Merger Agreement or (iii) a
combination of cash and Bancorp Common Shares (the "Merger Consideration").
The Merger Agreement provides that no more than 40% of the aggregate
consideration will consist of cash and no more than 75% will consist of
Bancorp Common Shares, provided, however, that Bancorp may permit a greater
percentage in its sole discretion. Thus, the actual form and value of
consideration ultimately received by a shareholder for shares of NCSB Common
Stock will depend upon such shareholder's election, the election of other
shareholders, as well as the allocation and proration procedure described
herein. As a result of the Merger, the separate corporate existence of NCSB
shall cease.
<PAGE>
The outstanding Bancorp Common Shares are, and the Bancorp Common Shares
offered hereby will be, included for quotation on The Nasdaq National Market
("Nasdaq"). The closing price of Bancorp Common Shares on , 1997 was
$ per share.
Bancorp has filed a Registration Statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering up to
330,355 Bancorp Common Shares. In addition to being the Proxy Statement for the
Special Meeting, this document constitutes a prospectus of Bancorp with respect
to the Bancorp Common Shares to be issued in connection with the Merger.
NCSB stock certificates should not be returned to NCSB with the enclosed
proxy and should not be forwarded until after receipt of a letter of
transmittal, which will be provided to NCSB shareholders promptly following
consummation of the Merger.
This Proxy Statement/Prospectus does not cover resales of Bancorp Common
Shares following consummation of the Merger, and no person may make use of this
Proxy Statement/Prospectus in connection with any such resale.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to shareholders of NCSB on or about , 1997.
All information contained in this Proxy Statement/Prospectus relating to
Bancorp and its subsidiaries has been supplied by Bancorp, and all information
contained in this Proxy Statement/Prospectus relating to NCSB and its
subsidiaries has been supplied by NCSB.
-------------------------------------------------------------
THE BANCORP COMMON SHARES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION") OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE BANCORP COMMON SHARES OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS ACCOUNTS
OR OTHER OBLIGATIONS OF ANY DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER GOVERNMENTAL AGENCY.
-------------------------------------------------------------
The date of this Proxy Statement/Prospectus is , 1997.
2
<PAGE>
TABLE OF CONTENTS
PAGE
---------
AVAILABLE INFORMATION................................. 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....... 6
SUMMARY............................................... 8
The Parties to the Merger........................... 8
The Shareholder Meeting............................. 9
Merger Consideration and Election, Allocation and
Proration Procedures.............................. 11
Opinion of McDonald & Company....................... 14
Recommendation of the Board of Directors of NCSB.... 14
Shareholders Agreement.............................. 14
Effective Time of the Merger; Termination of the
Merger Agreement.................................. 15
Conditions to the Merger............................ 15
Dissenters' Rights.................................. 15
Certain Federal Income Tax Consequences............. 16
Accounting Treatment of the Merger.................. 16
Interests of Certain Persons in the Merger........... 16
Unaudited Pro Forma Condensed Combined
Summary Financial Information..................... 16
COMPARATIVE PER SHARE DATA............................ 19
COMPARATIVE MARKET PRICES............................. 21
BANCORP SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS.... 23
NCSB SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS....... 24
SHAREHOLDER MEETING................................... 26
Special Meeting of NCSB Shareholders................ 26
Costs............................................... 27
THE MERGER............................................ 28
General............................................. 28
Background of and Reasons for the Merger............ 28
Opinion of McDonald & Company....................... 31
Merger Consideration and Election, Allocation and
Proration......................................... 36
Conditions to the Merger............................ 39
Procedures for Exchange of NCSB Stock Certificates.. 41
Regulatory Approvals................................ 43
Business Pending the Merger......................... 43
Acquisition Proposals............................... 45
Representations and Warranties...................... 45
Effective Time of the Merger; Termination and
Amendment......................................... 46
Interests of Certain Persons in the Merger.......... 47
Resale Considerations With Respect to the Bancorp
Common Shares..................................... 49
Certain Federal Income Tax Consequences............. 49
Accounting Treatment of the Merger.................. 51
Dissenters' Rights.................................. 51
Expenses of the Merger.............................. 54
Shareholders' Agreement.............................. 55
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)......................................... 56
ADJOURNMENT OF SPECIAL MEETING........................ 60
OWNERSHIP OF NCSB COMMON STOCK BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF NCSB....................... 61
-3-
<PAGE>
PAGE
---------
NCSB MANAGEMENT INFORMATION........................... 62
Directors............................................. 62
Meetings of Directors................................. 63
Committees of Directors............................... 63
Executive Officers.................................... 63
Executive Compensation................................ 64
401-K Plan............................................ 64
Employment Agreement.................................. 64
NCSB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 66
General............................................. 66
Financial Condition at September 30, 1997........... 66
Financial Condition at December 31, 1996............ 67
Comparison of Results of Operations for the Nine
Months Ended September 30, 1997 and September 30,
1996.............................................. 68
Comparison of Results of Operations for the Years
Ended December 31, 1996 and December 31, 1995..... 70
Yields Earned and Rates Paid........................ 72
Asset and Liability Management...................... 75
Impact of Inflation and Changing Prices............. 77
Impact of Recent Accounting Pronouncements.......... 77
BUSINESS OF NCSB...................................... 79
Lending Activities.................................. 80
Investment Activities............................... 88
Deposits and Borrowings............................. 93
Competition......................................... 96
Employees........................................... 97
Properties.......................................... 97
REGULATION OF NCSB.................................... 97
Ohio Regulation....................................... 97
Federal Regulation.................................... 98
FDIC Regulations...................................... 101
FRB Regulations....................................... 102
Transactions with Affiliates and Insiders............. 102
Federal Home Loan Bank System......................... 103
Federal Taxation...................................... 104
Ohio Taxation......................................... 106
DESCRIPTION OF BANCORP COMMON SHARES.................. 106
General............................................. 106
Voting Rights....................................... 107
Nomination Procedure; Shareholder Proposals;
Number of Directors; Classified Board of Directors;
Removal of Directors.............................. 107
Pre-Emptive Rights.................................. 108
Repurchases......................................... 108
Dividend Rights..................................... 109
Liquidation Rights.................................. 109
COMPARISON OF RIGHTS OF HOLDERS OF BANCORP COMMON
SHARES AND HOLDERS OF NCSB COMMON STOCK............. 109
General............................................. 109
Authorized Capital Stock............................ 109
Issuance of Capital Stock........................... 110
Voting Rights....................................... 110
Board of Directors.................................. 111
Payment of Dividends................................ 112
Special Meetings of Shareholders.................... 113
Shareholder Action Without a Meeting................ 113
Pre-Emptive Rights.................................. 113
Mergers, Consolidations and Sales of Assets......... 113
Business Combinations and Share Acquisitions........ 114
Amendment of Articles............................... 116
Antitakeover Statutes............................... 116
Limitations on Liability............................ 118
Indemnification of Directors Officers, Employees and
Agents............................................ 118
SHAREHOLDER PROPOSALS................................. 121
LEGAL OPINIONS........................................ 121
EXPERTS............................................... 121
INDEX TO NCSB CONSOLIDATED FINANCIAL STATEMENTS....... F-1
-4-
<PAGE>
PAGE
---------
APPENDIX A: Agreement and Plan of
Reorganization, dated as of July
18, 1997 between Enterprise Federal
Bancorp, Inc., Enterprise Federal
Savings Bank and North Cincinnati
Savings Bank, including a related
Plan of Merger attached as Appendix
B thereto............................. A-1
APPENDIX B: Opinion of McDonald & Company
Securities, Inc....................... B-1
APPENDIX C: Ohio General Corporation Law
provisions regarding dissenters'
rights of appraisal................... C-1
APPENDIX D: Annual Report to Shareholders of
Enterprise Federal Bancorp, Inc. for
the year ended September 30, 1997.... D-1
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus in connection
with the solicitation of proxies or the offering of securities made hereby,
and, if given or made, any such information or representation should not be
relied upon as having been authorized by Bancorp, the Bank or NCSB or any
other person. This Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities offered by
this Proxy Statement/Prospectus, or the solicitation of a proxy, in any
jurisdiction in which it is unlawful to make such an offer, solicitation of
an offer or proxy solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of the securities offered pursuant
to this Proxy Statement/ Prospectus shall, under any circumstances, create
any implication that there has been no change in the information set forth
herein or in the affairs of Bancorp or NCSB or any of their respective
subsidiaries since the date of this Proxy Statement/Prospectus.
-5-
<PAGE>
AVAILABLE INFORMATION
Bancorp and NCSB are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission and with the FDIC, respectively. The reports, proxy statements
and other information filed by Bancorp with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at
the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 or from the Web Site maintained by the Commission
at "http://www.sec.gov." Copies of such material also can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. Copies of such
reports, proxy statements and other information may also be inspected at the
National Association of Securities Dealers, Inc. (the "NASD"), located at 1735 K
Street, N.W., Washington, D.C. 20006.
Copies of NCSB's reports, proxy statements and other information can be
obtained, upon payment of prescribed fees, from the FDIC at the Registration and
Disclosure Section of the FDIC at 550 17th Street, N.W., Room F-643, Washington
D.C., 20429.
Bancorp has filed with the Commission a Registration Statement on Form S-4
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Bancorp Common Shares
to be issued pursuant to the Merger. As permitted by the rules and regulations
of the Commission, this Proxy Statement/Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
Such additional information may be obtained from the Commission's principal
office in Washington, D.C. by either of the means described above for obtaining
reports, proxy statements and other information filed pursuant to the Exchange
Act. Statements contained in this Proxy Statement/Prospectus or in any document
incorporated in this Proxy Statement/ Prospectus by reference or supplied
herewith as to the contents of any contract or other document referred to herein
or therein are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document, each such statement being
qualified in all respects by such reference.
--------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Bancorp (File No.
0-24694) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. Bancorp's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997; the financial and statistical information incorporated
therein from its Annual Report to Shareholders for the year ended September
30, 1997, including Statistical Information incorporated into Item 1 to its
Form 10-K; Item
-6-
<PAGE>
6, Selected Financial Data; Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations; and Item 8, Financial
Statements and Supplementary Data; and
2. The description of the Bancorp Common Shares contained in the
Registration Statement on Form 8-A filed by Bancorp with the Commission on
August 15, 1994.
All documents subsequently filed by Bancorp pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
made hereby shall be deemed to be incorporated by reference into this Proxy
Statement/Prospectus and to be a part hereof.
The Merger Agreement is included herewith as Appendix A and is
incorporated by reference herein. Discussion of the terms and conditions of
the Merger Agreement is summary in nature, and reference is made to the
Merger Agreement for a more complete discussion of the terms and conditions
of the Merger, the Merger Agreement and related transactions.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein, in any supplement hereto or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus or any supplement
hereto.
Also incorporated herein by reference are the documents attached hereto as
Appendices B and C to this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS FILED BY
BANCORP WITH THE COMMISSION WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. ALL OF SUCH DOCUMENTS WITH RESPECT TO BANCORP ARE AVAILABLE, UPON
WRITTEN OR ORAL REQUEST, FROM EDITH P. MAYER, SECRETARY, ENTERPRISE FEDERAL
BANCORP, INC., 7810 TYLERSVILLE SQUARE DRIVE, WEST CHESTER, OHIO 45069;
TELEPHONE NUMBER (513) 755-4600. COPIES WILL BE FURNISHED (WITHOUT EXHIBITS
UNLESS THE EXHIBITS HAVE BEEN SPECIFICALLY INCORPORATED BY REFERENCE) FREE OF
CHARGE. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY REQUEST SHOULD
BE MADE BY , 1997.
-7-
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/ PROSPECTUS AND IS NOT INTENDED TO BE A COMPLETE
STATEMENT OF THE MATTERS DESCRIBED HEREIN. REFERENCE IS MADE TO, AND THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
CONTAINED, OR INCORPORATED BY REFERENCE, IN THIS PROXY STATEMENT/PROSPECTUS
AND IN THE APPENDICES ATTACHED HERETO. SHAREHOLDERS ARE URGED TO READ THIS
PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY.
THE PARTIES TO THE MERGER
BANCORP. Enterprise Federal Bancorp, Inc. ("Bancorp") 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").
Bancorp sold 2,268,596 shares of common stock, par value $.01 per share, in
an offering to certain depositors, borrowers and members of the general
public during the Conversion. The Conversion was consummated on October 14,
1994 and, as a result, Bancorp became a unitary savings and loan holding
company for its wholly owned subsidiary, Enterprise Federal Savings Bank (the
"Bank"). Bancorp 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 and a minority interest in North Cincinnati Savings Bank
("NCSB"), and has no significant liabilities.
Bancorp is a savings and loan holding company within the meaning of the Home
Owners' Loan Act ("HOLA"), has registered with the Office of Thrift Supervision
("OTS") and is subject to OTS regulations, examinations, supervision and
reporting requirements.
THE 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 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.
The Bank is subject to examination and comprehensive regulation by the OTS,
which is the Bank's chartering authority and primary regulator. The Bank is also
regulated by the FDIC, the administrator of the Savings Association Insurance
Fund ("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.
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<PAGE>
At September 30, 1997, Bancorp had consolidated total assets of $274.9
million, total deposits of $146.3 million and shareholders' equity of $31.4
million. Bancorp'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.
For additional information concerning Bancorp, its business, financial
condition and results of operations, see "Available Information," "Incorporation
Of Certain Documents By Reference," and "Bancorp Selected Consolidated Financial
Information."
NCSB. NCSB is a stock savings bank which serves the Hamilton County, Ohio,
community. NCSB was incorporated under Ohio law in 1882 as a mutual savings and
loan association under the name "The North Cincinnati Loan and Building Company"
and in 1993, NCSB converted to a savings bank charter. On April 30, 1996, NCSB
converted to a stock savings bank (the "NCSB Conversion") and sold 396,750
shares of common stock, $1.00 par value per share, in connection with the NCSB
Conversion. As a state-chartered Ohio savings bank, NCSB is subject to
supervision and regulation by the Ohio Department of Commerce, Division of
Financial Institutions (the "Division"), and the FDIC. NCSB is a member of the
FHLB of Cincinnati, and the deposits of NCSB are insured up to applicable limits
by the SAIF administered by the FDIC.
NCSB is principally engaged in the business of originating real estate loans
secured by first mortgages on one- to four-family residential real estate in
NCSB's primary market area which consists of Hamilton County, Ohio, although
NCSB also makes loans to borrowers in Butler, Clermont and Warren Counties,
which border Hamilton County. NCSB also makes loans secured by multifamily real
estate (over four units) and, to a lesser extent, nonresidential real estate and
consumer loans secured by savings accounts at NCSB. NCSB also invests in
mortgage-backed and related securities, U.S. government agency obligations and
other investments permitted by applicable law. Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC, and loan principal and
mortgage-backed security repayments.
NCSB's executive offices are located at 9477 Kenwood Road, Blue Ash, Ohio
45242 and its telephone number is (513) 791-4800. At September 30, 1997, NCSB
had total consolidated assets of $60.6 million, total liabilities of $54.8
million, including deposits of $50.1 million, and shareholders' equity of $5.8
million.
For additional information concerning NCSB, see "Available Information,"
"NCSB Selected Consolidated Financial Information," "NCSB Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business of NCSB," "Regulation of NCSB" and the NCSB Consolidated Financial
Statements contained elsewhere herein.
THE SHAREHOLDER MEETING
The Special Meeting will be held at [ ], Ohio, on , 1998
at 0:00 .m., Eastern Time. Only the holders of record of the outstanding
shares of NCSB Common Stock at the close of business on , 1997 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting.
At the Record Date, 396,750 shares of NCSB Common Stock were outstanding and
entitled to vote. A majority of the
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outstanding shares of NCSB Common Stock must be represented in person or by
proxy at the Special Meeting in order for a quorum to be present. Each share
of NCSB Common Stock entitles the holder thereof to one vote on each matter
to be submitted to NCSB's shareholders at the Special Meeting.
At the Special Meeting, NCSB's shareholders will be asked to consider and
vote upon (a) a proposal to adopt the Merger Agreement, (b) a proposal to
adjourn the Special Meeting to solicit additional proxies, if necessary, and (c)
the transaction of such other business as may properly come before the Special
Meeting and any adjournment or adjournments thereof. The proposals to adopt the
Merger Agreement and adjourn the Special Meeting, if necessary, will require the
affirmative vote of a majority of the votes cast by all shareholders of NCSB
entitled to vote thereon at the Special Meeting. Shares as to which the
"ABSTAIN" box has been marked on the proxy and broker non-votes will be counted
as present for determining if a quorum is present and such abstentions and
broker non-votes will have the same effect as a vote against the Merger. See
"Shareholder Meeting--Special Meeting of NCSB Shareholders."
The directors of NCSB have agreed and intend to vote or cause to be voted
all shares of NCSB Common Stock in which they have the right to vote for
adoption of the Merger Agreement. At the Record Date, directors of NCSB and
their affiliates in the aggregate beneficially owned 53,800 shares, or 13.6%,
of the outstanding NCSB Common Stock. In addition, at the Record Date,
Bancorp beneficially owned 39,600 Shares, or 9.9%, of NCSB Common Stock and
intends to vote such shares for adoption of the Merger Agreement.
REVOCABILITY OF PROXIES. Without affecting any vote previously taken, a
proxy may be revoked by a shareholder executing a later dated proxy which is
received by NCSB before the proxy is exercised or by giving notice of
revocation to NCSB in writing or in open meeting before the proxy is
exercised. Attendance at the Special Meeting will not, of itself, revoke a
proxy. If your shares are not registered in your own name, you will need
additional documentation from your recordholder in order to vote personally
at the Special Meeting.
HOLDERS OF NCSB COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE SPECIAL MEETING. ALL PROPERLY
EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE SPECIAL MEETING WILL BE VOTED WITH
RESPECT TO THE MATTERS IDENTIFIED ON THE PROXY CARDS IN ACCORDANCE WITH ANY
INSTRUCTIONS THEREON AND, IF NO INSTRUCTIONS ARE GIVEN, WILL BE VOTED FOR
ADOPTION OF THE MERGER AGREEMENT AND, IF APPLICABLE, FOR ADJOURNMENT OF THE
SPECIAL MEETING.
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<PAGE>
MERGER CONSIDERATION AND ELECTION, ALLOCATION AND PRORATION PROCEDURES
GENERAL. In accordance with the terms of the Merger Agreement, NCSB will be
merged with and into the Bank, a wholly-owned subsidiary of Bancorp, with the
Bank as the surviving corporation of the Merger operating under the name
"Enterprise Federal Savings Bank."
MERGER CONSIDERATION. The Merger Agreement provides that at the
effective time of the Merger (the "Effective Time"), each share of NCSB
Common Stock outstanding immediately prior to the Effective Time (other than
shares as to which dissenters' rights have been asserted and duly perfected
in accordance with Ohio law and shares held by Bancorp, NCSB or any of their
respective subsidiaries, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted) will be converted into and
represent the right to receive either (i) $18.50 in cash (the "Per Share Cash
Consideration"); (ii) a number of Bancorp Common Shares (the "Per Share Stock
Consideration") as determined by the Exchange Ratio (defined below) and based
on the daily average of the high bid and low asked price per share as
reported on Nasdaq as of the close of trading of Bancorp Common Shares over
the 20 trading day period ending at the close of business on the business day
immediately preceding the Closing Date of the Merger (the "Average Share
Price"); or (iii) a combination of cash and Bancorp Common Shares. The Merger
Agreement provides that the number of Bancorp Common Shares comprising the
Per Share Stock Consideration will be equal to (A) if the Average Share Price
is equal to or less than $22.00 but equal to or greater than $15.00, the
quotient, rounded to four decimal places, determined by dividing (x) $18.50
by (y) the Average Share Price, (B) if the Average Share Price is less than
$15.00, 1.2333 shares, or (C) if the Average Share Price is greater than
$22.00, 0.8409 shares (the "Exchange Ratio"). To the extent that the Average
Share Price is greater than $22.00 or less than $15.00, and a NCSB
shareholder chooses the Per Share Stock Consideration, the Per Share Stock
Consideration would be more or less, respectively, than the Per Share Cash
Consideration. For example, if the Average Share Price was $25.00 and a NCSB
shareholder chose the Per Share Stock Consideration, such consideration would
amount to $21.02 (25.00 multiplied by an Exchange Ratio of .8409). In
addition, if the Average Share Price was $14.00 and a NCSB shareholder chose
the Per Share Stock Consideration, such consideration would amount to $17.27
($14.00 multiplied by an Exchange Ratio of 1.2333). The Merger Agreement
provides that no more than 40% of the aggregate consideration will consist of
cash and no more than 75% will consist of Bancorp Common Shares, provided,
however, that Bancorp may permit the consideration to consist of a greater
percentage of Bancorp Common Shares in its sole discretion. See "The
Merger--The Merger Consideration."
ELECTIONS. Within three business days after the consummation of the Merger,
each record holder of NCSB Common Stock will be sent materials asking such
shareholder to make an election (an "Election") as to the consideration to be
received for his or her shares of NCSB Common Stock. Such holders of NCSB Common
Stock may:
(i) elect to receive the number of Bancorp Common Shares, based on the
Exchange Ratio, for each share of NCSB Common Stock (a "Stock Election");
(ii) elect to receive $18.50 in cash, without interest, for each share of
NCSB Common Stock (a "Cash Election"); or
(iii) make no election with respect to such holder's shares of NCSB Common
Stock ("No-Election Shares").
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<PAGE>
A failure to properly make an election as described herein will be treated
as a No-Election. Any shares for which dissenters' rights have been perfected
will be deemed to have made a Cash Election. See "The Merger--Dissenters'
Rights."
NO OVERSUBSCRIPTION. In the event that the number of shares as to which a
Cash Election has been made does not exceed 40% of the shares of NCSB Common
Stock outstanding at the Effective Time and the number of shares as to which a
Stock Election has been made does not exceed 75% of the shares of NCSB Common
Stock outstanding at the Effective Time, then:
(i) each share of NCSB Common Stock as to which a Cash Election has been
made shall be converted into the right to receive the Per Share Cash
Consideration, without interest;
(ii) each share of NCSB Common Stock as to which a Stock Election has been
made shall be converted into the right to receive the Per Share Stock
Consideration, as determined by the Exchange Ratio; and
(iii) with respect to NCSB shareholders who have No-Election Shares, the
exchange agent (the "Exchange Agent") will attempt to provide for Per Share
Cash Consideration equal to 100% of the Merger Consideration; provided,
however, that to the extent that it is not possible to provide for such
allocation and ensure that no greater than 40% of the shares of NCSB Common
Stock are exchanged for cash, the Exchange Agent will allocate the Per Share
Stock Consideration on a pro rata basis so that such result will be attained.
OVERSUBSCRIPTION FOR CASH. If the aggregate number of shares of NCSB Common
Stock as to which a Cash Election has been made exceeds 40% of the shares of
NCSB Common Stock outstanding at the Effective Time, then:
(i) each share of NCSB Common Stock as to which a Stock Election has
been made and each share of NCSB Common Stock deemed to be a No-Election
Share will be converted into the right to receive the Per Share Stock
Consideration, as determined by the Exchange Ratio; and
(ii) each share of NCSB Common Stock as to which a Cash Election has
been made shall be converted into the right to receive a combination of cash
and Bancorp Common Shares. The amount in cash, without interest, will be
equal to the product, rounded to the nearest $0.01, of (x) $18.50 and (y) a
fraction (the "Cash Fraction"), the numerator of which shall be a number
equal to 40% of the shares of NCSB Common Stock outstanding at the Effective
Time and the denominator of which will be the total number of shares as to
which a Cash Election has been made. The number of Bancorp Common Shares
will be equal to the product, rounded to four decimal places, of (x) the Per
Share Stock Consideration and (y) a number equal to one minus the Cash
Fraction.
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<PAGE>
OVERSUBSCRIPTION FOR BANCORP COMMON SHARES. If the aggregate number of
shares of NCSB Common Stock as to which a Stock Election has been made
exceeds 75% of the shares of NCSB Common Stock outstanding at the Effective
Time, then:
(i) each share of NCSB Common Stock as to which a Cash Election has been
made and each share of NCSB Common Stock deemed to be a No-Election Share
will be converted into the right to receive the Per Share Cash
Consideration, without interest; and
(ii) each share of NCSB Common Stock as to which a Stock Election has
been made will be converted into the right to receive a combination of cash
and Bancorp Common Shares. The number of Bancorp Common Shares will be equal
to the product, rounded to four decimal places, of (x) the Per Share Stock
Consideration and (y) a fraction (the "Stock Fraction"), the numerator of
which shall be a number equal to 75% of the shares of NCSB Common Stock
outstanding at the Effective Time and the denominator of which will be the
total number of shares as to which a Stock Election has been made. The
amount of cash, without interest, will be equal to the product, rounded to
the nearest $0.01, of (x) $18.50 and (y) a number equal to one minus the
Stock Fraction.
NO GUARANTEE OF CHOSEN CONSIDERATION OR EQUIVALENT VALUE. Because the
Merger Agreement provides that no greater than 40% of the aggregate
consideration payable to holders of NCSB Common Stock in the Merger will be
comprised of cash and no greater than 75% of the aggregate consideration
payable to holders of NCSB Common Stock in the Merger will be comprised of
Bancorp Common Shares, no guarantee can be given that the election of any
given shareholder of NCSB will be fully honored. Rather, the election by each
shareholder will be subject to the election, allocation and proration
procedures described herein. Thus, shareholders may not receive their
requested form of consideration.
ELECTION PROCEDURES. All Elections will be required to be made on an
election form (the "Election Form"). To make an effective Election with
respect to shares of NCSB Common Stock, the holder thereof must, in
accordance with notice and letter of transmittal and the Election Form, (i)
complete properly and return the Election Form to the Exchange Agent and (ii)
deliver therewith his or her certificates representing all shares of NCSB
Common Stock (the "NCSB Stock Certificates") prior to 5:00 p.m. on the 15th
business day following, but not including, the date of mailing of the notice
and letter of transmittal and the Election Form, or such other date as
Bancorp and NCSB shall mutually agree upon (the "Election Deadline").
NCSB STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY
AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL A NCSB SHAREHOLDER
HAS RECEIVED THE NOTICE AND LETTER OF TRANSMITTAL AND THE ELECTION FORM.
A holder of NCSB Common Stock having a preference as to the form of
consideration to be received for his or her shares of NCSB Common Stock
should make an Election because shares as to which an Election has been made
will be given priority in allocating
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<PAGE>
such consideration over shares as to which an Election is not received.
NEITHER NCSB NOR THE NCSB BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO
WHETHER SHAREHOLDERS SHOULD ELECT TO RECEIVE THE PER SHARE CASH CONSIDERATION
OR THE PER SHARE STOCK CONSIDERATION IN THE MERGER. EACH HOLDER OF NCSB
COMMON STOCK MUST MAKE HIS OR HER OWN DECISION WITH RESPECT TO SUCH ELECTION.
No fractional Bancorp Common Shares will be issued in the Merger to
holders of NCSB Common Stock. Each holder of NCSB Common Stock who otherwise
would have been entitled to a fraction of a Bancorp Common Share will receive
in lieu thereof, at the time of surrender of the certificate or certificates
representing such holder's NCSB Common Stock, an amount of cash (without
interest) determined by multiplying the fractional share interest to which
such holder would otherwise be entitled by the Average Share Price.
OPINION OF MCDONALD & COMPANY
The Board of Directors of NCSB has received a written opinion from
McDonald & Company Securities, Inc. ("McDonald & Company"), dated as of the
date of this Proxy Statement/Prospectus, to the effect that, as of the date
thereof, the financial consideration to be received by NCSB's shareholders
pursuant to the Merger Agreement is fair to the shareholders of NCSB from a
financial point of view. A copy of the fairness opinion of McDonald & Company
is attached hereto as Appendix B and should be read in its entirety.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF NCSB
The Board of Directors of NCSB has determined that the Merger is in the
best interests of the shareholders and, accordingly, has unanimously approved
the Merger. THE BOARD OF DIRECTORS OF NCSB UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT. SEE "THE
MERGER--BACKGROUND OF AND REASONS FOR THE MERGER."
SHAREHOLDERS AGREEMENT
In conjunction with the Merger Agreement, Bancorp has entered into a
Shareholders Agreement, dated as of July 18, 1997, with certain shareholders
of NCSB ("Shareholders Agreement"). Pursuant to such Shareholders Agreement,
each such shareholder of NCSB has agreed, among other things, not to sell,
pledge, transfer or otherwise dispose of his or her shares of NCSB Common
Stock and to vote such shares of NCSB Common Stock in favor of the adoption
of the Merger Agreement. The number of shares of NCSB Common Stock subject to
the Shareholders Agreement is 53,800, or 13.6%, of the outstanding shares of
NCSB Common Stock. See "The Merger--Shareholders Agreement."
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<PAGE>
Effective Time of the Merger; Termination of the Merger Agreement
The Merger shall become effective upon the occurrence of the filing
of the articles of combination with the OTS (the "Articles of Combination")
and the certificate of merger (the "Certificate of Merger") with the
Secretary of State of the State of Ohio pursuant to the Ohio General
Corporation Law ("OGCL"), unless a later date and time is specified as the
effective time in such Articles of Combination and Certificate of Merger.
Such filings will occur only after the receipt of all requisite regulatory
approvals, approval of the Merger Agreement by the requisite vote of NCSB's
shareholders, the expiration of all applicable regulatory waiting periods and
the satisfaction or waiver of all other conditions to the Merger. See "The
Merger--Effective Time of the Merger; Termination and Amendment."
The Merger Agreement may be terminated prior to the Effective Time
(A) by mutual written consent of Bancorp, the Bank and NCSB; (B) by Bancorp,
the Bank or NCSB if either (i) the Merger has not been consummated on or
prior to June 30, 1998 or (ii) the shareholders of NCSB do not adopt the
Merger Agreement; or (C) by Bancorp or NCSB upon written notice to the other
party if (i) any required regulatory applications are denied or withdrawn at
the request or recommendation of the applicable regulatory agency or
government authority, or are approved contingent upon the satisfaction of any
condition or requirement which materially impairs the value of NCSB to Bancorp
or (ii) there is a material breach of any representation, warranty, covenant
or undertaking by the other party which is not cured within the specified
time period. See "The Merger--Effective Time of the Merger; Termination and
Amendment."
Conditions to the Merger
Consummation of the Merger is subject to various conditions,
including, without limitation, the adoption of the Merger Agreement by the
shareholders of NCSB; receipt of all necessary regulatory approvals
pertaining to the Merger; and certain other closing conditions. A holding
company application has been filed by Bancorp with the OTS with respect to
the Merger. See "The Merger--Conditions to the Merger" and "The Merger
- -Regulatory Approvals." Substantially all of the conditions to consummation
of the Merger (except for required shareholder and regulatory approvals) may
be waived at any time by the party for whose benefit they were created, and
the Merger Agreement may be amended at any time by written agreement of the
parties, except that no waiver or amendment occurring after approval of the
Merger Agreement by NCSB's shareholders shall modify either the amount or the
form of the Merger Consideration.
Dissenters' Rights
Holders of shares of NCSB Common Stock who do not vote their shares
in favor of and who object to the Merger Agreement and comply with the
prescribed statutory procedures are entitled to have the fair value of their
shares determined in accordance with Section 1701.85 of the OGCL and paid to
them in cash in lieu of the Bancorp Common Shares and/or cash they would
otherwise be entitled to receive in the Merger. A copy of the pertinent
statutory provisions of the OGCL is attached
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to this Proxy Statement/Prospectus as Appendix C. Failure to follow such
provisions precisely may result in a loss of dissenters' rights. See "The
Merger--Dissenters' Rights."
Certain Federal Income Tax Consequences
Consummation of the Merger is conditioned upon an opinion of counsel
delivered to each of Bancorp, the Bank and NCSB to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that no taxable
gain will be recognized by Bancorp, the Bank or NCSB in connection with the
Merger. The opinion of counsel is summarized under "The Merger--Certain
Federal Income Tax Consequences" and is filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus is a part. No
gain or loss will be recognized by the shareholders of NCSB upon the exchange
of their shares of NCSB Common Stock for Bancorp Common Shares, except for
cash received in lieu of fractional shares. A NCSB shareholder who exchanges
shares of NCSB Common Stock for cash, either as part of the Merger
Consideration or through the exercise of dissenters' rights, will recognize
gain or loss, but not in excess of the amount of cash received. See "The
Merger--Certain Federal Income Tax Consequences."
Accounting Treatment of the Merger
It is anticipated that the Merger will be accounted for as a purchase
for accounting purposes. See "The Merger--Accounting Treatment of the
Merger."
Interests of Certain Persons in the Merger
The Merger Agreement provides that upon consummation of the Merger,
David G. Hendy, a director of NCSB, will be elected to the Board of Directors
of Bancorp and the Bank. In addition, the remaining non-employee directors of
NCSB as of the Effective Time shall be requested by Bancorp to serve as an
advisory board for a term of three years following the Effective Time.
Furthermore, Bancorp and the Bank have agreed to honor the terms of NCSB's
employment agreement with Michael W. Kelley, NCSB's President.
Unaudited Pro Forma Condensed Combined Summary Financial Information
The unaudited pro forma condensed combined summary financial
information set forth below gives effect to the Merger under the purchase
accounting method. The pro forma condensed combined summary statement of
earnings treats the Merger as if it had been consummated at the beginning of
the period, and the pro forma condensed combined summary balance sheet treats
the Merger as if it had been consummated on September 30, 1997. The pro forma
combined per share data gives effect to the assumed issuance of 225,246
Bancorp Common Shares based on an Exchange Ratio of 0.8409 assuming the
Average Share Price is greater than $22.00 and 75% of the shares of NCSB
Common Stock are exchanged for Bancorp Common Shares. For a description of
the basis for the pro forma adjustments, including the basis for the number
of Bancorp Common Shares which are assumed to be issued in the Merger, see
"Pro Forma Condensed Consolidated Financial Statements (Unaudited)."
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<PAGE>
This pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been
consummated at the dates assumed herein, nor is it necessarily indicative of
future operating results or financial position. See "Pro Forma Condensed
Consolidated Financial Statements (Unaudited)."
Summary of Unaudited Pro Forma Earnings Information
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
---------------------------------------------------
AS REPORTED
---------------------
PRO FORMA PRO FORMA
BANCORP NCSB ADJUSTMENTS(1) COMBINED
---------- --------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.......................................... $ 19,049 $ 4,323 $ 160 $ 23,212
Interest expense......................................... 11,919 2,916 -- 14,835
Net interest income...................................... 7,130 1,407 160 8,377
Earnings before income taxes............................. 3,625 198 261 3,562
Net earnings............................................. 2,369 198 210 2,357
Net earnings per share:.................................. $ 1.23 $ .50 $ -- $ 1.10
Weighted average shares
and share equivalents
outstanding............................................ 1,920,482 396,750 2,145,728
</TABLE>
(Footnote on next page)
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SUMMARY OF UNAUDITED PRO FORMA BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEET DATA AS OF SEPTEMBER 30, 1997
----------------------------------------------
<S> AS REPORTED
--------------------
PRO FORMA PRO FORMA
BANCORP NCSB ADJUSTMENTS(1) COMBINED
--------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed
securities available for
sale at market................................................... $ 61,457 $ 12,423 $ -- 73,880
Loans receivable, net.............................................. 191,096 41,757 (650) 232,203
Total assets....................................................... 274,888 60,589 1,853) 333,624
Deposits........................................................... 146,297 50,126 -- 196,423
Advances from FHLB................................................. 95,000 4,390 -- 99,390
Total liabilities.................................................. 243,464 54,794 -- 298,258
Retained earnings.................................................. 14,581 2,791 2,791 14,581
Total shareholders' equity......................................... 31,424 5,795 1,853 35,366
</TABLE>
- ----------------------
(1) For a description of the basis for the pro forma adjustments, including the
basis for the number of Bancorp Common Shares which are assumed to be issued
in the Merger, see "Pro Forma Condensed Consolidated Financial Statements
(Unaudited)."
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<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share, pro forma
combined per share and pro forma equivalent per share information with
respect to the Bancorp Common Shares and the NCSB Common Stock at the dates
and for the periods presented, giving effect to the Merger using the purchase
method of accounting, based on the Exchange Ratio (assuming that 225,246
Bancorp Common Shares are issued in the Merger based upon the assumptions
described in the Notes to Pro Forma Condensed Consolidated Financial
Statements (Unaudited) included elsewhere herein). See "The Merger
- -Accounting Treatment of the Merger" and "Pro Forma Condensed Consolidated
Financial Statements (Unaudited)."
The selected per share data set forth below should be read in conjunction
with, and is qualified in its entirety by, the historical consolidated
financial statements of Bancorp, including the related notes, incorporated
herein by reference and the historical consolidated financial statements of
NCSB and the pro forma condensed consolidated financial statements
(unaudited) appearing elsewhere herein. See "Available Information,"
"Incorporation of Certain Documents by Reference," the historical
consolidated financial statements of NCSB included elsewhere herein and "Pro
Forma Condensed Consolidated Financial Statements (Unaudited)." The pro forma
information gives effect to the Merger as if the transaction had been
consummated at the beginning of the period presented using the purchase
method of accounting. The data set forth below is not necessarily indicative
of the results of the future operations of Bancorp upon consummation of the
Merger or the actual results that would have been achieved had the Merger
been consummated prior to the periods presented.
<TABLE>
<CAPTION>
BANCORP COMMON SHARES NCSB COMMON STOCK
---------------------------- ------------------------
<S> <C> <C> <C> <C>
PRO FORMA PRO FORMA
HISTORICAL COMBINED(1)(2) HISTORICAL EQUIVALENT
----------- --------------- ----------- -----------
Primary earnings per share(2):
Year ended September 30, 1997................................. $ 1.23 $ 1.10 $ .50 $ 1.03
Dividends declared per share:
Year ended September 30, 1997................................. 1.75 1.59 -- 1.47
Book value per share at:
September 30, 1997............................................ $ 15.82 $ 15.99 $ 14.60 $ 18.50(3)
</TABLE>
(Footnotes on next page)
-19-
<PAGE>
- ------------------------
(1) Reflects (i) estimated purchase accounting adjustments to be recorded in
connection with the Merger, consisting of mark-to-market valuation
adjustments for assets acquired and liabilities assumed and establishment of
intangible assets for the purchase price in excess of the fair value of the
net assets acquired, and the resultant amortization/accretion of all such
adjustments over appropriate future periods, (ii) the assumed issuance
of 225,246 Bancorp Common Shares in the Merger based upon an Exchange Ratio
of 0.8409 assuming the Average Share Price per share is greater than
$22.00, and (iii) 75% of the Merger Consideration consists of Bancorp Common
Stock.
(2) Represents the Bancorp pro forma combined amounts which assumes an Exchange
Ratio of .8409.
(3) Assumes a $22.00 per share market value for Bancorp Common Shares and an
Exchange Ratio of .8409. To the extent that the Average Share Price is
greater than $22.00 or less than $15.00, and a NCSB shareholder chooses the
Per Share Stock Consideration, the Per Share Stock Consideration would be
more or less, respectively, than the Per Share Cash Consideration. For
example, if the Average Share Price was $25.00 and a NCSB shareholder
chose the Per Share Stock Consideration, such consideration would amount
to $21.02 (25.00 multiplied by an Exchange Ratio of .8409). In addition,
if the Average Share Price was $14.00 and a NCSB shareholder chose the
Per Share Stock Consideration, such consideration would amount to $17.27
($14.00 multiplied by an Exchange Ratio of 1.2333).
-20-
<PAGE>
COMPARATIVE MARKET PRICES
The Bancorp Common Shares is included for quotation on Nasdaq under the
symbol "EFBI." The NCSB Common Stock is traded under the symbol "NSGB" on the
OTC Bulletin Board. The table below sets forth, for the calendar quarters
indicated, the reported high and low bid prices of Bancorp Common Shares and
NCSB Common Stock based on published financial sources and cash dividends
declared per share by Bancorp and NCSB. NCSB converted from a mutual savings
bank charter to a stock savings bank charter on April 30, 1996 and,
therefore, no information with respect to prices of NCSB Common Stock or
dividends on such shares is presented for 1995 or the first quarter of 1996.
<TABLE>
<CAPTION>
BANCORP COMMON SHARES NCSB COMMON STOCK
--------------------------------- -----------------------------------
CASH CASH
DIVIDENDS DIVIDENDS
PAID PER PAID PER
1995 HIGH LOW SHARE HIGH LOW SHARE
- ------------- --------- --------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter.................. $ 14.00 $ 12.25 $ -- $ -- $ -- $ --
Second Quarter................. $ 15.00 13.25 -- -- -- --
Third Quarter.................. 16.75 14.25 -- -- -- --
Fourth Quarter................. 18.00 13.75 --(1) -- -- --
1996
- -------------
First Quarter.................. 15.75 14.25 -- -- -- --
Second Quarter................. 15.00 14.00 -- 11.75 10.375 --
Third Quarter.................. 14.75 12.75 -- 11.75 10.875 --
Fourth Quarter................. 16.00 13.75 1.00 13.25 10.875 --
1997
- -------------
First Quarter.................. 17.00 14.00 -- 12.00 11.25 --
Second Quarter................. 19.25 15.25 .25 13.50 13.00 --
Third Quarter.................. 25.125 18.25 .25 17.325 13.00 --
Fourth Quarter
(through November , 1997)
</TABLE>
- ------------------------
(1) A $3.00 per share capital distribution was paid on the Bancorp Common Shares
during the quarter ended December 31, 1995 of which $2.95 was a return of
capital and $.05 was a taxable dividend.
Since the market price of the Bancorp Common Shares is subject to
fluctuation, the market value of the Bancorp Common Shares that holders of
shares of NCSB Common Stock may receive in the Merger may increase or
decrease prior to and after the Merger.
On July 17, 1997, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the
closing sales price per share
-21-
<PAGE>
of Bancorp Common Shares as reported in the Wall Street Journal was $18.25.
Since such price is greater than $15.00 but less than $22.00, the equivalent
market value per share of NCSB Common Stock would have been $18.50. To the
extent that the Average Share Price is greater than $22.00 or less than
$15.00, and a NCSB shareholder chooses the Per Share Stock Consideration, the
Per Share Stock Consideration would be more or less, respectively, than the
Per Share Cash Consideration. For example, if the Average Share Price was
$25.00 and a NCSB shareholder chose the Per Share Stock Consideration, such
consideration would amount to $21.02 (25.00 multiplied by an Exchange Ratio
of .8409). In addition, if the Average Share Price was $14.00 and a NCSB
shareholder chose the Per Share Stock Consideration, such consideration would
amount to $17.27 ($14.00 multiplied by an Exchange Ratio of 1.2333). On July
15, 1997, the last day that shares of NCSB Common Stock traded prior to the
execution and delivery of the Merger Agreement and the public announcement
thereof, the closing sales price per share as reported in the "pink sheets"
was $14.75. On , 1997, the most recent practicable date prior to
the printing of this Proxy Statement/Prospectus, the closing sales prices per
share of Bancorp Common Shares and NCSB Common Stock were $ and
$ , respectively.
Shareholders are urged to obtain current market quotations for the
Bancorp Common Shares and NCSB Common Stock, to the extent possible, prior to
the Special Meeting.
-22-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
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
Shareholders' 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 solely 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 margin represents net earnings 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 OTS.
-23-
<PAGE>
NORTH CINCINNATI SAVINGS BANK
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
The following tables set forth certain information concerning the
consolidated financial condition, results of operations and other data
regarding NCSB at the dates and for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
SELECTED CONSOLIDATED FINANCIAL AT SEPTEMBER 30, -----------------------------------------------------
CONDITION DATA: 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------- --------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets.............................................. $ 60,585 $ 61,383 $ 55,776 $ 52,838 $ 54,462 $ 54,257
Cash and cash equivalents........................... 1,428 2,966 1,846 1,120 1,006 3,018
Investment securities--at cost...................... 999 1,999 3,004 3,209 3,212 1,100
Investment securities available for sale--at market
(1)............................................... 2,332 2,318 3,170 -- -- --
Mortgage-backed securities--at cost................. 704 520 17 23 32 26,447
Mortgage-backed and related securities available for
sale--at market (1)............................... 11,714 13,643 8,417 14,833 26,612 --
Loans receivable--net............................... 41,757 38,356 37,400 31,931 22,053 22,247
Deposits............................................ 50,126 49,361 52,713 49,141 50,291 50,033
Advances from the FHLB.............................. 4,390 5,998 -- 1,100 -- --
Unrealized losses on securities designated as
available for sale, net........................... 553 591 218 1,230 95 --
Shareholders' equity, net (2)....................... 5,791 5,561 2,646 2,165 3,745 3,641
</TABLE>
- ------------------------
(1) NCSB adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting For Certain Investments in Debt and Equity Securities," on
December 31, 1993. As of and subsequent to that date, NCSB carries
securities designated as available for sale at market.
(2) Consists of retained earnings only at December 31, 1992 through 1995,
inclusive.
-24-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30, FOR THE YEAR ENDED DECEMBER 31,
SELECTED CONSOLIDATED ------------------ ------------------------------------------------
OPERATING DATA: 1997 1996 1996 1995 1994 1993 1992
- -------------------------------------------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income............................. $ 3,269 $ 3,048 $ 4,102 $ 3,807 $ 3,471 $ 3,743 $ 4,397
Interest expense............................ 2,205 2,075 2,786 2,725 2,292 2,428 2,963
------- ------- ------- ------- ------- ------- -------
Net interest income......................... 1,064 973 1,316 1,082 1,179 1,315 1,434
Provision for loan losses................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses................. 1,064 973 1,316 1,082 1,179 1,315 1,434
Other income (loss)......................... 54 67 83 (213) (419) 273 499
General, administrative and other expense... 926 1,311 1,664 1,401 1,394 1,304 1,371
------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes
(credits)................................. 192 (271) (265) (532) (634) 284 562
Federal income taxes (credits)............ -- -- -- -- (190) 85 156
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)......................... $ 192 $ (271) $ (265) $ (532) $ (444) $ 199 $ 406
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
SELECTED CONSOLIDATED FINANCIAL ------------------ ------------------------------------------------
RATIOS AND OTHER DATA: 1997 (2) 1996(2) 1996 1995 1994 1993 1992
- ------------------------------------------- -------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets (1)............... .41% (.48)% (.45)% (.98)% (.83)% .37% .72%
Average interest rate spread
during period............................. 1.75 1.96 2.00 1.91 2.03 2.10 2.32
Net interest margin........................ 2.31 1.80 2.34 2.02 2.19 2.43 2.61
Return on average equity (1)............... 4.51 (6.58) (6.46) (22.12) (15.03) 5.39 11.81
Equity to total assets at end of period.... 9.56 9.22 9.06 4.74 4.10 6.88 6.71
Average interest-earning assets to average
interest-bearing liabilities (1)......... 111.73 104.63 106.81 102.17 103.72 107.44 105.27
Net interest income to general,
administrative and other expense......... 114.90 74.22 79.09 77.23 84.58 100.84 104.60
General, administrative and other expense
to average total assets (1).............. 1.99 2.31 2.84 2.58 2.60 2.40 2.42
Number of full-service offices............. 2 2 2 2 3 3 3
</TABLE>
- ------------------------
(1) Based on the arithmetic average of beginning and ending balances.
(2) Annualized where applicable.
-25-
<PAGE>
SHAREHOLDER MEETING
This Proxy Statement/Prospectus is being furnished to NCSB shareholders in
connection with the solicitation of proxies by the Board of Directors of NCSB
for use at the Special Meeting to be held on , 1998, and at any
adjournment or adjournments thereof. This Proxy Statement/Prospectus also serves
as a prospectus of Bancorp in connection with the issuance of Bancorp Common
Shares to holders of NCSB Common Stock upon consummation of the Merger.
NCSB SHAREHOLDERS SHOULD NOT FORWARD ANY NCSB STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
This Proxy Statement/Prospectus, the Notice of Special Meeting of
Shareholders of NCSB and the accompanying proxy solicited by the Board of
Directors of NCSB, are first being mailed to the shareholders of NCSB on or
about , 1997.
The principal executive offices of NCSB are located at 9477 Kenwood Road,
Blue Ash, Ohio 45242, and its telephone number is (513) 791-4800.
SPECIAL MEETING OF NCSB SHAREHOLDERS
The Special Meeting will be held on , 1998, commencing at
:00 .m., Eastern Time, at [ ], Ohio.
PURPOSE OF MEETING. The purposes of the Special Meeting are to consider and
vote upon a proposal to adopt the Merger Agreement, to consider and vote upon a
proposal to adjourn the Special Meeting to solicit additional proxies, if
necessary, and to transact such other business as may properly come before the
Special Meeting and any adjournment or adjournments thereof. It is not
anticipated that any matter other than the proposal to adopt the Merger
Agreement and, if necessary, the adjournment proposal as aforesaid will be
brought before the Special Meeting. If any other matter is properly presented at
the Special Meeting for consideration, the persons named in the enclosed form of
proxy card and acting thereunder will have discretion to vote on such matter in
accordance with their best judgment.
Shares Outstanding and Entitled to Vote; Record Date. The close of business
on , 1997 has been fixed by the Board of Directors of NCSB as the
Record Date for the determination of holders of NCSB Common Stock entitled to
notice of and to vote at the Special Meeting and any adjournment or adjournments
thereof. At the close of business on the Record Date, there were 396,750 shares
outstanding and entitled to vote, held by approximately holders of record.
Each share of NCSB Common Stock entitles the holder thereof to one vote on each
matter to be submitted to NCSB shareholders at the Special Meeting.
-26-
<PAGE>
Vote Required. A majority of the outstanding shares of NCSB Common Stock
must be represented in person or by proxy at the Special Meeting in order for a
quorum to be present. The affirmative vote of a majority of the votes cast by
all shareholders of NCSB entitled to vote thereon is required to approve the
Merger Agreement and the proposal to adjourn the Special Meeting to solicit
additional proxies, if necessary. The votes may be made in person or by proxy.
Shares as to which the "ABSTAIN" box has been marked on the proxy and broker
non-votes will be counted as present for determining if a quorum is present and
an abstention or a broker non-vote will have the effect of a vote against the
Merger.
As of the Record Date, the directors and executive officers of NCSB and
their affiliates in the aggregate beneficially owned and are entitled to vote
53,800 shares, or 13.6%, of the outstanding NCSB Common Stock. The directors of
NCSB have signed a Shareholders Agreement which provides, among other things,
that they will vote any shares of NCSB Common Stock over which they have voting
power in favor of the Merger Agreement. The directors of NCSB who signed the
Shareholders Agreement beneficially owned 53,800 shares, or 13.6%, of the NCSB
Common Stock outstanding on the Record Date. In addition, at the Record Date,
Bancorp beneficially owned 39,600 shares, or 9.9%, of NCSB Common Stock and
intends to note such shares for adoption of the Merger Agreement.
Voting; Solicitation and Revocation of Proxies. A proxy for use at the
Special Meeting is being furnished to each NCSB shareholder together with
this Proxy Statement/Prospectus and is solicited by the Board of Directors of
NCSB. Without affecting any vote previously taken, a proxy may be revoked by a
shareholder executing a later dated proxy which is received by NCSB before the
proxy is exercised or by giving notice of revocation to NCSB in writing or
in open meeting before the proxy is exercised. Attendance at
the Special Meeting will not, in and of itself, revoke a
proxy. Each proxy returned to NCSB (and not revoked) will be voted in
accordance with the instructions thereon. IF NO INSTRUCTIONS ARE INDICATED,
THE PROXY WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT.
COSTS
Bancorp and NCSB will share the costs of printing this Proxy
Statement/Prospectus and the accompanying proxy. Each party will otherwise bear
its own costs in the transaction. Proxies will be solicited by mail and may be
further solicited, for no additional compensation by officers, directors or
employees of NCSB, by further mailing, by telephone or by personal contact. NCSB
will also pay the standard charges and expenses of brokerage houses, voting
trustees, banks, associations and other custodians, nominees and fiduciaries,
who are record holders of NCSB Common Stock, not beneficially owned by them, for
forwarding such materials to and obtaining proxies from the beneficial owners of
NCSB Common Stock entitled to vote at the Special Meeting.
-27-
<PAGE>
THE MERGER
The following description of the material terms of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached to this Proxy Statement/Prospectus
as Appendix A. All shareholders of NCSB are urged to read such document
carefully.
GENERAL
The Boards of Directors of Bancorp and NCSB have determined that the
acquisition of NCSB by Bancorp is desirable and in the best interests of
Bancorp's and NCSB's respective shareholders and have unanimously approved the
Merger. The Merger will be accomplished through the Merger of NCSB with and into
the Bank, pursuant to the Merger Agreement, with the Bank being the surviving
corporation operating under the name "Enterprise Federal Savings Bank." THE
BOARD OF DIRECTORS OF NCSB UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. Upon consummation of
the Merger, each share of NCSB Common Stock outstanding at the Effective Time
will be converted into and represent the right to receive Bancorp Common Shares,
cash or a combination of both, as described under "The Merger--The Merger
Consideration."
BACKGROUND OF AND REASONS FOR THE MERGER
Bancorp. The terms of the Merger Agreement, including the Merger
Consideration to be paid to NCSB's shareholders, were the result of
arm's-length negotiations between the representatives of Bancorp and NCSB.
Among the factors considered by the Board of Directors of Bancorp in deciding
to approve and recommend the terms of the Merger were (i) the Merger
Consideration to be paid to NCSB's shareholders in relation to the market
value, book value, earnings per share and dividend rates of the Bancorp
Common Shares and the NCSB Common Stock; (ii) the ability to expand Bancorp's
presence in Butler, Hamilton and Warren Counties, Ohio; (iii) information
concerning the financial condition, results of operations, capital levels,
asset quality and prospects of NCSB; (iv) the short-term and long-term impact
the Merger will have on Bancorp's consolidated results of operations,
including anticipated cost savings resulting from consolidations in certain
areas and expanded lending and retail banking products and services; (v) the
improvement of the franchise value of Bancorp to its shareholders as a result
of the enhanced network and products and services; (vi) the likelihood of
receiving the requisite regulatory approvals in a timely manner; (vii) the
ability of the combined enterprise to compete in relevant banking and
non-banking markets; (viii) industry and economic conditions; and (ix) the
impact of the Merger on the depositors, employees, customers and communities
served by Bancorp through expanded lending and retail banking products and
services.
-28-
<PAGE>
In making their determination, the Board of Directors of Bancorp did not
ascribe relative weights to the factors which they considered. Based upon all
of the foregoing factors, and after thorough discussion and consideration at
a meeting of the Board held on July 17, 1997, the directors of Bancorp
unanimously approved the Merger Agreement and the transactions contemplated
thereby.
NCSB. In April 1996, NCSB converted from a mutual savings bank to a stock
savings bank and sold 396,750 common shares at $10.00 per share (the
"Conversion"). Although the proceeds of the Conversion helped NCSB to address
its capital needs, NCSB was unable to effectively increase its return on
average assets or return on average equity in 1996 due partly to its large
investments in mortgage-backed securities ("MBSs"). In conjunction with its
asset and liability management objectives in the early 1990s, NCSB had
purchased a significant amount of MBSs consisting of adjustable-rate
participation certificates and collateralized mortgage obligations ("CMOs")
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") and the Government National Mortgage
Association ("GNMA"). During 1994, NCSB began to liquidate these securities
because a significant amount of the mortgage-backed securities had yields
lower than prevailing market rates. As a result of the sales, NCSB reported
net losses in 1995 and 1994 of $532,000, and $444,000, respectively.
Despite having significantly reduced its investment in mortgage-backed
securities from its 1994 levels, NCSB reported a net loss of $265,000 for the
year ended December 31, 1996. Although this loss was primarily the result of the
payment of a one-time SAIF assessment of $304,000 and $54,000 in other one-time
charges, the earnings of NCSB continued to be adversely affected by NCSB's
remaining MBS investments. NCSB's earnings in 1996 were also adversely impacted
by the inability of NCSB to utilize the Conversion proceeds to generate
increased loan production. Loans receivable at December 31, 1996, increased only
$1.0 million, or 2.6%, over the total at December 31, 1995. As a result,
although NCSB's return on average equity and return on average assets increased
in 1996 over the two prior years, its 1996 levels continued to remain
significantly lower than those of its peer financial institutions. For the years
ended December 30, 1996, 1995 and 1994, NCSB's return on average assets equaled
(.45%), (.98%) and (.83%), respectively, and its return on average equity was
(6.46%), (22.12%) and (15.03%), respectively.
-29-
<PAGE>
During the first quarter of 1997, the Board of Directors began to
consider strategic alternatives that would enhance NCSB's shareholder value.
The Board met with representatives of several financial institutions who had
expressed unsolicited interests in NCSB. In April 1997, NCSB engaged McDonald
& Company to advise the Board concerning a possible sale of NCSB. The Board
of Directors determined that the best strategy for increasing the value of
shareholders' investment in NCSB would be a sale of NCSB to a larger
financial institution.
In conjunction with McDonald & Company, the Board compiled a list of
selected financial institutions as prospective merger partners. Based on
discussions with the Board, in April 1997 McDonald & Company contacted 26 thrift
and bank holding companies which were considered potentially appropriate
acquirers. Of the parties which were contacted, eight, including Bancorp, chose
to submit a non-binding indication of interest outlining the general terms and
conditions of their offer, including a proposed price or range of proposed
prices, the form of consideration, and any significant terms and conditions for
an acquisition of NCSB.
The Board, with the assistance of McDonald & Company, evaluated the
different characteristics of the institutions which had submitted indications
of interest to determine their suitability as merger partners and the value
of the consideration to be received under the various proposals. The Board of
NCSB considered a number of factors, including, but not limited to, the
amount and nature of the proposed consideration, the characteristics of the
markets served by the potential acquirors, the products and services offered
by the potential acquirors and the prospects for NCSB's employees. For those
companies which offered their stock as a component of the consideration to be
received by NCSB shareholders, the Board reviewed the market performance of
each company's stock with respect to the price and volume of trading. Based
on their overview of such factors, the Board decided to invite six companies,
including Bancorp, to conduct a due diligence review of NCSB.
After completing the due diligence process, five of the six companies
submitted a final proposal to acquire NCSB. Three companies offered cash as the
form of consideration and one company offered stock. Bancorp's proposal allowed
shareholders to choose to receive either Bancorp Common Shares, cash, or a
mixture of Bancorp Common Shares and cash, in exchange for their NCSB common
shares, subject to the limitation that only 40% of the NCSB common shares may be
exchanged for cash consideration.
With extensive information provided by McDonald & Company, the Board of
Directors analyzed the value of the consideration to be received under the five
proposals. With respect to Bancorp and the other company offering stock, the
Board of Directors reviewed historical and prospective earnings of the
companies, the pro forma financial impact and earnings per share dilution, if
any, of a merger with NCSB, the pro forma impact on the NCSB shareholders with
respect to earnings, book value and dividends per share, the ability of the
combined entity to realize cost savings through economies of scale and
-30-
<PAGE>
consolidation of operations, comparable merger transactions and the liquidity
of such companies' stocks. Although the value of the Bancorp proposal was
slightly lower than the cash proposals at that time, the Board considered the
fact that the receipt of cash in exchange for NCSB shares would result in a
recognition of taxable income by the NCSB shareholders. The exchange of
shares proposed by Bancorp would enable a majority of the NCSB shareholders
to defer the recognition of the gain on their investment in NCSB.
The asset size of Bancorp was another important consideration to the
Board. Bancorp is large enough to support the staff and the technology
necessary to offer products and services that NCSB does not currently offer,
but it is not too large to be incompatible with NCSB. Like NCSB, Bancorp has
served the financial needs of residents of Southern Ohio suburban
communities. Moreover, because of its size relative to NCSB, Bancorp can
offer NCSB's employees more diverse opportunities for career advancement.
The Board recognized that these features would provide the foundation for
a combination that would benefit NCSB's shareholders, its employees, its
customers and the communities it serves. After carefully considering the
relevant factors, the Board concluded that Bancorp was the most suitable
acquiror and decided to proceed with the negotiation of a definitive
agreement with Bancorp. On July 18, 1997, at the conclusion of arm's length
negotiations between NCSB and Bancorp, the Board of NCSB met to consider
approval of the terms of the Merger Agreement. At that meeting,
representatives of McDonald & Company met with the Board to review the
financial components of the Merger and advised the Board that, in the opinion
of McDonald & Company, the financial consideration to be received by the NCSB
shareholders in the Merger was fair as of that date, to the NCSB shareholders
from a financial point of view.
Based on all of the foregoing, the directors of NCSB concluded that the
terms of the Merger, as set forth in the Merger Agreement, were in the best
interests of NCSB and its shareholders.
The directors of NCSB believe that the Merger is in the best interests of
their organization and shareholders. THE NCSB DIRECTORS UNANIMOUSLY RECOMMEND
THAT NCSB SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
Opinion of McDonald & Company
NCSB has retained McDonald & Company to render its opinion with respect
to the fairness, from a financial point of view, of the financial
consideration to the holders of NCSB Common Stock. McDonald & Company
rendered its oral opinion to the NCSB Board of Directors on July 18, 1997,
which it subsequently confirmed in writing, that, as of the date of such
opinion, the financial consideration pursuant to the Merger was fair, from a
financial point of view, to the holders of NCSB Common Stock.
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The full text of the opinion of McDonald & Company, updated as of the date
of this Proxy Statement/ Prospectus, which sets forth certain assumptions made,
matters considered and limitations on the reviews undertaken, is attached as
Appendix B to this Proxy Statement/Prospectus, and should be read in its
entirety. The summary of the opinion of McDonald & Company set forth in this
Proxy Statement/ Prospectus is qualified in its entirety by reference to the
opinion. McDonald & Company's opinion is directed to the NCSB Board of Directors
and addresses only the financial consideration to be received by NCSB
shareholders.
In arriving at its opinion, McDonald & Company reviewed, among other things,
the Merger Agreement together with exhibits and schedules thereto, certain
publicly available information relating to the business, financial condition and
operations of NCSB and Bancorp as well as certain other non-public information,
primarily financial in nature, furnished to it by NCSB and Bancorp relating to
the respective businesses, earnings, assets and prospects of NCSB and Bancorp.
McDonald & Company also held discussions with members of senior management of
NCSB and Bancorp concerning their respective businesses, assets, financial
forecasts and prospects. McDonald & Company also reviewed certain publicly
available information concerning the trading of, and the trading market for,
NCSB Common Stock and Bancorp Common Shares and certain publicly available
information concerning comparable companies and transactions, all as set forth
in McDonald & Company's opinion.
McDonald & Company was not engaged to and did not conduct a physical
inspection of any of the assets, properties, or facilities of either NCSB or
Bancorp and was not engaged to and has not made, obtained or been furnished with
any independent evaluation or appraisal of any of such assets, properties, or
facilities or any of the liabilities of NCSB or Bancorp. McDonald & Company has
assumed and relied, without independent investigation, upon the accuracy and
completeness of the financial and other information provided to it or publicly
available, has relied upon the representations and warranties of NCSB and
Bancorp contained in the Merger Agreement, and has not independently attempted
to verify such information. McDonald & Company has also assumed that all of the
conditions to the Merger as set forth in the Merger Agreement, including the
tax-free nature of the reorganization for federal income tax purposes, would be
satisfied and that the Merger would be consummated on a timely basis in the
manner contemplated by the Merger Agreement. No limitations were imposed by NCSB
upon McDonald & Company with respect to the scope of McDonald & Company's
investigation, nor were any specific instructions given to McDonald & Company in
connection with its fairness opinion.
In connection with rendering its opinion dated July 18, 1997, and as updated
to , 1997, McDonald & Company considered a variety of financial analyses,
which are summarized below. McDonald & Company believes that its analyses must
be considered as a whole and that selecting portions of such analyses and of the
factors considered by McDonald & Company without considering all such analyses
and factors
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may create an incomplete view of the analytical process underlying McDonald &
Company's opinion. In its analyses, McDonald & Company made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters. Any estimates contained in McDonald & Company's
analyses are not necessarily indicative of future results or values, which
may be significantly more or less favorable than such estimates.
The following is a summary of selected analyses considered by McDonald &
Company and discussed with the NCSB Board of Directors, in connection with
McDonald & Company's opinion dated July 18, 1997:
COMPARISON WITH SELECTED COMPANIES. McDonald & Company compared the
financial performance and stock market valuation of Bancorp with
corresponding data for the following selected companies: First Midwest
Financial, Inc., Charter Financial, Inc., First Bancshares, Inc., FFW
Corporation, Wood Bancorp, Inc., FFY Financial Corp, HMN Financial, Inc.,
Landmark Bancshares, Inc., Mid Continent Bancshares Inc. and Southwest
Bancshares, Inc. In addition, McDonald & Company compared the same data of
NCSB with corresponding data for the following selected companies: Capital
Savings Bancorp, Inc., 1st Bancorp, First Financial Bancorp, Inc., First
Federal Bancorp, Inc., First Franklin Corporation, Glenway Financial Corp.,
LSB Financial Corp., Mid-Iowa Financial Corp., Midwest Bancshares, Inc.,
Potters Financial Corporation, and Winton Financial Corporation. At the time,
none of the companies listed above had announced a merger transaction or
disclosed an interest in pursuing a possible merger transaction which would
have significantly affected its stock market valuation.
PRO FORMA MERGER ANALYSIS. McDonald & Company analyzed certain pro forma
effects resulting from the Merger on the pro forma combined company over a five
year period from 1998 through 2002. This analysis, based upon the financial
forecasts of management of NCSB and Bancorp and including estimates of cost
savings provided by the management of NCSB and Bancorp, showed approximately
3.0% dilution for Bancorp in pro forma earnings per share in 1998 and
approximately 5.1% dilution in pro forma earnings per share in 1999.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. McDonald & Company reviewed
five groups of selected pending bank acquisition transactions involving (i)
selling thrifts headquartered in Iowa, Illinois, Indiana, Kansas, Kentucky,
Michigan, Minnesota, Missouri, North Dakota, Nebraska, Ohio, Pennsylvania,
South Dakota, West Virginia and Wisconsin (ii) selling thrifts with total
assets less than $250 million, (iii) selling thrifts with an equity to assets
ratio of between 8% and 12%, (iv) selling thrifts with a return on average
assets ratio of less than 0.70%, and (v) selling thrifts with a ratio of
non-performing assets to total assets of less than 0.50%. McDonald & Company
reviewed the ratios of the offer value to stated book value and tangible book
value, the multiple of the last 12 months earnings of the acquired company
(adjusted for the one-time SAIF assessment), and the ratio of offer value to
assets in each such transaction, and computed
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the mean and median ratios and multiples for each group. The
calculations yielded ranges of median ratios of price to stated book value and
tangible book value of 152% to 174%. Median multiples of earnings among the five
groups ranged from l9.6x to 23.3x; and median ratios of offer value to assets
ranged from 15.2% to 20.4%. This analysis showed an imputed reference range of
$15.53 to $18.98 per share of NCSB Common Stock.
No company or transaction used in the above analysis as a comparison is
identical to NCSB, Bancorp or the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies to which they are being compared. Mathematical analysis (such
as determining the mean or median) is not, in itself, a meaningful method of
using comparable company or comparable transaction data.
DISCOUNTED CASH FLOW ANALYSIS. Using discounted cash flow analysis,
McDonald & Company estimated the present value of the future streams of
after-tax cash flows that NCSB could produce over a five year period from
1998 through 2002, under various assumptions, based upon NCSB's management
forecasts. McDonald & Company then estimated the terminal value of NCSB after
the five year period by applying an estimated perpetual growth rate to the
sixth year's projected after-tax cash flow and then applied to this value
multiples ranging from 8.1x to l0.lx. The five year cash flow streams and
terminal values were then discounted to present values using different
discount rates chosen to reflect different assumptions regarding the
estimated required rates of return of prospective buyers of NCSB. On the
basis of such varying assumptions, this discounted cash flow analysis
indicated a reference range of $15.74 to $19.75 per share of NCSB Common
Stock. This analysis was based upon NCSB and Bancorp management's forecasts
including variations and assumptions made by McDonald & Company, which
included adjustments to reflect the anticipated effects of potential
merger-related cost savings estimated by NCSB and Bancorp. Management's
forecasts are based upon many factors and assumptions, many of which are
beyond the control of NCSB or Bancorp. As indicated above, this analysis is
not necessarily indicative of actual values or actual future results and does
not purport to reflect the prices at which any securities may trade at the
present time or at any time in the future.
OTHER ANALYSIS. In addition to performing the analyses summarized above,
McDonald & Company also considered its analysis of the general market for bank
and thrift mergers, NCSB's relative share of the deposit market that it serves
and the general economic conditions and prospects of those markets.
In performing its analyses, McDonald & Company made numerous assumptions
with respect to industry performance, general business and economic
conditions and other matters. The analyses performed by McDonald & Company
are not necessarily indicative of actual values, which may be significantly
more or less favorable than the values
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suggested by such analyses. Such analyses were
prepared solely as part of McDonald & Company's opinion.
The term "fair from a financial point of view," is a standard phrase
contained in investment banking fairness opinions and refers to the fact that
McDonald & Company's opinion as to the fairness of the financial consideration
is addressed solely to the financial attributes of the financial consideration.
The analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold. In addition, as described above, McDonald &
Company's opinion and related presentation to the NCSB Board of Directors were
one of many factors taken into consideration by the NCSB Board in making its
determination to approve the Merger Agreement. Consequently, the McDonald &
Company analyses described above should not be viewed as determinative of the
NCSB Board's conclusions with respect to the value of NCSB or of the decision of
the NCSB Board to agree to the financial consideration.
McDonald & Company's opinion is based on economic and market conditions and
other circumstances existing on, and information made available as of, the date
of the opinion. In addition, the opinion does not address the underlying
business decision to effect the Merger or any other terms of the Merger.
McDonald & Company's opinion does not represent its opinion as to what the value
of NCSB Common Stock or Bancorp Common Shares may be at the Effective Time.
In connection with its opinion dated as of the date of this Proxy
Statement/Prospectus, McDonald & Company performed procedures to update certain
of its analyses and reviewed the assumptions on which such analyses were based
and the factors considered herewith.
McDonald & Company, as part of its investment banking business, is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. McDonald & Company has
extensive experience with the valuation of financial institutions. NCSB's Board
of Directors selected McDonald & Company as its financial advisor because of
McDonald & Company's industry expertise with respect to financial institutions
and because of its substantial experience in transactions similar to the Merger.
McDonald & Company is not affiliated with either NCSB or Bancorp.
In the ordinary course of business, McDonald & Company makes a market in
Bancorp Common Shares and NCSB Common Stock and may actively trade securities of
Bancorp or NCSB for its own account and for the accounts of its customers. At
any time and from time to time, McDonald & Company may hold a short or long
position in such securities.
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For its services as financial advisor, NCSB has paid McDonald & Company a
retainer of $15,000 and a fee of $25,000 upon rendering of the oral opinion.
Assuming the consummation of the Merger and based upon the value of the
Merger assuming a per share merger consideration equal to $________,
additional fees equal to approximately $ would be payable to McDonald
& Company upon consummation of the Merger. NCSB has also agreed to reimburse
McDonald & Company for its reasonable out-of-pocket expenses and to indemnify
McDonald & Company against certain liabilities, including certain liabilities
under federal securities laws.
MERGER CONSIDERATION AND ELECTION, ALLOCATION AND PRORATION
MERGER CONSIDERATION. The Merger Agreement provides that at the Effective
Time of the Merger, each share of NCSB Common Stock outstanding immediately
prior to consummation of the Merger (other than shares as to which
dissenters' rights have been asserted and duly perfected in accordance with
Ohio law and shares held by Bancorp, NCSB or any of their respective
subsidiaries, other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted) will be converted into and
represent the right to receive: (i) the Per Share Cash Consideration; (ii)
the Per Share Stock Consideration or (iii) a combination of cash and Bancorp
Common Shares. The Merger Agreement provides that the number of Bancorp
Common Shares comprising the Per Share Stock Consideration will be equal to
(A) if the Average Share Price is equal to or less than $22.00 but equal to
or greater than $15.00, the quotient, rounded to four decimal places,
determined by dividing (x) $18.50 by (y) the Average Share Price; (B) if the
Average Share Price is less than $15.00, 1.2333 shares; or (C) if the Average
Share Price is greater than $22.00, 0.8409 shares. The Merger Agreement
provides that no greater than 40% of the shares of NCSB Common Stock may be
exchanged for the Per Share Cash Consideration. To the extent that the
Average Share Price is greater than $22.00 or less than $15.00, and a NCSB
shareholder chooses the Per Share Stock Consideration, the Per Share Stock
Consideration would be more or less, respectively, than the Per Share Cash
Consideration. For example, if the Average Share Price was $25.00 and a NCSB
shareholder chose the Per Share Stock Consideration, such consideration would
amount to $21.02 ($25.00 multiplied by an Exchange Ratio of .8409). In
addition, if the Average Share Price was $14.00 and a NCSB shareholder chose
the Per Share Stock Consideration, such consideration would amount to $17.27
($14.00 multiplied by an Exchange Ratio of 1.2333). Further, the Merger
Agreement provides that no greater than 75% of the shares of NCSB Common
Stock may be exchanged for the Per Share Stock Consideration, provided,
however, that Bancorp may permit a greater percentage of Bancorp Common
Shares in its sole discretion. Accordingly, the actual form and value of
consideration ultimately received by a shareholder for shares of NCSB Common
Stock will depend upon such shareholder's election, the election of other
shareholders, as well as the allocation and proration procedure described
herein.
If, between the date of this Proxy Statement/Prospectus and the Effective
Time, Bancorp Common Shares are changed into a different number or class of
shares by reason of any reorganization, reclassification, recapitalization, or a
stock dividend, stock split or reverse stock split thereon is declared with a
record date within said period, the Merger Consideration as specified above
shall be adjusted accordingly.
ELECTIONS. Within three business days after the consummation of the
Merger, each record holder of NCSB Common Stock will be sent materials asking
such shareholder to
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make an Election as to the form of consideration to be received for his or
her shares of NCSB Common Stock. Such holder of NCSB Common Stock may:
(i) make a Stock Election;
(ii) make a Cash Election; or
(iii) indicate that such holder makes no such election with respect to
such holder's shares of NCSB Common Stock.
The failure to properly make an Election as described below will be treated
as a No-Election. Any shares for which dissenters' rights have been perfected
will be deemed to have made a Cash Election. See "Dissenters' Rights".
No gain or loss will be recognized by the holders of NCSB Common Stock who
receive Bancorp Common Shares as a result of the Merger, except to the extent of
any cash received in lieu of a fractional share interest in NCSB Common Stock.
Holders of NCSB Common Stock who receive the Per Share Cash Consideration will
recognize gain in an amount per share equal to the difference between $18.50 and
the basis for their shares of NCSB Common Stock. See--"Certain Federal Income
Tax Consequences."
NO OVERSUBSCRIPTION. In the event that the number of shares as to which a
Cash Election has been made does not exceed 40% of the shares of NCSB Common
Stock outstanding at the Effective Time and the number of shares as to which a
Stock Election has been made does not exceed 75% of the shares of NCSB Common
Stock outstanding at the Effective Time, then:
(i) each share of NCSB Common Stock to which a Cash Election has been
made will be converted into the right to receive the Per Share Cash
Consideration, without interest;
(ii) each share of NCSB Common Stock as to which a Stock Election has
been made will be converted into the right to receive the Per Share Stock
Consideration; and
(iii) with respect to NCSB shareholders who have No-Election Shares, the
Exchange Agent will attempt to provide for Per Share Cash Consideration
equal to 100% of the Merger Consideration; provided, however, that to the
extent that it is not possible to provide for such allocation and to ensure
that no greater than 40% of the shares of NCSB Common Stock are exchanged
for the Per Share Cash Consideration, the Exchange Agent will allocate on a
pro rata basis so that such result will be attained.
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OVERSUBSCRIPTION FOR CASH. If the aggregate number of shares of NCSB Common
Stock as to which a Cash Election has been made exceeds 40% of the shares of
NCSB Common Stock outstanding at the Effective Time, then:
(i) each share of NCSB Common Stock as to which a Stock Election has
been made and each share of NCSB Common Stock deemed to be a No-Election
Share will be converted into the right to receive the Per Share Stock
Consideration; and
(ii) each share of NCSB Common Stock as to which a Cash Election has
been made will be converted into the right to receive a combination of cash
and Bancorp Common Shares. The amount in cash, without interest, will be
equal to the product, rounded to the nearest $0.01, of (x) $18.50 and (y)
the Cash Fraction, the numerator of which will be a number equal to 40% of
the shares of NCSB Common Stock outstanding at the Effective Time and the
denominator of which will be the total number of shares as to which a Cash
Election has been made. The number of Bancorp Common Shares will be equal to
the product, rounded to four decimal places, of (x) the Per Share Stock
Consideration and (y) a number equal to one minus the Cash Fraction.
OVERSUBSCRIPTION FOR BANCORP COMMON SHARES. If the aggregate number of
shares of NCSB Common Stock as to which a Stock Election has been made exceeds
75% of the shares of NCSB Common Stock outstanding at the Effective Time, then:
(i) each share of NCSB Common Stock as to which a Cash Election has been
made and each share deemed to be a No-Election Share will be converted into
the right to receive the Per Share Cash Consideration, without interest; and
(ii) each share of NCSB Common Stock as to which a Stock Election has
been made will be converted into the right to receive a combination of cash
and Bancorp Common Shares. The number of Bancorp Common Shares will be equal
to the product, rounded to four decimal places, of (x) the Per Share Stock
Consideration and (y) the Stock Fraction, the numerator of which will be a
number equal to 75% of the shares of NCSB Common Stock outstanding at the
Effective Time and the denominator of which will be the total number of
shares as to which a Stock Election has been made. The amount of cash,
without interest, will be equal to the product, rounded to the nearest
$0.01, of (x) $18.50 and (y) a number equal to one minus the Stock Fraction.
No Guarantee of Chosen Consideration or Equivalent Value. Because the
Merger Agreement provides that no greater than 40% of the aggregate Merger
Consideration payable to holders of NCSB Common Stock in the Merger will be
comprised of cash and no greater than 75% of the aggregate Merger
Consideration payable to holders of NCSB Common Stock in the Merger will be
comprised of Bancorp
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Common Shares, no guarantee can be given that the election of any given
shareholder of NCSB will be fully honored. Rather, the election by each
shareholder will be subject to the election, allocation and proration
procedures described herein. Thus shareholders may not receive their
requested form of consideration or combination thereof.
ELECTION PROCEDURES. All Elections will be required to be made on the
Election Form. To make an effective Election with respect to shares of NCSB
Common Stock, the holder thereof must, in accordance with the notice and
letter of transmittal and the Election Form, (i) complete properly and return
the Election Form to the Exchange Agent and (ii) deliver therewith his or her
certificates representing all shares of NCSB Common Stock covered thereby,
prior to 5:00 p.m. on the 15th business day following but not including the
date of mailing of the notice and letter of transmittal and the Election
Form, or such other date as Bancorp and NCSB shall mutually agree upon.
NCSB Stock Certificates should not be returned with the enclosed proxy
and should not be forwarded to the Exchange Agent until a NCSB shareholder
has received the notice and letter of transmittal and the Election Form.
A holder of NCSB Common Stock having a preference as to the form of
consideration to be received for his or her NCSB Common Stock should make an
Election because shares as to which an Election has been made will be given
priority in allocating such consideration over shares as to which an Election
is not received. Neither NCSB nor the NCSB Board of Directors makes any
recommendation as to whether shareholders should elect to receive the Per
Share Cash Consideration or the Per Share Stock Consideration in the Merger.
Each holder of NCSB Common Stock must make his or her own decision with
respect to such election.
NO FRACTIONAL BANCORP COMMON SHARES TO BE ISSUED. No fractional Bancorp
Common Shares will be issued in the Merger to holders of NCSB Common Stock.
Each holder of NCSB Common Stock who otherwise would have been entitled to a
fraction of a share of Bancorp Common Shares will receive in lieu thereof, at
the time of surrender of the certificate or certificates representing such
holder's NCSB Common Stock, an amount of cash (without interest) determined
by multiplying the fractional share interest to which such holder would
otherwise be entitled by the Average Share Price.
CONDITIONS TO THE MERGER
The Merger Agreement provides that consummation of the proposed
transaction is subject to the satisfaction of certain conditions, or waiver
of such conditions by the party entitled to do so, at or before the Effective
Time. Each of the parties' obligations under the Merger Agreement is subject
to the following conditions, among others: (a) all necessary approvals and
consents for the transactions contemplated by the Merger Agreement from the
OTS and any other governmental entity and the other transactions contemplated
hereby have been received without any term or condition which would
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materially impair the value of NCSB to Bancorp and the Bank; all conditions
required to be satisfied prior to the Effective Time by the terms of such
approvals and consents shall have been satisfied; and all statutory waiting
periods in respect thereof shall have expired; (b) all corporate action
necessary to authorize the execution and delivery of the Merger Agreement and
consummation of the transactions contemplated thereby have been duly and
validly taken by Bancorp, the Bank and NCSB, including the adoption by the
requisite vote of the shareholders of NCSB of the Merger Agreement; (c) none
of Bancorp, NCSB, their respective subsidiaries or a third party is (i)
subject to any outstanding order, judgment or decree that would have the
effect of preventing completion of the Merger, (ii) subject to a pending or
threatened suit, action or other proceeding by any governmental body in which
it is sought to restrain or prohibit the Merger, or (iii) subject to a suit,
action or other proceeding before any court or governmental agency in which
it is sought to restrain or prohibit the Merger or obtain other substantial
monetary or other relief against one or more of the parties to the Merger
Agreement and which Bancorp, the Bank or NCSB determines in good faith, based
upon the advice of their respective counsel, would make it inadvisable to
proceed with the Merger because any such pending suit, action or proceeding
has a significant potential to be resolved in such a way as to deprive the
party electing not to proceed of any of the material benefits to it of the
Merger; (d) the Form S-4 has become effective under the Securities Act, and
Bancorp shall have received all state securities laws or "blue sky" permits
and other authorizations or there shall be exemptions from registration
requirements necessary to issue the Bancorp Common Shares in connection with
the Merger, and neither the Form S-4 nor any such permit, authorization or
exemption shall be subject to a stop order or threatened stop order by the
Commission or any state securities authority; (e) Bancorp, the Bank and NCSB
have received, in form and substance reasonably satisfactory to them, an
opinion of Elias, Matz, Tiernan & Herrick L.L.P. to the effect that, for
federal income tax purposes, the Merger will qualify as a "reorganization"
under Section 368(a) of the Code and that no taxable gain will be recognized
by Bancorp, the Bank or NCSB (i) upon the transfer of NCSB's assets to the
Bank in exchange for Bancorp Common Shares, cash and the assumption of NCSB's
liabilities or (ii) upon the distribution of such Bancorp Common Shares and
cash to NCSB shareholders.
In addition to the foregoing conditions, Bancorp's and the Bank's
obligations under the Merger Agreement are conditioned upon, among other
things: (a) NCSB shall have performed in all material respects all
obligations and covenants required to be performed by it pursuant to the
Merger Agreement on or prior to the Effective Time, and the representations
and warranties of NCSB contained in the Merger Agreement are true and correct
as of July 18, 1997 and as of the Effective Time as though made at and as of
the Effective Time, except (i) as to any representation or warranty which
specifically relates to an earlier date, (ii) where the facts which caused
the failure of any representation or warranty to be so true and correct would
not, either individually or in the aggregate, constitute a material adverse
change in the business, operations, assets or financial condition of NCSB,
and Bancorp and the Bank shall have received a certificate to that effect
signed by the President and Chief Executive Officer of NCSB, or (iii) with
respect
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to changes in the financial condition of NCSB attributable to actual or
unrealized losses on securities held for sale as of the date of the Merger
Agreement; (b) the Dissenter's Shares constitute not more than 10% of the
outstanding shares of NCSB Common Stock immediately prior to the Effective
Time; (c) NCSB Affiliates have executed and delivered a commitment and
undertaking with respect to certain matters related to Rule 145 promulgated
under the Securities Act; (d) NCSB shall have furnished Bancorp and the Bank
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions as Bancorp and the Bank may reasonably
request; and (e) Bancorp and the Bank shall have received the written opinion
of Vorys, Sater, Seymour and Pease, dated the date of the Closing, that
addresses certain legal matters.
In addition to the conditions set forth above as applicable to all
parties, NCSB's obligations under the Merger Agreement are conditioned upon,
among others: (a) Bancorp and the Bank shall have performed in all material
respects all obligations and covenants required to be performed by them
pursuant to the Merger Agreement on or prior to the Closing, and the
representations and warranties of Bancorp and the Bank contained in the
Merger Agreement are true and correct as of July 18, 1997 and as of the
Effective Time as though made at and as of the Effective Time, except (i) as
to any representation or warranty which specifically relates to an earlier
date or (ii) where the facts which caused the failure of any representation
or warranty to be so true and correct would not, either individually or in
the aggregate, constitute a material adverse change in the business,
operations, assets or financial condition of Bancorp and the Bank, taken as a
whole, and NCSB shall have received a certificate to that effect signed by
the President and Chief Executive Officers of Bancorp and the Bank; (b)
Bancorp and the Bank shall have furnished NCSB with such certificates of its
officers or others and such other documents to evidence fulfillment of the
conditions as NCSB may reasonably request and (c) NCSB shall have received
the written opinion of Elias, Matz, Tiernan & Herrick L.L.P., dated the date
of the Closing, that addresses certain legal matters.
PROCEDURES FOR EXCHANGE OF NCSB STOCK CERTIFICATES
At the Effective Time, Bancorp shall deliver to the Exchange Agent the
number of Bancorp Common Shares issuable and the amount of cash payable in
the Merger. Within five business days after the Election Deadline, the
Exchange Agent shall distribute Bancorp Common Shares and cash as provided in
the Merger Agreement. The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the Bancorp Common Shares
held by it from time to time pursuant to the Merger Agreement, except that it
shall receive and hold all dividends or other distributions paid or
distributed with respect to such shares for the account of the persons
entitled thereto.
After the completion of the foregoing allocation, each holder of an
outstanding NCSB Stock Certificate(s) who surrenders such certificate or
certificates to the Exchange Agent will, upon acceptance thereof by the
Exchange Agent, be entitled to a certificate or certificates representing the
number of full Bancorp Common Shares and/or the amount
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of cash into which the aggregate number of shares of NCSB Common Stock
represented by the NCSB Stock Certificate(s) surrendered shall have been
converted pursuant to the Merger Agreement and, if such holder's shares of
NCSB Common Stock have been converted into Bancorp Common Shares, any other
distribution theretofore paid with respect to Bancorp Common Shares issuable
in the Merger, in each case without interest. The Exchange Agent shall accept
such certificates upon compliance with such reasonable terms and conditions
as the Exchange Agent may impose to effect an orderly exchange thereof in
accordance with normal exchange practices. Each outstanding NCSB Stock
Certificate (other than shares of NCSB Common Stock the holder of which
objects to the Merger) which is not surrendered to the
Exchange Agent in accordance with the procedures provided for in the Merger
Agreement will, except as otherwise provided in the Merger Agreement, until
duly surrendered to the Exchange Agent be deemed to evidence ownership of the
number of Bancorp Common Shares and/or the right to receive the amount of
cash into which such NCSB Common Stock shall have been converted. After the
Effective Time, there shall be no further transfer on the records of NCSB of
NCSB Stock Certificates and if such certificates are presented to NCSB for
transfer, they shall be cancelled against delivery of certificates for
Bancorp Common Shares or cash as provided in the Merger Agreement. No
dividends which have been declared will be remitted to any person entitled to
receive Bancorp Common Shares pursuant to the Merger Agreement until such
person surrenders the NCSB Stock Certificate(s) at which time such dividends
shall be remitted to such person, without interest.
Bancorp shall not be obligated to deliver cash and/or a certificate or
certificates representing Bancorp Common Shares to which a holder of NCSB
Common Stock would otherwise be entitled as a result of the Merger until such
holder surrenders the NCSB Stock Certificate(s) for exchange as provided in
the Merger Agreement, or, in lieu thereof, an appropriate affidavit of loss
and indemnity agreement and/or a bond as may be required in each case by
Bancorp. If any certificates evidencing Bancorp Common Shares are to be
issued in a name other than that in which the NCSB Stock Certificate
surrendered in exchange therefor is registered, it shall be a condition of
the issuance thereof that the certificate so surrendered shall be properly
endorsed or accompanied by an executed form of assignment separate from the
certificate and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for Bancorp Common Shares
in any name other than that of the registered holder of the certificate
surrendered or otherwise establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
Any portion of the Bancorp Common Shares and cash delivered to the
Exchange Agent by Bancorp pursuant to the Merger Agreement that remains
unclaimed by the shareholders of NCSB for six months after the Effective Time
(as well as any proceeds from any investment thereof) shall be delivered by
the Exchange Agent to Bancorp. Any shareholders of NCSB who have not
theretofore complied with the Merger Agreement shall thereafter look only to
Bancorp for the consideration deliverable in respect of each
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share of NCSB Common Stock such shareholder holds as determined pursuant to
this Agreement without any interest thereon. If outstanding NCSB Stock
Certificates are not surrendered or the payment for them is not claimed prior
to the date on which such Bancorp Common Shares or cash would otherwise
escheat to or become the property of any governmental unit or agency, the
unclaimed items shall, to the extent permitted by abandoned property and any
other applicable law, become the property of Bancorp (and to the extent not
in its possession shall be delivered to it), free and clear of all claims or
interest of any person previously entitled to such property. Neither the
Exchange Agent nor any party to the Merger Agreement shall be liable to any
holder of stock represented by any certificate for any consideration paid to
a public official pursuant to applicable abandoned property, escheat or
similar laws. Bancorp and the Exchange Agent shall be entitled to rely upon
the stock transfer books of NCSB to establish the identity of those persons
entitled to receive consideration specified in the Merger Agreement, which
books shall be conclusive with respect thereto. In the event of a dispute
with respect to ownership of stock represented by any certificate, Bancorp
and the Exchange Agent shall be entitled to deposit any consideration
represented thereby in escrow with an independent third party and thereafter
be relieved with respect to any claims thereto.
Bancorp (through the Exchange Agent, if applicable) shall be entitled to
deduct and withhold from any amounts otherwise payable pursuant to the Merger
Agreement to any holder of shares of NCSB Common Stock such amounts as
Bancorp is required under the Code or any provision of state, local or
foreign tax law to deduct and withhold with respect to the making of such
payment. Any amounts so withheld shall be treated for all purposes of the
Merger Agreement as having been paid to the holder of NCSB Common Stock in
respect of which such deduction and withholding was made by Bancorp.
In the event any NCSB Stock Certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such NCSB Stock Certificate to be lost, stolen or destroyed and, if
required by the Exchange Agent, the posting by such person of a bond in such
amount as the Exchange Agent may direct as indemnity against any claim that
may be made against it with respect to such NCSB Stock Certificate, the
Merger Consideration deliverable in respect thereof pursuant to the Merger
Agreement will be paid to the shareholder.
REGULATORY APPROVALS
Consummation of the Merger is subject to, among other things, prior
receipt of all requisite approvals from the OTS, the Department and any other
regulatory agency of competent jurisdiction necessary to consummate the
Merger and expiration of all regulatory waiting periods applicable to the
Merger. Bancorp has applied to [and received] approval from the OTS pursuant
to the HOLA to acquire NCSB. No other regulatory approval is necessary in
connection with the transactions contemplated by the Merger Agreement.
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BUSINESS PENDING THE MERGER
Under the terms of the Merger Agreement, NCSB has agreed not to take
certain actions, prior to consummation of the Merger without the prior
written consent of Bancorp, including, among other things, the following: (i)
change any provision of the Articles of Incorporation, Constitution or Bylaws
of NCSB; (ii) change the number of shares of its authorized or issued capital
stock or issue or grant any option, warrant, call, commitment, subscription,
award, right to purchase or agreement of any character relating to the
authorized or issued capital stock of NCSB, or any securities convertible
into shares of such capital stock, or split, combine or reclassify any shares
of its capital stock, or redeem or otherwise acquire any shares of such
capital stock; (iii) declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof)
in respect of the capital stock of NCSB; (iv) grant any severance or
termination pay (other than pursuant to binding contracts of NCSB currently
in effect and disclosed to Bancorp pursuant to the Merger Agreement), to, or
enter into or amend any employment, consulting or compensation agreement
with, any of its directors, officers or employees; or award any increase in
compensation or benefits to its directors, officers or employees, except, in
the case of non-officer employees, such as may be granted in the ordinary
course of business and consistent with past practices and policies; (v)
subject to certain exceptions, enter into or modify any employee benefit plan
or arrangement, or any trust agreement related thereto, in respect of any of
its directors, officers or employees; or make any contributions to any
defined contribution plan or any defined benefit pension or retirement plan
other than in the ordinary course of business consistent with past practice;
(vi) sell or dispose of any material assets other than in the ordinary course
of business consistent with past practices and policies, or acquire in any
manner whatsoever (other than to realize upon collateral for a defaulted
loan) any business or entity; (vii) enter into any new capital commitments or
make any capital expenditures other than pursuant to binding commitments
existing on July 18, 1997, other than expenditures necessary to maintain
existing assets in good repair and other than as disclosed pursuant to the
Merger Agreement; (viii) file any applications or make any contract with
respect to branching or site location or relocation; (ix) make any material
change in its accounting methods or practices, other than changes required by
generally accepted accounting principles, or change any of its methods of
reporting income and deductions for federal income tax purposes, except as
required by changes in laws or regulations; (x) change its lending,
investment, deposit or asset and liability management or other banking
policies in any material respect except as may be required by applicable law;
(xi) engage in any transaction with an "affiliated person" or "affiliate," in
each case as defined in the Merger Agreement; (xii) enter into any futures
contract, option or other agreement or take any other action for purposes of
hedging the exposure of its interest-earning assets and interest-bearing
liabilities to changes in market rates of interest; (xiii) incur any
liability for borrowed money except extensions of credit from the FHLB of
Cincinnati (in which no single transaction shall exceed $2,000,000) in the
ordinary course of business, or place upon or permit any lien or encumbrance
upon any of its properties or assets, except liens of the type permitted
pursuant to the Merger Agreement; (xiv) take any action that would result in
any of its representations and warranties contained in the Merger Agreement
not
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being true and correct in any material respect at the Effective Time; or (xv)
agree to do any of the foregoing.
Furthermore, each party has agreed to provide the other party and its
representatives with such financial data and other information with respect
to its business and properties as such party from time to time reasonably
requests. Each party will cause all non-public financial and business
information obtained by it from the other to be treated confidentially. If
the Merger is not consummated, each party will either return to the other all
non-public financial statements, documents and other materials previously
furnished by such party or destroy such information.
ACQUISITION PROPOSALS
Until the Effective Time or the earlier termination of the Merger
Agreement, NCSB will not and NCSB will not authorize or permit any of its
directors, officers or employees or any investment banker, financial advisor,
attorney, accountant or other representative of NCSB to, directly or
indirectly, encourage or solicit or hold discussions or negotiations with, or
provide any information to, any person, entity or group (other than Bancorp
and the Bank) concerning any merger, sale of substantial assets or
liabilities not in the ordinary course of business, sale of shares of capital
stock or similar transactions involving NCSB (an "Acquisition Transaction");
provided, however, that NCSB may provide information in connection with an
unsolicited possible Acquisition Transaction if the Board of Directors of
NCSB, after reviewing the written legal advice of its counsel, determines in
good faith that the failure to furnish information is likely to constitute a
breach of their fiduciary duties under applicable Ohio law. Under the Merger
Agreement, NCSB is required to promptly communicate to Bancorp the terms of
any proposal which it may receive in respect of any such Acquisition
Transaction and to provide Bancorp with copies of (i) any written legal
advice provided to the Board of Directors of NCSB, (ii) all such written
inquiries or proposals and (iii) an accurate and complete written synopsis of
all such oral inquiries or proposals.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties of Bancorp
and NCSB which are customary in transactions of this type, including, but not
limited to, representations and warranties concerning: (a) the organization
and capitalization of Bancorp and its subsidiaries and NCSB; (b) the due
authorization, execution, delivery and enforceability of the Merger
Agreement; (c) consents or approvals required, and the lack of conflicts or
violations under applicable articles of incorporation, bylaws, instruments
and laws, with respect to the transactions contemplated by the Merger
Agreement; (d) the documents to be filed by Bancorp and NCSB with the
Commission and other regulatory agencies; (e) the conduct of business in the
ordinary course and absence of certain changes; (f) financial statements; (g)
compliance with laws; and (h) the allowance for loan losses and real estate
owned.
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EFFECTIVE TIME OF THE MERGER; TERMINATION AND AMENDMENT
The Effective Time will occur upon the filing of the Articles of
Combination with the OTS and a Certificate of Merger with the Secretary of
State of the State of Ohio pursuant to the OGCL, unless a later date and time
is specified as the Effective Time in such Articles of Combination and
Certificate of Merger. Such filings will occur only after the receipt of all
requisite regulatory approvals, approval of the Merger Agreement by the
requisite vote of NCSB's shareholders, the expiration of all applicable
regulatory waiting periods and the satisfaction or waiver of all other
conditions to the Merger.
A closing (the "Closing") will take place immediately prior to the
Effective Time at 10:00 a.m. on the fifth business day following the receipt
of all necessary regulatory or governmental approvals and consents and the
expiration of all statutory waiting periods in respect thereof and the
satisfaction or waiver (to the extent permitted) of the conditions to
consummation of the Merger, or on such other date as the parties may mutually
agree upon.
The Merger Agreement may be terminated, either before or after approval
by the shareholders of NCSB, as follows: (a) by mutual written consent of the
parties; (b) by Bancorp, the Bank or NCSB (i) if the Effective Time has not
occurred on or prior to June 30, 1998 or (ii) if a vote of the shareholders
of NCSB is taken and such shareholders fail to approve the Merger Agreement
at the meeting of shareholders (or any adjournment thereof); unless the
failure of such occurrence is due to the failure of the party seeking to
terminate the Merger Agreement to perform or observe its agreements set forth
therein to be performed or observed by such party at or before the Effective
Time; (c) by Bancorp or NCSB upon written notice to the other 30 or more days
after the date upon which any application for a regulatory or governmental
approval necessary to consummate the Merger and the other transactions
contemplated by the Merger Agreement has been denied or withdrawn at the
request or recommendation of the applicable regulatory agency or governmental
authority, unless within such 30-day period a petition for rehearing or an
amended application is filed or noticed, or 30 or more days after any
petition for rehearing or amended application is denied; (d) by Bancorp in
writing if NCSB has, or by NCSB in writing if Bancorp has, breached (i) any
covenant or undertaking contained in the Merger Agreement, or (ii) any
representation or warranty contained in the Merger Agreement, which breach
would have a material adverse effect on the business, operations, assets or
financial condition of NCSB and its subsidiaries or Bancorp and its
subsidiaries, as applicable, taken as a whole, or upon the consummation of
the transactions contemplated by the Merger Agreement, in any case if such
breach has not been cured by the earlier of 30 days after the date on which
written notice of such breach is given to the party committing such breach or
the Effective Time; provided that either party may terminate the Merger
Agreement on the basis of any such material breach of any representation or
warranty, notwithstanding any qualification therein relating to the knowledge
of the other party; (e) by Bancorp or NCSB, in writing, if any of the
applications for prior approval referred to in the Merger Agreement are
denied or are
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approved contingent upon the satisfaction of any condition or requirement
which, in the reasonable opinion of the Board of Directors of Bancorp, would
materially impair the value of NCSB to Bancorp, and the time period for
appeals and requests for reconsideration has run.
To the extent permitted under applicable law, at any time prior to the
consummation of the Merger, whether before or after approval thereof by the
shareholders of NCSB, the parties may by written agreement (a) amend the
Merger Agreement, (b) extend the time for the performance of any of the
obligations or other acts of the other parties thereto, (c) waive any
inaccuracies in the representations and warranties contained therein or in
any document delivered pursuant thereto, or (d) waive compliance with any of
the agreements or conditions contained therein. However, after any approval
of the Merger Agreement by the shareholders of NCSB, there may not be,
without further approval of such shareholders, any amendment or waiver of the
Merger Agreement which modifies either the amount or the form of the Merger
Consideration to be delivered to the shareholders of NCSB.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the NCSB Board of Directors,
shareholders should be aware that members of NCSB's management and the NCSB
Board of Directors have interests in the Merger that are in addition to the
interests of shareholders generally. The NCSB Board of Directors was aware of
these interests and considered them, among other matters, in approving the
Merger Agreement and the transactions contemplated thereby.
BOARD OF DIRECTORS OF BANCORP AND THE BANK. Pursuant to the Merger,
effective as of the Effective Time, the number of directors of both Bancorp
and the Bank will be increased by one, and Bancorp and the Bank will appoint
David G. Hendy, who is presently a director of NCSB, as a director of each of
Bancorp and the Bank to serve until the next annual meeting of shareholders
of Bancorp, at which time Mr. Hendy will be nominated for election as a
director for a two-year term. If Mr. Hendy is elected by Bancorp's
shareholders as a director of Bancorp for a two-year term, then Bancorp as
the sole shareholder of the Bank shall also elect Mr. Hendy as a director of
the Bank for a term of two years.
ADVISORY BOARD OF DIRECTORS. The remaining non-employee directors of
NCSB, will be requested by Bancorp as of the Effective Time to serve as an
Advisory Board for a term of three years following the Effective Time, and
each of such persons shall be paid an Advisory Board fee of $3,105 per
quarterly meeting.
OFFICERS AND EMPLOYEES OF NCSB. Bancorp and the Bank have agreed to
honor the terms of NCSB's Employment Agreement with Michael W. Kelley, the
President of NCSB, as set forth in the Merger Agreement. In addition, the
Bank anticipates retaining
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all full-time persons who are officers and employees of NCSB as of both the
date of this Agreement and the Effective Time for a period of not less than
size (6) months subsequent to the Effective Time, except in the event of
termination for cause. Any full-time employee who is terminated within six
months from the Effective Time, except for those individuals terminated for
cause, will be entitled to severance pay equal to one week of salary for each
full year employed by NCSB with a minimum of four weeks severance pay and a
maximum of 26 weeks of severance pay.
EMPLOYEE BENEFIT PLANS. Subject to the provisions of the Merger
Agreement, all employees of NCSB immediately prior to the Effective Time who
are employed by Bancorp or the Bank (the "Employers") immediately following
the Effective Time ("Transferred Employees") will be covered by the
Employers' employee benefit plans on substantially the same basis as any
employee of the Employers in a comparable position. Notwithstanding the
foregoing, Bancorp and the Bank may determine to continue any of the NCSB
benefit plans for Transferred Employees in lieu of offering participation in
the Employers' benefit plans providing similar benefits (e.g., medical and
hospitalization benefits), to terminate any of NCSB's benefit plans, or to
merge any such benefit plans with the Employers' benefit plans, provided the
result is the provision of benefits to Transferred Employees that are
substantially similar to the benefits provided to the Employers' employees
generally. Service to NCSB by a Transferred Employee prior to the Effective
Time shall be recognized as service to the Employers for purposes of
eligibility to participate under the Employers' sick leave policies, paid
vacation policies, and medical, long-term disability and life insurance
plans. In addition, for purposes of determining eligibility to participate in
and the vesting of benefits (but not for purposes of benefit accrual) under
Bancorp's Employee Stock Ownership Plan and defined benefit plan, Bancorp
shall recognize years of service with NCSB. Bancorp and the Bank agree that
any pre-existing condition, limitation or exclusion in its medical, long-term
disability and life insurance plans will not apply to Transferred Employees
or their covered dependents who are covered under a medical or
hospitalization indemnity plan maintained by NCSB on the Effective Time and
who then change coverage to the Employers' medical or hospitalization
indemnity health plan at the time such Transferred Employees are first given
the option to enroll.
If the Effective Time occurs after November 30, 1997, NCSB may, prior to
the Effective Time (i) conduct employee reviews in December 1997 and
implement salary increases effective January 1, 1998 in an amount not to
exceed on a percentage basis the increase in the Consumer Price Index for the
then most recently available 12-month period, and (ii) make a contribution to
the NCSB defined contribution plan in an amount not to exceed 4% of total
compensation.
INDEMNIFICATION. The Merger Agreement provides that from and after the
Effective Time through the third anniversary of the Effective Time, Bancorp
shall indemnify and hold harmless each present and former director, officer
and employee of NCSB determined as of the Effective Time (the "Indemnified
Parties") against any costs
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or expenses (including reasonable attorneys' fees), judgements, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent to
which such Indemnified Parties were entitled under the Amended Articles of
Incorporation, Constitution or other governing instrument and Bylaws of NCSB
as in effect on the date thereof.
INSURANCE. Bancorp and the Bank will maintain a directors' and officers'
liability insurance policy covering the Indemnified Parties for a period of
three (3) years after the Effective Time on terms generally no less favorable
than the NCSB policy in effect on the date of this Agreement.
Resale Considerations With Respect to the Bancorp Common Shares
The Bancorp Common Shares that will be issued if the Merger is
consummated have been registered under the Securities Act and listed on
Nasdaq and will be freely transferable, except for Bancorp Common Shares
received by persons, including directors and executive officers of NCSB, who
may be deemed to be "affiliates" of NCSB under Rule 145 promulgated under the
Securities Act. Affiliates may not sell their Bancorp Common Shares acquired
pursuant to the Merger, except pursuant to an effective registration
statement under the Securities Act covering such Bancorp Common Shares or in
compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act. Persons who may be deemed to
be affiliates of NCSB generally include individuals or entities that control,
are controlled by, or are under common control with, NCSB and may include
certain officers and directors of NCSB as well as any shareholders who own
more than 10% of the NCSB Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Elias, Matz, Tiernan & Herrick L.L.P., special counsel to Bancorp and the
Bank, has rendered an opinion to Bancorp, the Bank and NCSB as to the
principal federal income tax consequences expected to result from the Merger.
Such opinion is included as an exhibit to the Registration Statement. Neither
the opinion nor this summary addresses any tax considerations under foreign,
state or local laws, or the tax considerations to certain shareholders in
light of their particular circumstances, including persons who are not United
States citizens, or who are resident aliens, life insurance companies,
dealers in securities, tax exempt entities, shareholders who received their
shares through the exercise of employee stock options or through other
compensation arrangements, and shareholders who do not hold their shares as
"capital assets" within the meaning of Section 1221 of the Code.
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No rulings have been requested from the Internal Revenue Service ("IRS")
as to the federal income tax consequences of the Merger. Shareholders should
be aware that the opinion of Elias, Matz, Tiernan & Herrick L.L.P. is not
binding on the IRS. Shareholders should also be aware that some of the tax
consequences of the Merger are governed by provisions of the Code as to which
there are no final regulations and little or no judicial or administrative
guidance. The opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based upon
the federal income tax laws as in effect on the date of such opinion and as
those laws are currently interpreted. There can be no assurance that future
legislation, regulations, administrative rulings or court decisions will not
adversely affect the accuracy of the statements contained herein.
The federal income tax consequences discussed below are conditioned upon,
and the opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based upon, the
accuracy as of the date hereof and at, as of and after the Effective Time of
the Merger of certain assumptions, including, but not limited to, the
following (taking into account for purposes hereof all of the events which
are contemplated under the Merger Agreement): (A) that, pursuant to the
Merger, the holders of NCSB Common Stock receive Bancorp Common Shares having
a value as of the Effective Time of the Merger of not less than fifty percent
(50%) of the value of the NCSB Common Stock as of the same date; (B) that
following the Merger, Bancorp will continue the historic business of NCSB or
use a significant portion of NCSB's historic business assets in a business;
and (C) that a bona fide corporate business purpose exists for the Merger.
Bancorp, the Bank and NCSB believe that all of the foregoing assumptions
are accurate as of the date hereof, and will be accurate at, as of and after
the Effective Time. If either Bancorp, the Bank or NCSB learns before the
Effective Time that such assumptions are false and that its counsel therefore
believes that the Merger is unlikely to be treated as a tax-free
reorganization, then additional shareholder approval will be obtained before
consummation of the Merger.
Bancorp, the Bank and NCSB intend for the Merger to qualify as a
reorganization under Section 368(a)(1)(A) and Section 368(a)(2)(D) of the
Code. Pursuant to Section 368(a)(2)(D) of the Code, the acquisition of NCSB
by the Bank, in exchange for stock of Bancorp, will qualify as a
reorganization under Section 368(a)(1)(A) of the Code if (1) substantially
all of the properties of NCSB are acquired by the Bank; (2) NCSB is merged
into the Bank; (3) the merger would have qualified under Section 368(a)(1)(A)
of the Code had it been effected directly into Bancorp; and (4) no stock of
the Bank is used in the transaction.
Elias, Matz, Tiernan & Herrick L.L.P. has rendered an opinion to Bancorp,
the Bank and NCSB, based upon the assumptions set forth herein, that the
Merger will be treated as a reorganization within the meaning of Section 368
(a)(1)(A) and Section 368 (a)(2)(D) of the Code and will have the following
federal income tax consequences: (i) no gain or loss will be recognized by
Bancorp, the Bank or NCSB as a result of the
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Merger; (ii) no gain or loss will be recognized by the shareholders of NCSB
who exchange their NCSB Common Stock solely for Bancorp Common Shares
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Bancorp Common Shares); (iii) the tax basis of
the Bancorp Common Shares received by shareholders who exchange all of their
NCSB Common Stock solely for Bancorp Common Shares in the Merger will be the
same as the tax basis of the NCSB Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share interest for
which cash is received); and (iv) any shareholders of NCSB who receive cash
in exchange for their shares of NCSB Common Stock will recognize gain, if
any, equal to the lesser of (a) the excess of the amount of cash plus the
fair market value of any Bancorp Common Shares received in the Merger over
the shareholder's adjusted tax basis in the NCSB Common Stock, or (b) the
amount of cash received.
Unless an exception is available under applicable law or regulations, 31%
of the cash portion of the Merger Consideration payable to a shareholder will
be withheld unless that payee provides a tax identification number (social
security number or employer number) and certifies that such number is correct
on a Form W-9 which will be provided with the notice and letter of
transmittal and the Election Form that will be used to exchange shares of
NCSB Common Stock for the Merger Consideration.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase for financial reporting
purposes. Under this method of accounting, Bancorp will record the
acquisition of NCSB at its cost at the Effective Time, which cost would
include the cash paid in the Merger, the fair value of the Bancorp Common
Shares issued in the Merger and all direct acquisition costs. The purchase
price will be allocated to the acquired assets and assumed liabilities of
NCSB based upon their estimated fair values at the Effective Time in
accordance with generally accepted accounting principles. The purchase price
in excess of the fair values of the identifiable net assets acquired will be
recorded as an intangible asset and amortized over a period of 15 years for
financial accounting purposes. The reported income of Bancorp will include
the operations of NCSB after the Effective Time of the Merger. See "Pro Forma
Condensed Consolidated Financial Statements (Unaudited)."
DISSENTERS' RIGHTS
Pursuant to Section 1701.85 of the OGCL, in the event that the Merger is
consummated, any holder of shares of NCSB Common Stock who objects to the
Merger ("Dissenting Shareholder") is entitled to dissent from the Merger and
to have the fair value of such shares as determined by Bancorp, NCSB, or if
necessary, judicially determined, paid to him or her, by complying with the
provisions of Section 1701.85 of
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the OGCL. Failure to take any steps set forth in Section 1701.85 in
connection with the exercise of such rights may result in termination or
waiver thereof.
The following is a summary of the statutory procedures required to be
followed by Dissenting Shareholder in order to exercise his or her rights
under the OGCL. This summary is qualified in its entirety by reference to
Section 1701.85 of the OGCL, the text of which is attached as Appendix C to
this Prospectus/Proxy Statement.
Shareholders of NCSB who (i) are shareholders of record on the Record
Date, (ii) do not vote in favor of adoption of the Merger Agreement, and
(iii) within 10 days after the date of the vote on the Merger Agreement is
taken, deliver written demand in compliance with the provisions of Section
1701.85(A)(2) of the OGCL, shall be entitled to receive the fair cash value
of the shares that were not voted in favor of the Merger. The demand must set
forth the dissenting shareholder's address, the number and class (the
"Dissenting Stock") of such shares and the amount claimed by him as the fair
cash value of the shares. Any such shareholder who wishes to exercise such
appraisal rights should review carefully the following discussion and
Appendix C to this Prospectus/Proxy Statement because failure to timely and
properly comply with the procedures specified will result in the loss of
appraisal rights under Section 1701.85.
A demand for appraisal rights must be in addition to and separate from
any proxy or vote against the Merger. A vote against the Merger does not, by
itself, constitute a demand for appraisal rights. Also, voting in favor of
the Merger will result in the loss of appraisal rights with respect to such
shares.
A demand for appraisal should be executed by or on behalf of the holder
of record fully and correctly, as his name appears on his stock certificates.
If the shares of NCSB Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the
demand should be made in that capacity, and if the shares of NCSB Common
Stock are owned of record by more than one person, as in a joint tenancy or
tenancy in common, the demand should be executed by or on behalf of all joint
owners. An authorized agent, including one or more joint owners, may execute
a demand for appraisal on behalf of a holder of record; however, the agent
must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or owners. A
record holder such as a broker who holds shares of NCSB Common Stock as
nominee for several beneficial owners may exercise appraisal rights with
respect to the shares of NCSB Common Stock held for one or more beneficial
owners while not exercising such rights with respect to the shares of NCSB
Common Stock held for other beneficial owners; in such case, the written
demand should set forth the number of shares of NCSB Common Stock as to which
appraisal is sought and where no number of shares of NCSB Common Stock is
expressly mentioned the demand will be presumed to cover all shares of NCSB
Common Stock held in the name of the record owner. Shareholders who hold
their shares of NCSB Common Stock in brokerage accounts or other nominee
forms and who wish to exercise appraisal rights
-52-
<PAGE>
must take all necessary steps in order that a demand for appraisal is made by
the record holder of such shares and are urged to consult with their brokers
to determine the appropriate procedures for the making of a demand for
appraisal by the record holder and for surrendering the certificates for such
shares for notation of appraisal rights as set forth below.
All written demands for appraisal with respect to NCSB Common Stock
should be sent or delivered to Eileen M. Davis, Secretary, North Cincinnati
Savings Bank, 4947 Kenwood Road, Blue Ash, Ohio 45242, within ten days
following the NCSB Special Meeting.
If NCSB receives a written demand from a shareholder seeking the fair
value of his Dissenting Stock, it may request the surrender of the
certificates that represent the Dissenting Stock. The Dissenting Shareholder,
within fifteen days from the date of the sending of such request, must
deliver to NCSB the certificates requested so that such institution may
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. NCSB must promptly return such endorsed
certificates to the Dissenting Shareholder. Failure to deliver such
certificates to NCSB terminates, at the option of NCSB, the Dissenting
Shareholder's appraisal rights if NCSB exercises such option by providing
written notice to the Dissenting Shareholder within twenty days after the
lapse of fifteen-day period unless a court for good cause shown otherwise
directs.
If NCSB and any Dissenting Shareholder who has complied with the
foregoing procedures have not agreed on the fair cash value of the Dissenting
Stock within three months after the service of the demand by the Dissenting
Shareholder, NCSB, Bancorp or the Dissenting Shareholder may file a complaint
with the court of common pleas in the county in which the principal office of
NCSB is located. Other Dissenting Shareholders, within the three-month
period, may join as plaintiffs.
If a complaint requesting an appraisal is timely filed, after a hearing
on such petition, the court may determine that the Dissenting Shareholders
are entitled to appraisal rights and, in such a case, may order an appraisal
of the "fair value" of the shares of such NCSB Common Stock, as of the day
prior to the day on which the vote by the shareholders was taken. Such
appraisal may be conducted by an appraiser appointed by the court. The fair
cash value for purposes of appraisal rights is the amount that a willing
seller who is under no compulsion to sell would be willing to accept and what
a willing buyer under no compulsion to purchase would be willing to pay.
Holders of shares of NCSB Common Stock considering seeking appraisal rights
should be aware that the fair value of their shares of NCSB Common Stock as
determined under Section 1701.85 could be more than, the same as, or less
than the value of the consideration they would receive pursuant to the Merger
Agreement if they did not seek appraisal of their shares of NCSB Common Stock.
-53-
<PAGE>
The costs of any appraisal proceeding may be apportioned and assessed by
the court as it deems equitable against all or some of the parties. The final
order of the court may be appealed as set forth in Section 1701.85.
Any Dissenting Shareholder who has duly demanded an appraisal in
compliance with Section 1701.85 will not, after the Effective Time, be
entitled to vote the shares of NCSB Common Stock subject to such demand for
any purpose or be entitled to the payment of dividends or other distributions
on those shares (except dividends or other distributions payable to holders
of record of Bancorp Common Shares shall be paid to the holder of record as a
credit upon the fair cash value of the shares).
A shareholder's right to receive the fair cash value for the Dissenting
Stock terminates if (i) the Dissenting Shareholder does not strictly comply
with the requirements of Section 1701.85, (ii) the Merger is abandoned, (ii)
the Dissenting Shareholder withdraws the demand for fair cash value, or (iv)
NCSB and the Dissenting Shareholder have not come to an agreement regarding
the fair cash value of the Dissenting Stock and neither has filed a complaint
with the Hamilton County Court of Common Pleas within the time period
prescribed by Section 1701.85(B).
If any holder of NCSB Common Stock who demands appraisal of his shares
under Section 1701.85 fails to perfect, or effectively withdraws or loses his
right to appraisal as provided in Section 1701.85, the shares of such
shareholder will be converted into the right to receive the Merger
Consideration in accordance with the terms of the Agreement. A Dissenting
Shareholder may withdraw his demand for appraisal by delivering to NCSB a
written withdrawal of his demand for appraisal.
Failure to follow the steps required by Section 1701.85 for perfecting
appraisal rights may result in the loss of such rights.
EXPENSES OF THE MERGER
The Merger Agreement provides that Bancorp, the Bank and NCSB will each
bear and pay their own costs and expenses incurred in connection with the
transactions contemplated by the Merger Agreement, including, without
limitation, legal, accounting, investment banking and printing expenses,
provided, however, that Bancorp and NCSB will share equally in the costs of
printing the Registration Statement and this Proxy Statement/Prospectus.
In order to increase the likelihood that the transactions contemplated by
the Merger Agreement will be consummated, the Merger Agreement provides that
if an Acquisition Transaction has occurred and the NCSB Board of Directors is
excused from recommending approval of the Merger to the NCSB shareholders and
the NCSB shareholders do not approve the Merger Agreement, then in
consideration of Bancorp's costs and expenses in connection with the Merger
Agreement and the transactions
-54-
<PAGE>
contemplated thereunder, NCSB will pay $250,000 to Bancorp as an agreed-upon
termination fee. In the event that the Merger Agreement is terminated on
account of an intentional breach of any of the representations and warranties
or of any of the covenants or agreements set forth therein, the
non-defaulting party may pursue any remedy available at law or in equity to
enforce its rights and will be paid by the willfully defaulting party for all
damages, costs and expenses, including without limitation, legal, accounting
and investment banking fees and expenses, incurred or suffered by the
non-defaulting party in connection therewith or in the enforcement of its
rights under the Merger Agreement if such non-defaulting party prevails,
provided, however, that such damages, costs and expenses will in no event be
less than $150,000.
SHAREHOLDERS' AGREEMENT
In conjunction with the Merger Agreement, Bancorp has also entered into a
Shareholders' Agreement with each of the directors of NCSB. Pursuant to such
Shareholders' Agreement, each of the directors of NCSB has agreed, among other
things, not to sell, pledge, transfer or otherwise dispose of his or her
shares of NCSB Common Stock prior to the Special Meeting and to vote such
shares of NCSB Common Stock in favor of the Merger Agreement.
-55-
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The pro forma condensed consolidated balance sheet as of September 30,
1997, and the related pro forma condensed consolidated statement of earnings
for the year ended September 30, 1997, gives effect to the acquisition of
100% of the outstanding Common Stock of NCSB by Bancorp. The pro forma
information is based on the historical consolidated financial statements,
including the notes thereto, of Bancorp that are incorporated by reference
into this Proxy Statement/Prospectus (see "Incorporation of Certain Documents
by Reference" and "Bancorp Selected Consolidated Financial Information") and
the historical consolidated financial statements of NCSB, including the notes
thereto, included elsewhere herein (see "Index to NCSB Consolidated Financial
Statements" and "NCSB Selected Consolidated Financial Information and Other
Data").
The pro forma information set forth below gives effect to the Merger
using the purchase method of accounting. The pro forma condensed statement of
earnings gives effect to the Merger as if it had occurred at the beginning of
the period presented. The pro forma consolidated per share data gives effect
to the assumed issuance of 225,246 Bancorp Common Shares at an Exchange Ratio
of .8409, which results in a pro forma 2,145,728 weighted average shares of
Bancorp Common Shares outstanding following the Merger.
This pro forma information may not necessarily be indicative of the
operating results or financial position that would have actually occurred if
the Merger had been consummated at the beginning of the period presented, nor
is it necessarily indicative of future operating results or financial
position.
-56-
<PAGE>
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-----------------------------------------------
AS REPORTED
--------------------- PRO FORMA PRO FORMA
BANCORP NCSB ADJUSTMENTS COMBINED
---------- --------- ----------- -----------
DR(CR)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks................................................ $ 811 $ 455 -- $ 1,266
Federal funds sold..................................................... 8,000 -- (2,572)(a) 5,428
Interest-bearing deposits in other financial institutions.............. 2,330 973 -- 3,303
---------- --------- ---------- ---------
Total cash and cash equivalents...................................... 11,141 1,428 (2,572) 9,997
Investment securities available for sale at market..................... 698 3,331 (698)(a) 3,331
Mortgage-backed securities available for sale-at market................ 61,457 12,418 -- 73,875
Loans, receivable--net................................................. 191,096 41,757 (650)(b) 232,203
Office premises and equipment--at depreciated cost..................... 3,544 523 (100)(b) 3,967
Federal Home Loan Bank stock--at cost.................................. 5,500 499 -- 5,999
Accrued interest receivable............................................ 1,113 371 -- 1,484
Goodwill and other intangible assets................................... 20 -- 1,667 1,687
Prepaid expenses and other assets...................................... 290 157 -- 447
Prepaid federal income taxes........................................... 29 71 136(b) 236
Deferred federal income tax asset...................................... -- 30 364(b) 394
---------- --------- ---------- ---------
Total assets......................................................... $ 274,888 $ 60,585 $ (1,853) $ 333,620
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Liabilities:
Deposits............................................................... $ 146,297 $ 50,126 -- $ 196,423
Advances from the Federal Home Loan Bank............................... 95,000 4,390 -- 99,390
Escrow deposits........................................................ -- 130 -- 130
Accrued interest payable............................................... 636 -- -- 636
Other liabilities...................................................... 1,365 148 -- 1,513
Deferred federal income taxes.......................................... 166 -- -- 166
---------- --------- ----------- -----------
Total liabilities.................................................... 243,464 54,794 -- 298,258
Shareholders' equity:
Common stock........................................................... 23 397 397(a) 23
Additional paid-in capital............................................. 23,082 3,156 3,156(a) 23,530
Less shares of treasury stock--at cost................................. (4,386) -- (448)(a) (892)
Less shares acquired by employee stock benefit plans................... (1,927) -- (3,494)(a) (1,927)
Retained earnings--restricted.......................................... 14,581 2,791 2,791(a) 14,581
Unrealized gain (loss) on securities designated as available for
sale, net of related tax effects..................................... 51 (553) (549)(a) 51
---------- --------- ----------- -----------
Total shareholders' equity........................................... 31,424 5,795 1,853 35,366
---------- --------- ----------- -----------
Total liabilities and shareholders' equity......................... $ 274,888 $ 60,585 $ 1,853 $ 333,620
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
-57-
<PAGE>
Pro Forma Condensed Consolidated Statement of Earnings (Unaudited)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
----------------------------------------------------
AS REPORTED
---------------------- PRO FORMA PRO FORMA
BANCORP NCSB ADJUSTMENTS COMBINED
----------- --------- ------------- -----------
DR(CR)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income:
Loans......................................................... $ 14,067 $ 3,056 $ (20)(c1) $ 17,143
Mortgage-backed securities.................................... 4,147 860 -- 5,007
Investment securities......................................... 3 252 -- 255
Interest-bearing deposits and other........................... 832 155 180(c2) 807
----------- --------- ----- ----------
Total interest income....................................... 19,049 4,323 160 23,212
Interest expense:
Deposits.................................................... 7,299 2,653 -- 9,952
Borrowings.................................................. 4,620 263 -- 4,883
----------- --------- ----- ----------
Total interest expense.................................... 11,919 2,916 -- 25,835
----------- --------- ----- ----------
Net interest income....................................... 7,130 1,407 160 8,377
Provision for losses on loans............................... 165 -- -- 165
----------- --------- ----- ----------
Net interest income after provision for losses on loans... 6,965 1,407 160 8,212
Other income:
Gain on sale of investment and mortgage-backed securities... 597 8 -- 605
Other operating............................................. 129 62 -- 191
----------- --------- ----- ----------
Total other income........................................ 726 70 -- 796
General, administrative and other expense:
Employee compensation and benefits.......................... 2,548 590 -- 3,138
Occupancy and equipment..................................... 385 287 (10)(c3) 662
Federal deposit insurance premiums.......................... 122 38 -- 160
Franchise taxes............................................. 447 66 -- 513
Data processing............................................. 140 90 -- 230
Amortization of goodwill and other intangible assets........ 30 -- 111(c4,5) 131
Other operating............................................. 394 208 -- 602
----------- --------- ----- ----------
Total general, administrative and other expense........... 4,066 1,279 101 5,446
----------- --------- ----- ----------
Earnings before income taxes.............................. 3,625 198 261 3,562
Federal income taxes
Current..................................................... 959 -- (51)(c5) 908
Deferred.................................................... 297 -- -- 297
----------- --------- ----- ----------
Total federal income taxes................................ 1,256 -- (51) 1,205
----------- --------- ----- ----------
Net Earnings.............................................. $ 2,369 $ 198 $ 210 $ 2,357
----------- --------- ----- ----------
----------- --------- ----- ----------
Earnings per share.......................................... $ 1.23 $ .50 $ 1.10
----------- --------- ----- ----------
----------- --------- ----- ----------
Weighted average number of shares outstanding............... 1,920,482 396,750 2,145,728
----------- --------- ----- ----------
----------- --------- ----- ----------
</TABLE>
-58-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1997
The accompanying pro forma consolidated financial statements reflect the
Merger based on assumed cash consideration equal to 25% of NCSB's remaining
outstanding shares, coupled with the assumed issuance of 225,246 of Bancorp's
treasury shares at fair value. The pro forma cost of the acquisition also
reflects assumed transaction expenses of $784,000. Detailed explanations of
the Notes to Pro Forma Condensed Consolidated Financial Statements follows:
(a) Reflects the elimination of NCSB's historic equity using the purchase
method of accounting coupled with (i) the issuance of 225,246 common
shares from treasury at fair value; (ii) payment of $1.7 millon in cash
consideration for 25% of NCSB's remaining outstanding shares; (iii)
cancellation of 39,600 NCSB common shares presently owned by Bancorp; and
(iv) payment of expenses related to the Merger. The foregoing assumptions
result in 2,145,728 pro forma weighted average shares outstanding as of
and for the year ended September 30, 1997. Fully-diluted earnings per
share is not presented as the dilutive effect of Bancorp's stock option
plan is not material.
(b) Under purchase accounting, NCSB' assets and liabilities are adjusted to
their estimated fair values at the Effective Time. The estimated fair
value adjustments have been determined by Bancorp based upon information
set forth in the notes to NCSB consolidated financial statements included
elsewhere in this Proxy Statement/Prospectus and other information
available to Bancorp's management. No assurance can be given that such
estimated fair values represent fair values that would ultimately be
determined at the Effective Time. Following are the pro forma adjustments
made to reflect NCSB's estimated fair values at September 30, 1997:
<TABLE>
<CAPTION>
NET ASSETS
--------------------
INCREASE (DECREASE)
(IN THOUSANDS)
--------------------
<S> <C>
Fair value adjustments:
Loans................................................ $(200)
Valuation allowance to conform NCSB to
Bancorp loss allowance methodology.................. (450)
Equipment charge related to signage, etc............. (100)
Prepaid income tax related to above.................. 136
Deferred income tax asset related to above........... 364
Costs in excess of fair value of
net assets acquired................................. 1,667
</TABLE>
(c) For purposes of determining the pro forma effect of the Merger on the
Bancorp's consolidated statements of earnings for the year ended
September 30, 1997, the following pro forma adjustments have been made"
<TABLE>
<CAPTION>
Year Ended
September 30,
1997
-----------------
<S> <C>
(In thousands)
1. Accretion adjustment to loans using the interest method.................. $ 20
2. Decrease in interest income resulting from the use of federal funds sold
for cash component of Merger.............................................. (180)
3. Reduced depreciation due to adjustments to fixed assets over an estimated
average remaining life of 10 years........................................ 10
4. Amortization of purchase price in excess of fair value of net assets
acquired over 15 years.................................................... (111)
5. Decrease in income tax provision associated with adjustments 1-3......... 51
</TABLE>
-59-
<PAGE>
ADJOURNMENT OF SPECIAL MEETING
Each proxy solicited hereby requests authority to vote for an adjournment
of the Special Meeting, if an adjournment is deemed to be necessary. NCSB may
seek an adjournment of the Special Meeting for not more than 30 days in order
to enable NCSB to solicit additional votes in favor of the proposal to adopt
the Merger Agreement in the event that such proposal has not received the
requisite vote of shareholders at the Special Meeting and such proposal has
not received the negative votes of the holders of a majority of the NCSB
Common Stock. If NCSB desires to adjourn the meeting with respect to
foregoing proposal, it will request a motion that the meeting be adjourned
for up to 30 days with respect to such proposal (and solely with respect to
such proposal, provided that a quorum is present at the Special Meeting), and
no vote will be taken on such proposal at the originally scheduled Special
Meeting. Each proxy solicited hereby, if properly signed and returned to the
Company and not revoked prior to its use, will be voted on any motion for
adjournment in accordance with the instructions contained therein. If no
contrary instructions are given, each proxy received will be voted in favor
of any motion to adjourn the meeting. Unless revoked prior to its use, any
proxy solicited for the Special Meeting will continue to be valid for any
adjournment of the Special Meeting, and will be voted in accordance with
instructions contained therein, and if no contrary instructions are given,
for the proposal in question.
Any adjournment will permit NCSB to solicit additional proxies and will
permit a greater expression of the shareholders' views with respect to such
proposal. Such an adjournment would be disadvantageous to shareholders who
are against the proposal, because an adjournment will give NCSB additional
time to solicit favorable votes and thus increase the chances of passing such
proposal.
If a quorum is not present at the Special Meeting, no proposal will be
acted upon and the Board of Directors of NCSB will adjourn the Special
Meeting to a later date in order to solicit additional proxies on the
proposal being submitted to shareholders.
An adjournment for up to 30 days will not require either the setting of a
new record date or notice of the adjourned meeting as in the case of an
original meeting. NCSB has no reason to believe that an adjournment of the
Special Meeting will be necessary at this time.
Because the NCSB Board of Directors recommends that shareholders vote FOR
the proposal to adopt the Merger Agreement, as discussed above, the NCSB
Board of Directors recommends that shareholders vote FOR the possible
adjournment of the Special Meeting. The holders of a majority of the NCSB
Common Stock present, in person or by proxy, at the Special Meeting will be
required to approve a motion to adjourn the Special Meeting.
-60-
<PAGE>
OWNERSHIP OF NCSB COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF NCSB
The following table sets forth certain information with respect to the only
person or entity known to NCSB to own beneficially more than five percent of the
outstanding common shares of NCSB as of the Record Date:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP SHARES OUTSTANDING
- ----------------- --------------------- ---------------------
<S> <C> <C>
Enterprise Federal Bancorp, Inc 39,600 9.98%
7810 Tylersville Square Drive
West Chester, Ohio 45067
</TABLE>
The following table sets forth certain information with respect to the
number of common shares of NCSB beneficially owned by each director of NCSB
and by all directors and executive officers of NCSB as a group as of
the Record Date:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------
SHARED VOTING PERCENT OF
SOLE VOTING AND AND INVESTMENT SHARES
NAME AND ADDRESS(1) INVESTMENT POWER POWER OUTSTANDING
- ------------------- ----------------- --------------- -----------
<S> <C> <C> <C>
David G. Hendy...................................................... 5,000 5,000 2.52%
John L. Mason....................................................... 10,000 -- 2.52
Robert J. Novak..................................................... 10,000 -- 2.52
Arthur J. Schuh..................................................... 9,000 1,000 2.52
Robert H. Sendelbeck................................................ 6,000 -- 1.51
Michael W. Kelley................................................... 8,800 1,800 2.67
------ ----- -----
All directors and executive officers of NCSB as a group
(7 persons)....................................................... 53,800 7,800 15.53%
------ ----- -----
------ ----- -----
</TABLE>
- ------------------------
(1) Each of the persons listed in this table may be contacted at the address of
NCSB.
-61-
<PAGE>
NCSB MANAGEMENT INFORMATION
DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR
OF NCSB
NAME AGE(1) POSITION(S) HELD SINCE TERM EXPIRES
- --------------------------------------- ----------- --------------------------------------- ----------- ---------------
<S> <C> <C> <C> <C>
David G. Hendy......................... 53 Director 1983 1998
Michael W. Kelley...................... 54 Director and President 1997 2000
John L. Mason.......................... 75 Director 1985 1999
Robert J. Novak........................ 76 Director and Chairman of the Board 1975 2000
Arthur J. Schuh........................ 71 Director 1990 1999
Robert H. Sendelbeck................... 71 Director and Interim Treasurer 1971 1998
</TABLE>
- ------------------------
(1) As of February 28, 1997.
David G. Hendy is the President and co-owner of Stern-Hendy Properties,
Inc. a real estate development and management firm, and has been employed by
the company since 1980.
Michael W. Kelley has served as the President of NCSB since February 24,
1997. Mr. Kelley served NCSB as Treasurer and Chief Financial Officer from
November 1994 to February 1997, and as Executive Vice President from February
1995 to February 1997. From 1984 to 1994, Mr. Kelley was employed by
Brentwood Savings Association.
John L. Mason is the Chairman and retired President of Anderson
Publishing Co., a publisher of legal texts, located in Cincinnati, Ohio.
Robert J. Novak served as the President and Chief Executive Officer of
NCSB from 1974 until his retirement from NCSB in 1995.
Arthur J. Schuh is a partner in the law firm Schuh and Goldberg, located
in Cincinnati, Ohio, and has practiced law since 1955.
Robert H. Sendelbeck served NCSB as a loan officer and vice president
from 1960 until his retirement in 1988. In February 1997 the Board of
Directors appointed Mr. Sendelbeck as Interim Treasurer.
-62-
<PAGE>
MEETINGS OF DIRECTORS
The Board of Directors of NCSB met 12 times for regularly scheduled and
special meetings during the year ended December 31, 1996. Each director
attended at least 75% of the aggregate of such meetings and all committee
meetings of which such director was a member.
COMMITTEES OF DIRECTORS
The Board of Directors of NCSB has an Audit Committee and a Compensation
Committee. The Board of Directors of NCSB does not have a Nominating
Committee.
The Audit Committee recommends audit firms to the full Board of Directors
and reviews and approves the annual independent audit report. The members of
the Audit Committee are Messrs. Hendy, Mason and Schuh. The Audit Committee
met once during the year ended December 31, 1996.
The Compensation Committee is comprised of Messrs. Novak, Hendy, Mason,
Schuh and Sendelbeck. The function of the Compensation Committee is to
determine compensation for NCSB's employees and to make recommendations
regarding employee benefit and related matters. The Compensation Committee
met twice in 1996.
EXECUTIVE OFFICERS
In addition to Mr. Kelley, the President of NCSB, the following person is an
executive officer of NCSB and holds the designated positions:
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD
- ----------------------------------------- ----------- -----------------------------------------
<S> <C> <C>
Eileen M. Davis.......................... 60 Vice President and Secretary
</TABLE>
- ------------------------
(1) As of February 28, 1997.
Eileen M. Davis has served as the Vice President and Secretary of NCSB since
January 1996 and was the Assistant Vice President of NCSB from 1987 to January
1996.
-63-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to Michael W. Kelley,
who was named President of NCSB on February 24, 1997. No executive officer of
NCSB earned salary and bonus in excess of $100,000 during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1)
- --------------------------- --------- ----------- ------------
<S> <C> <C> <C>
Michael W. Kelley................................................................ 1997 $ 75,000 $ --
President
</TABLE>
- ------------------------
(1) Does not include amounts attributable to miscellaneous benefits received
by Mr. Kelley, the cost of which was less than 10% of Mr. Kelley's annual
salary and bonus. The amounts reported consist of directors fees.
401-K PLAN
Effective January 1, 1995, NCSB established a profit sharing/401(k) plan
(the "401(k) Plan") for all of its employees who are at least 21 years of age
and have completed one year of service with NCSB.
Participants in the 401(k) Plan are permitted to contribute up to 15% of
their annual compensation on a tax-deferred basis. In addition, in its sole
discretion, NCSB may make annual profit sharing contributions to the 401(k)
Plan for the benefit of employee participants in an amount not exceeding 15%
of the total compensation paid to such employee participants for the year in
question.
The NCSB Common Stock is not an investment alternative under the 401(k)
Plan.
EMPLOYMENT AGREEMENT
In May 1997, NCSB entered into an employment agreement with Mr. Kelley
which provides for an annual base salary of $75,000 and a term which expires
on December 31, 1999. The agreement also provides for termination upon Mr.
Kelley's death, disability, for cause or upon mutual agreement between the
parties.
-64-
<PAGE>
The employment agreement contains provisions with respect to the
occurrence of a change in control as defined in the employment agreement and
(i) the termination of Mr. Kelley's employment without cause, and (ii) Mr.
Kelley's resignation for good reason (as defined in the employment agreement)
within six months of a change in control of NCSB, which provides that Mr.
Kelley will be entitled to receive payment of an amount equal to the greater
of the aggregate amount Mr. Kelley would have been paid if he had continued
to be employed until the later of December 31, 1999, or twelve months after
he was terminated. A "change in control," as defined in the employment
agreement generally refers to the acquisition by any person or entity of the
ownership or power to vote 20% or more of the voting stock of NCSB, the
approval of a merger or consolidation agreement or the sale of substantially
all of the assets of NCSB and any change in control that would be required to
be reported in response to Item 1 of Form 8-K promulgated by the Commission.
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<PAGE>
NCSB MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
NCSB is primarily engaged in the business of attracting savings deposits
from the general public and investing such funds in mortgage loans secured by
one- to four-family residential real estate located primarily in Hamilton
County, Ohio. Real estate loans secured by multifamily real estate (over four
units) and nonresidential real estate and consumer loans secured by passbook
accounts are also originated by NCSB. In recent years, NCSB has made
significant investments in mortgage-backed and related securities as an
alternative to originating loans. NCSB also invests in U.S. Government agency
obligations, interest-bearing deposits in other financial institutions and
other investments permitted by applicable law.
NCSB's profitability is primarily dependent upon its net interest income,
which is the difference between interest income on NCSB's loan, investment
and mortgage-backed and related securities portfolios and interest paid on
deposits and borrowed funds. Net interest income is directly affected by the
relative amounts of interest-earning assets and interest-bearing liabilities
and the interest rates earned or paid on such amounts. NCSB's profitability
is also affected by the provision for loan losses and the level of other
income or losses and general and administrative expenses. Other income
consists primarily of service charges and gains on the sale of assets. Other
losses consist of losses on the sale of mortgage-backed securities. General,
administrative and other expense includes salaries and employee benefits,
occupancy of premises, federal deposit insurance premiums, state franchise
taxes and other operating expenses.
The operating results of NCSB are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. NCSB's
cost of funds is influenced by interest rates on competing investments and
general market rates of interest. Lending activities are influenced by the
demand for real estate loans and other types of loans, which is in turn
affected by the interest rates at which such loans are made, general economic
conditions and the availability of funds for lending activities.
Financial Condition at September 30, 1997
At September 30, 1997, NCSB's consolidated assets totaled $60.6 million,
a decrease of $798,000, or 1.3%, from the December 31, 1996, total of $61.4
million. The decrease resulted primarily from a decrease in advances from the
FHLB of $1.6 million, which was partially offset by an increase in deposits
of $765,000, coupled with net earnings of $192,000.
Cash and interest-bearing deposits in other financial institutions
totaled $1.4 million at September 30, 1997, a decrease of $1.5 million, or
51.9%, from December 31, 1996 levels. Investment securities totaled $3.3
million at September 30, 1997, a decline of $986,000, or
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<PAGE>
22.8%, from December 31, 1996 levels. Maturities of investment securities
during the 1997 period totaled $1.0 million.
Mortgage-backed securities totaled $12.4 million at September 30, 1997, a
decrease of $1.7 million, or 12.3%, from December 31, 1996, due to sales
during the period of $6.5 million and principal repayments received of
$691,000, which were partially offset by purchases totaling $5.4 million.
Proceeds from the decline in mortgage-backed and investment securities, as
well as excess liquidity, were generally utilized to fund growth in the loan
portfolio and to repay advances from the Federal Home Loan Bank.
Loans receivable totaled $41.8 million at September 30, 1997, an increase
of $3.4 million, or 8.9%, over December 31, 1996. The increase was primarily
attributable to loan disbursements of $6.5 million, which were partially
offset by principal repayments of $3.1 million.
As of September 30, 1997 and December 31, 1996, NCSB's allowance for loan
losses totaled $51,000. NCSB had one nonperforming loan account totaling
$151,000 at September 30, 1997, as compared to no nonperforming loans at
December 31, 1996. This loan account was secured by a single-family residence
and was in foreclosure at September 30, 1997. Management anticipates no loss
on this account. On September 30, 1997, NCSB's allowance for loan losses was
comprised solely of a general loan loss allowance which is includable as a
component of regulatory risk-based capital. Although management believes that
its allowance for loan losses was adequate as of September 30, 1997, based on
the available facts and circumstances, there can be no assurance that the
allowance will be adequate to absorb actual loan losses or that additions to
such allowance will not be necessary in future periods, which could adversely
affect NCSB's results of operations.
Deposits totaled $50.1 million at September 30, 1997, an increase of
$765,000, or 1.5%, over December 31, 1996 levels. The increase resulted
primarily from management's continuing efforts to increase the deposit
portfolio through marketing and pricing strategies.
Advances from the FHLB totaled $4.4 million at September 30, 1997, a
decline of $1.6 million, or 26.8%, from the total at December 31, 1996.
Management elected to redeploy excess liquidity to repay such advances during
the nine month period.
NCSB is required to maintain minimum regulatory capital pursuant to
federal regulations. At September 30, 1997, NCSB's regulatory capital
exceeded all regulatory capital requirements.
Financial Condition at December 31, 1996
NCSB's consolidated total assets amounted to $61.4 million as of December
31, 1996, an increase of $5.6 million, or 10.1%, over the $55.8 million total
at December 31, 1995. The increase was funded primarily through an increase
in borrowings of $6.0 million and an increase in shareholders' equity of
approximately $2.9 million, which were partially offset by a decrease in
deposits of $3.4 million.
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<PAGE>
Cash and due from banks, interest-bearing deposits in other financial
institutions, and investment securities decreased by $737,000, or 9.2%, to a
total of $7.3 million at December 31, 1996, compared to $8.0 million at
December 31, 1995. Investment securities decreased by $1.9 million, as
maturities of $2.6 million and sales of $491,000 exceeded purchases of $1.2
million.
Mortgage-backed securities increased by $5.7 million as NCSB utilized
FHLB borrowings to purchase adjustable-rate participation certificates issued
by the GNMA. Through the purchase of the treasury-indexed GNMA
participations, management sought to offset the decline in deposits and its
impact on earnings by utilizing the 110 basis point spread between the rates
paid by NCSB on the FHLB advances and the rates earned on the mortgage-backed
securities.
Loans receivable totaled $38.4 million at December 31, 1996, an increase
of $1.0 million, or 2.6%, over the $37.4 million total at December 31, 1995.
Loan disbursements totaled $9.2 million during 1996, which were partially
offset by loan sales of $1.7 million and principal repayments of $6.6
million. Loan origination volume during 1996 exceeded that of 1995 by
$824,000 and sales volume increased by $1.7 million.
NCSB's allowance for loan losses amounted to $51,000 at December 31, 1996
and 1995. The allowance for loan losses represented 0.13% of the total loan
portfolio at December 31, 1996, as compared to 0.14% at December 31, 1995.
There were no nonperforming loans at December 31, 1996 and 1995.
Deposits totaled $49.4 million at December 31, 1996, a decrease of $3.4
million, or 6.4%, from the $52.7 million total at December 31, 1995. The
decline in deposits can be primarily attributed to customers utilizing funds
from deposit accounts to purchase NCSB's common shares in connection with the
Conversion in April 1996.
NCSB's shareholders' equity amounted to $5.6 million at December 31,
1996, an increase of $2.9 million, or 110.2%, over the total at December 31,
1995. The increase resulted from $3.6 million of net cash proceeds from
NCSB's initial public offering, which was partially offset by NCSB's $265,000
operating loss during the year, and a $373,000 increase in unrealized losses
on securities designated as available for sale.
Comparison of Results of Operations for the Nine Months Ended September 30,
1997 and September 30, 1996
General. NCSB's profitability depends primarily on the level of net
interest income, which is the difference between interest income on
interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on deposit accounts and
borrowings. NCSB's operations are also influenced by the level of general,
administrative and other expenses, including employee compensation and
benefits, occupancy, federal deposit insurance premiums and franchise taxes,
as well as various other operating expense categories, including federal
income tax expense.
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<PAGE>
NCSB's net earnings for the nine months ended September 30, 1997 totaled
$192,000 compared to the $271,000 net loss reported in the comparable 1996
period. The increase in net earnings resulted primarily from a $91,000
increase in net interest income and a $385,000 decrease in general,
administrative and other expense, which were partially offset by a $13,000
decline in other income.
Net Interest Income. Total interest income for the nine months ended
September 30, 1997, amounted to $3.3 million, an increase of $221,000, or
7.3%, over the comparable period in 1996, reflecting the effects of growth in
weighted-average interest-earning assets outstanding year to year of
approximately $6.1 million. Interest income on loans and mortgage-backed
securities totaled $3.0 million for the nine months ended September 30, 1997,
an increase of $324,000, or 12.2%, over the comparable 1996 period. The
increase resulted primarily from a $7.4 million increase in the
weighted-average balance outstanding, which was partially offset by a 22
basis point decline in the average yield to 7.26% in 1997. Interest income on
investments and interest-bearing deposits decreased by $103,000, or 26.0%,
due to a $1.3 million decline in the weighted-average balance outstanding,
coupled with a 73 basis point decline in the average yield, to 5.82% in 1997.
Interest expense on deposits decreased by $62,000, or 3.0%, to a total of
$2.0 million for the nine months ended September 30, 1997, due to a $1.4
million decline in the weighted-average balance of deposits outstanding.
Interest expense on borrowings increased by $192,000 for the nine months
ended September 30, 1997, due to a $4.3 million increase in the average
balance outstanding in 1997 as compared to 1996, coupled with an increase in
the average cost of borrowings year to year.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $91,000, or 9.4%, for the nine
months ended September 30, 1997 as compared to the comparable period in 1996.
The interest rate spread amounted to 1.75% in 1997 and 2.03% in 1996, while
the net interest margin was 2.31% in 1997 and 2.35% in 1996.
Provision for Losses on Loans. A provision for losses on loans is charged
to operations to bring the total allowance for loan losses to a level
considered appropriate by management based on historical experience, the
volume and type of lending conducted by NCSB, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to NCSB's market area, and other factors related to
the collectibility of NCSB's loan portfolio. As a result of such analysis,
management concluded that the allowance for loan losses was adequate and
therefore, an addition to the provision for losses on loans was not necessary
during the nine month periods ended September 30, 1997 and 1996. There can be
no assurance that the loan loss allowance of NCSB will be adequate to cover
losses on nonperforming assets in the future.
Other Income. Other income decreased for the nine months ended September
30, 1997 by $13,000 from the comparable 1996 period. The decrease in other
income was primarily attributable to the fact that the nine month period
ended September 30, 1996, included a $21,000 gain on sale of loans.
Additionally, NCSB realized a decrease of $9,000 in miscellaneous income and
a $17,000 increase in gain on sale of securities.
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<PAGE>
General, Administrative and Other Expense. General, administrative and
other expense totaled $926,000 for the nine months ended September 30, 1997,
a decrease of $385,000 from the 1996 nine month period, due primarily to a
one-time assessment by the FDIC to recapitalize the SAIF, totaling $304,000,
recorded during the 1996 period. Additionally, the decrease resulted from a
$68,000 decline in deposit insurance premiums due to a reduction in premium
rates and a $54,000, or 12.0%, decline in employee compensation and benefits,
due to a reduction in staffing levels. These decreases were partially offset
by a $34,000, or 141.7%, increase in franchise taxes due to the increase in
equity following the common stock offering.
Comparison of Results of Operations for the Years ended December 31, 1996
and December 31, 1995
General. Net losses for the years ended December 31, 1996 and 1995,
totaled $265,000 and $532,000, respectively. The $267,000, or 50.2%, decline
in net losses during 1996 resulted primarily from a $234,000 increase in net
interest income and a $296,000 increase in other income, which were partially
offset by a $263,000 increase in general, administrative and other expense.
The increase in general, administrative and other expense resulted primarily
from an increase of $283,000, or 222.8%, in FDIC premiums due to a special
assessment by the FDIC pursuant to legislation enacted to recapitalize the
SAIF.
Net Interest Income. Net interest income is determined by NCSB's
interest rate spread, which is 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. Total interest income for the year ended
December 31, 1996, amounted to $4.1 million, an increase of $295,000, or
7.7%, over the $3.8 million recorded in 1995. Interest income on loans
totaled $3.0 million, an increase of $300,000, or 11.3%, over the 1995
period. This increase resulted primarily from a $3.5 million, or 10.1%,
increase in the average portfolio balance outstanding from year to year,
coupled with an eight basis point increase in the average yield, from 7.67%
in 1995, to 7.75% in 1996. Interest income on mortgage-backed securities
declined by $183,000, or 22.3%, as a result of a $2.6 million, or 19.9%,
decline in the average portfolio balance outstanding from year to year,
combined with a 19 basis point decrease in the average yield, from 6.29% in
1995, to 6.10% in 1996. Interest income on investment securities and other
interest-earning assets increased by $178,000, or 53.6%, to a total of
$510,000 in 1996, as compared to $332,000 in 1995. This increase resulted
primarily from a $2.0 million increase in the average portfolio balance
outstanding from year to year, combined with a 84 basis point increase in the
average yield, from 5.70% in 1995, to 6.54% in 1996. The increase in
interest-earning assets generally reflects management's deployment of the net
proceeds of the offering.
Total interest expense amounted to $2.8 million for the year ended
December 31, 1996, an increase of $61,000, or 2.2%, over the $2.7 million
recorded in 1995. Interest expense on deposits increased by $142,000, or
5.5%, to a total of $2.7 million in 1996. The increase resulted primarily
from a $1.3 million, or 2.6%, increase in the average deposit portfolio
balance outstanding from year to year, combined with a 15 basis point
increase in the average cost of deposits, from 5.15% in 1995, to 5.30% in
1996. Interest expense on borrowings decreased by
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<PAGE>
$81,000, or 53.3%, during 1996. This decrease was due to a $898,000 decrease
in average borrowings outstanding, combined with a 162 basis point decrease
in the average cost of borrowings, from 6.29% in 1995 to 4.67% in 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $234,000, or 21.6%, for the year
ended December 31, 1996, as compared to 1995. The interest rate spread
increased by nine basis points to 2.00% in 1996, from 1.91% in 1995, while
the net interest margin increased by 32 basis points to 2.34% in 1996, from
2.02% in 1995.
Provision for Losses on Loans. NCSB 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 by management based upon
an assessment of prior loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the ability of individual
borrowers to repay their loans, the estimated value of any underlying
collateral, economic conditions in NCSB's market area generally and other
factors related to the collectibility of NCSB's loan portfolio. Based on such
analysis, management concluded that the allowance for loan losses was
adequate, and as a result did not record any additions to the allowance for
loan losses. At December 31, 1996 and 1995, NCSB had no nonperforming loans.
Although management believes that it uses the best information available
in providing for possible loan losses and believes that the allowance was
adequate at December 31, 1996, future adjustments to the allowance could be
necessary and results of operations could be adversely affected if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations.
Other Income. Other income totaled $83,000 for the year ended December
31, 1996, an increase of $296,000, or 139.0%, over the $213,000 loss recorded
in 1995. The increase resulted primarily from the absence of any loss on sale
of mortgage-backed and related securities during the year ended December 31,
1996, compared to a $270,000 loss on the sale of such securities during the
1995 period, gains on sale of mortgage loans of $21,000 during the year ended
December 31, 1996, and an increase in other operating income of $14,000, or
24.6%, resulting primarily from interest received on an Internal Revenue
Service refund relating to prior tax years.
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<PAGE>
General, Administrative and Other Expense. General, administrative, and
other expense totaled $1.7 million for the year ended December 31, 1996, an
increase of $263,000, or 18.8%, over the $1.4 million recorded in 1995. The
increase resulted primarily from an increase of $283,000, or 222.8%, in FDIC
premiums, which was partially offset by a $37,000, or 11.1%, decrease in
occupancy and equipment expense, which resulted from a decrease in rental
expenses of $24,000 from year to year, which were partially offset by
increased data processing costs. The increase in deposit insurance premiums
was due primarily to a special assessment by the FDIC pursuant to legislation
enacted to recapitalize the SAIF. The legislation required a one-time
assessment of $.657 per $100 of SAIF-insured deposits held as of March 31,
1995, resulting in a $304,000 charge recorded by NCSB during 1996. Effective
January 1, 1997, the deposit insurance premium rate for NCSB was set at
approximately $.945 per $100 of deposits.
Income Tax Credits. NCSB's operating losses during the years ended
December 31, 1996 and 1995 did not give rise to a credit tax provision due to
the existence of operating tax loss carryforwards. NCSB will recognize the
benefits of these loss carryforwards under SFAS No. 109 upon a return to
profitable operations.
Yields Earned and Rates Paid
The following table sets forth certain information relating to NCSB's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
for the periods indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of interest-earning assets
or interest-bearing liabilities, respectively, for the periods presented.
Average balances are derived from month-end balances, which include
nonaccruing loans in the loan portfolio, if any, net of the allowance for
loan losses. Management does not believe that the use of month-end balances
instead of daily balances has caused any material differences in the
information presented.
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<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997
-------------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE(2)
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable........................... $ 40,632 $ 2,320 7.61%
Mortgage-backed securities................. 14,034 656 6.23
Investment securities...................... 3,921 173 5.88
Interest-bearing deposits and other........ 2,796 120 5.72
--------- --------- ----------
Total interest-earning assets.............. 61,383 3,269 7.10
Non-interest earning assets.................. 560
---------
Total assets............................... $ 61,943
---------
---------
Interest-bearing liabilities:
Deposits................................... $ 50,530 2,009 5.30
Borrowings................................. 4,410 196 5.93
--------- ----------- -----------
Total interest-bearing liabilities......... 54,940 2,205 5.35
----------- -----------
Non-interest-bearing liabilities............. 1,327
---------
Total liabilities.......................... 56,267
Shareholders' equity (1)..................... 5,676
---------
Total liabilities and shareholders'
equity................................... $ 61,943
---------
---------
Net interest income and interest rate
spread..................................... $ 1,064 1.75%
--------- ------------
--------- ------------
Net interest margin (net interest income as a
percent of average interest-earning
assets).................................... 2.31%
-----------
-----------
Average interest-earning assets to
interest-bearing liabilities............... 111.73%
-----------
------------
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995
--------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ---------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................... $38,111 $ 2,955 7.75% $ 34,618 $ 2,655 7.67%
Mortgage-backed securities................. 10,438 637 6.10 13,030 820 6.29
Investment securities...................... 5,346 350 6.55 4,203 229 5.45
Interest-bearing deposits and other........ 2,449 160 6.53 1,621 103 6.35
--------- --------- ------- --------- --------- -----
Total interest-earning assets.............. 56,344 4,102 7.28 53,472 3,807 7.12
Non-interest earning assets.................. 1,888 1,979
--------- ---------
Total assets............................... $58,232 $ 55,451
--------- ---------
Interest-bearing liabilities:
Deposits................................... $51,235 2,715 5.30 $ 49,919 2,573 5.15
Borrowings................................. 1,519 71 4.67 2,417 152 6.29
--------- ---------- --------- --------- ----------- ------
Total interest-bearing liabilities......... 52,754 2,786 5.28 52,336 2,725 5.21
---------- --------- ----------- ------
Non-interest-bearing liabilities............. 639 520
--------- ---------
Total liabilities.......................... 53,393 52,856
Shareholders' equity (1)..................... 4,839 2,595
--------- ---------
Total liabilities and shareholders'
equity................................... $58,232 $ 55,451
--------- ---------
Net interest income and interest rate
spread..................................... $ 1,316 2.00% $ 1,082 1.91%
---------- -------- ----------- -----
---------- -------- ----------- -----
Net interest margin (net interest income as a
percent of average interest-earning
assets).................................... 2.34% 2.02%
-------- -----
-------- -----
Average interest-earning assets to
interest-bearing liabilities............... 106.81% 102.17%
-------- -------
-------- -------
<CAPTION>
1994
-------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- ---------- ------
<C> <C> <C>
Interest-earning assets:
Loans receivable........................... $27,484 $ 2,098 7.63%
Mortgage-backed securities................. 21,876 1,148 5.25
Investment securities...................... 3,211 160 4.98
Interest-bearing deposits and other........ 1,211 65 5.37
----------- ---------- ------
Total interest-earning assets.............. 53,782 3,471 6.45
Non-interest earning assets.................. 1,826
-----------
Total assets............................... $55,608
-----------
-----------
Interest-bearing liabilities:
Deposits................................... $49,770 2,187 4.39
Borrowings................................. 2,083 105 5.04
----------- ---------- ------
Total interest-bearing liabilities......... 51,853 2,292 4.42
Non-interest-bearing liabilities............. 524
Total liabilities.......................... 52,377
Shareholders' equity (1)..................... 3,231
-----------
Total liabilities and shareholders'
equity................................... $55,608 $ 1,179
----------- ----------
----------- ----------
Net interest income and interest rate
spread..................................... 2.03%
Net interest margin (net interest income as a
percent of average interest-earning
assets).................................... 2.19%
--------
--------
Average interest-earning assets to
interest-bearing liabilities............... 103.72%
--------
--------
</TABLE>
- ------------------------
(1) Consisted of retained earnings only for the years ended December 31, 1995
and 1994.
(2) Annualized.
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<PAGE>
The following table sets forth the weighted average yields earned on NCSB's
interest-earning assets, the weighted average interest rates paid on NCSB's
interest-bearing liabilities and the interest rate spread between the weighted
average yields and rates at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -------------------------------
1997 1996 1995 1994
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted-average yield on:
Loans receivable.................................. 7.63% 7.57% 7.57% 7.59%
Mortgage-backed securities........................ 6.18 6.25 6.22 4.99
Investment securities............................. 6.39 6.78 6.45 5.04
Interest-bearing deposits and other............... 7.28 5.88 6.00 5.53
Combined weighted-average yield on
interest-earning assets........................... 7.43 7.12 7.21 6.58
Weighted-average rate paid on:
Deposits............................................ 5.33 5.21 5.39 4.62
FHLB advances....................................... 5.88 5.66 -- 6.09
Combined weighted-average rate paid on
interest-bearing liabilities...................... 5.38 5.26 5.39 4.66
Interest rate spread................................ 2.05 1.86 1.82 1.92
</TABLE>
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to changes in volume (i.e., changes in volume multiplied by the
old rate) and changes in rate (i.e., changes in rate multiplied by the old
volume). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately based
on the absolute value of the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 VS. 1996
--------------------------------
INCREASE
(DECREASE) DUE TO
----------------------
VOLUME RATE TOTAL
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable........................................ $ 152 $ (51) $ 101
Mortgage-backed securities.............................. 223 -- 223
Investment securities................................... (74) (24) (98)
Interest-bearing deposits and other..................... 14 (19) (5)
---------- ---------- --------
Total interest income................................... 315 (94) 221
Interest-bearing liabilities:
Deposits................................................ (54) (8) (62)
FHLB advances........................................... 190 2 192
Total interest expense.................................. 136 (6) 130
---------- ---------- --------
Increase (decrease) in net interest income................ $ 179 $ (88) $ 91
---------- ---------- --------
---------- ---------- --------
</TABLE>
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<PAGE>
Asset and Liability Management
NCSB's interest rate spread is the principal determinant of NCSB's
income. The interest rate spread, and therefore, net interest income, can
vary considerably over time because asset and liability repricing do not
coincide. Moreover, the long-term and cumulative effect of interest rate
changes can be substantial. Interest rate risk is defined as the sensitivity
of an institution's earnings and net asset values to changes in interest
rates.
One of the methods utilized by NCSB to monitor its interest rate risk has
been the interest rate sensitivity gap, which is the difference between
interest-bearing liabilities and interest-earning assets maturing or subject
to repricing within a given time frame. A positive gap occurs when
interest-earning assets exceed interest-bearing liabilities maturing or
repricing during a designated time frame. Conversely, a negative gap occurs
when interest-bearing liabilities exceed interest-earning assets maturing or
repricing within a designated time frame. A positive gap may leave NCSB's
earnings vulnerable to declining interest rates because when interest rates
are declining, the interest income earned on assets may decline more rapidly
than the interest expense paid on NCSB's liabilities as interest-earning
assets reprice at a faster pace than interest-bearing liabilities. An
increase in interest rates would be expected to cause interest income to
increase more rapidly than interest expense. It is possible, however, that an
increase in interest rates could adversely affect income due to other
economic effects of rising interest rates. A negative gap will generally
result in reduced net interest income during a period of rising interest
rates. Conversely, during a period of falling interest rates, a negative gap
position would tend to enhance net interest income.
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
scheduled to reprice or mature in each of the time periods shown. Except as
stated below, the amount of assets and liabilities shown which reprice or mature
in a given period were determined in accordance with the contractual terms of
the asset or liability. This table does not necessarily indicate the impact of
general interest rate movements on NCSB's net interest income because the
repricing of certain categories of assets and liabilities is subject to the
interest rate environment, competition and other factors beyond NCSB's control.
As a result, certain assets and liabilities may in fact mature or reprice at
different times and in different volumes than indicated.
<TABLE>
<CAPTION>
WITHIN ONE OVER 1-3 OVER 3-5 OVER 5
YEARS YEARS YEARS YEARS TOTAL
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Fixed-rate real estate loans: (1).............................. $ 2,488 $ 4,559 $ 4,155 $ 22,997 $ 34,199
Adjustable-rate real estate loans.............................. 2,464 4,542 -- -- 7,006
Consumer and other loans....................................... 338 199 35 76 648
Mortgage-backed securities (1)................................. 13,072 -- 10 -- 13,082
Investment securities.......................................... 1,100 -- -- 2,245 3,345
FHLB stock..................................................... 499 -- -- -- 499
Interest-bearing deposits...................................... 973 -- -- -- 973
---------- ---------- --------- --------- ---------
Total interest-earning assets................................ 20,934 9,300 4,200 25,318 59,752
Interest-bearing liabilities:
Passbook accounts (2).......................................... 776 1,307 95 1,529 3,707
Demand, NOW and Super NOW (2).................................. 222 288 349 106 965
Money market demand accounts (2)............................... 325 583 72 2,603 3,583
Certificates of deposit........................................ 29,949 10,835 1,087 -- 41,871
Advances from the FHLB......................................... 2,890 1,500 -- -- 4,390
---------- ---------- --------- --------- ---------
Total interest-bearing liabilities........................... 34,162 14,513 1,603 4,238 54,516
---------- ---------- --------- --------- ---------
Interest rate sensitivity gap.................................... (13,228) (5,213) 2,597 21,082 5,237
Cumulative interest rate sensitivity gap......................... $ (13,228) $ (18,441) (15,844) $ 5,237 $ 5,237
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Cumulative interest rate sensitivity gap as a percentage of total
interest-earning assets........................................ (22.14% (30.86% (26.52% 8.76% 8.76%
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Fixed-rate mortgage loans and mortgage-backed securities are assumed to
prepay at an approximate 8% annual rate. NCSB's historic rate of prepayments
in recent years has generally exceeded the assumed rate of prepayments.
There can be no assurance, however, that such rate of prepayments will
continue. A decrease in the prepayment rate would be expected to adversely
impact NCSB's interest rate sensitivity. Adjustable-rate loans and
mortgage-backed securities are categorized in the period of repricing.
(2) Passbook accounts, demand, negotiable order of withdrawal ("NOW") and Super
NOW accounts are shown as decaying over a 20 year period. NCSB's actual rate
of account decay has generally been as favorable as the rate assumed. There
can be no assurance, however, that such decay rate will continue in the
future.
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<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of NCSB and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which generally require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
NCSB's operations. Unlike most industrial companies, nearly all the assets and
liabilities of NCSB are monetary. As a result, interest rates have a greater
impact on NCSB's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (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, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
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<PAGE>
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on NCSB's consolidated financial position or results of
operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early adoption is not permitted. Based upon the provisions of
SFAS No. 128, NCSB's basic and diluted earnings per share for the nine months
ended September 30, 1997, would each have been $.48.
In February, 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 is not expected to have a material impact on NCSB's financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and loses) in
a full set of general-purpose financial statements. SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on NCSB's financial statements.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes the
way that public business enterprises report information about operating segments
in annual financial
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<PAGE>
statements and requires that those enterprises report selected information
about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. For many
enterprises, the management approach will likely result in more segments
being reported. In addition, SFAS No. 131 requires significantly more
information to be disclosed for each reportable segment than is presently
being reported in annual financial statements and also requires that selected
information be reported in interim financial statements. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131 is
not expected to have a material impact on NCSB's financial statements.
BUSINESS OF NCSB
NCSB is a stock savings bank which serves the Hamilton County, Ohio,
community. NCSB was incorporated under Ohio law in 1882 as a mutual savings and
loan association under the name "The North Cincinnati Loan and Building Company"
and in 1993, NCSB converted to a savings bank charter. On April 30, 1996, NCSB
converted to a stock savings bank and sold 396,750 shares of common stock, $1.00
par value per share. As a state-chartered Ohio savings bank, NCSB is subject to
supervision and regulation by the Division and the FDIC. NCSB is a member of the
FHLB of Cincinnati, and the deposits of NCSB are insured up to applicable limits
by the SAIF administered by the FDIC.
NCSB is principally engaged in the business of originating real estate loans
secured by first mortgages on one- to four-family residential real estate in
NCSB's primary market area which consists of Hamilton County, Ohio, although
NCSB also makes loans to borrowers in Butler, Clermont and Warren Counties,
which border Hamilton County. NCSB also makes loans secured by multifamily real
estate (over four units) and, to a lesser extent, nonresidential real estate and
consumer loans secured by savings accounts at NCSB. NCSB also invests in
mortgage-backed and related securities, U.S. government agency obligations and
other investments permitted by applicable law. Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC, and loan principal and
mortgage-backed security repayments.
Interest on loans and investments is NCSB's primary source of income. NCSB's
principal expense is interest paid on deposit accounts. Operating results are
dependent to a significant degree on the "net interest income" of NCSB, which is
the difference between interest income earned on loans, mortgage-backed and
related securities and other investments and interest paid on deposits and
borrowings. Like most thrift institutions, NCSB's interest income and interest
expense are significantly affected by general economic conditions and by the
policies of various regulatory authorities.
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<PAGE>
LENDING ACTIVITIES
GENERAL. NCSB's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family homes located in
NCSB's primary market area and adjacent counties. Loans secured by multifamily
properties containing five units or more and nonresidential properties are also
occasionally originated by NCSB. NCSB currently does not originate mortgage
loans insured by the Federal Housing Authority or guaranteed by the Veterans
Administration. In addition to real estate lending, NCSB originates loans
secured by deposit accounts.
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of NCSB's loan portfolio at the dates
indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------
1997 1996
---------------------- ----------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of loan:
Secured by real estate:
One- to four-family residences..... $ 37,793 90.5% $ 35,561 92.7%
Multifamily........................ 920 2.2 469 1.2
Nonresidential..................... 3,055 7.3 2,911 7.6
--------- ----- --------- -----
Total real estate loans............ 41,768 100.0 38,941 101.5
Consumer and other loans:
Passbook........................... 221 .5 63 .2
Line of credit..................... 427 1.0 212 .5
--------- ----- --------- -----
Total loans.......................... 42,416 101.5 39,216 102.2
Less:
Undisbursed portion of loans in
process.......................... (512) (1.2) (696) (1.8)
Net deferred loan origination fees. (96) (.2) (113) (.3)
Allowance for loan losses.......... (51) (.1) (51) (.1)
--------- ----- --------- -----
Total loans, net................. $ 41,757 100.0% $ 38,356 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1995 1994
-------------------- -----------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Type of loan:
Secured by real estate:
One- to four-family residences..... $ 36,406 97.4% $30,851 96.6%
Multifamily........................ 233 .6 250 .8
Nonresidential..................... 864 2.3 965 3.0
--------- ----- --------- -----
Total real estate loans............ 37,503 100.3 32,066 100.4
Consumer and other loans:
Passbook........................... 83 .2 78 .3
Line of credit..................... -- -- -- --
--------- ----- --------- -----
Total loans.......................... 37,586 100.5 32,144 100.7
Less:
Undisbursed portion of loans in
process.......................... -- -- -- --
Net deferred loan origination fees. (135) (.4) (162) (.5)
Allowance for loan losses.......... (51) (.1) (51) (.2)
--------- ----- --------- -----
Total loans, net................. $ 37,400 100.0% $ 31,931 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
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<PAGE>
LOAN MATURITY. The following table sets forth the contractual maturity of
NCSB's loans at September 30, 1997, before consideration of net items:
<TABLE>
<CAPTION>
DUE DURING YEARS ONE-TO
ENDING SEPTEMBER 30, FOUR-FAMILY MULTIFAMILY NONRESIDENTIAL CONSUMER TOTAL
- ---------------------- ----------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1998 $ 1,597 $ -- $ 975 $ 338 $ 2,910
1999 2,540 -- -- 10 2,550
2000 932 630 1,345 190 3,097
2001 to 2002 522 -- -- 35 557
2003 to 2007 1,584 -- 297 75 1,956
2008 and thereafter 30,618 290 438 -- 31,346
--------- --------- --------- --------- ---------
$ 37,793 $ 920 $ 3,055 $ 648 $ 42,416
========= ========= ========= ========= =========
</TABLE>
The following table sets forth the dollar amount of all loans due after one
year from September 30, 1997, which have predetermined interest rates and have
floating or adjustable interest rates:
DUE MORE THAN
ONE YEAR AFTER
SEPTEMBER 30, 1997
------------------
(IN THOUSANDS)
Fixed rate of interest................................. $ 34,964
Adjustable rate of interest............................ 4,542
----------
$ 39,506
==========
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The principal lending activity of
NCSB is the origination of permanent conventional loans secured by one- to
four-family residences, primarily single-family residences, located within
NCSB's primary market area and adjacent counties. Each of such loans is secured
by a mortgage on the underlying real estate and improvements thereon, if any. At
September 30, 1997, NCSB's one- to four-family residential real estate loan
portfolio was approximately $37.8 million, or 90.5% of total loans.
Ohio law limits the amount which NCSB may lend in relationship to the
appraised value of the real estate and improvements at the time of loan
origination. In accordance with such laws, NCSB makes loans on one- to
four-family residences for up to 90% of the value of the real estate and
improvements (the "Loan-to-Value Ratio" or "LTV"). The principal amount of any
loan which exceeds an 80% LTV at the time of origination is usually covered by
private mortgage insurance at the expense of the borrower. In prior
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<PAGE>
years, NCSB typically did not make one- to four-family real estate loans for
more than $250,000. In response to increasing housing values in NCSB's market
area, particularly in the neighborhoods surrounding NCSB's main office, NCSB
has begun originating single-family loans for more than $250,000.
NCSB offers fixed-rate loans and adjustable-rate mortgage loans ("ARMs")
secured by one- to four-family real estate for terms of up to 30 years. The
interest rate adjustment periods on the ARMs are either one year or three
years. The interest rate adjustments on one-year and three-year loans secured
by one- to four-family real estate presently originated by NCSB are tied to
changes in the respective weekly average yield on one-year and three-year
U.S. Treasury securities, adjusted to a constant maturity. The maximum
allowable adjustment at each adjustment date is 2% with a maximum adjustment
of 4% over the term of the loan. The initial rate on a three-year ARM secured
by one- to four-family real estate is typically higher than the initial rate
on a one-year ARM to compensate for the reduced interest rate sensitivity.
Adjustable-rate loans decrease NCSB's interest rate risk but may involve
other risks, primarily credit risk. 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.
From time to time, NCSB originates ARMs that have initial interest rates
lower than the sum of the index plus the margin. Such loans are subject to
increased risk of delinquency or default due to increasing monthly payments
as the interest rates on such loans increase to the fully-indexed level. Such
increased risk is considered in NCSB's underwriting of such loans. These
risks have not had a material adverse effect on NCSB to date, as evidenced by
the historically low level of delinquent loans and nonperforming assets in
recent years and the absence of classified assets. See "Delinquent Loans,
Nonperforming Assets and Classified Assets."
NCSB makes construction loans to individuals for the construction and
permanent financing of their primary residences. Such loans are offered for
terms of up to 30 years. During the first four months, while the residence is
being constructed, the borrower is required to pay interest only.
Construction loans generally involve greater underwriting and default risks
than do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value before the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTV and the total loan funds required to
complete a project. In the event a default on a construction loan occurs and
foreclosure follows, NCSB would have to take control of the project and attempt
either to arrange for completion of construction or dispose of the unfinished
project. The increased risks inherent in construction lending are not
significant to NCSB because of the
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<PAGE>
small number of construction loans originated by NCSB. NCSB had no
construction loans outstanding at September 30, 1997.
MULTIFAMILY REAL ESTATE LOANS. NCSB occasionally originates loans secured by
multifamily properties containing over four units. Multifamily loans are offered
for terms of up to 30 years and a maximum LTV of 80%.
Multifamily lending is generally considered to involve a higher degree of
risk than one- to four-family residential lending because the borrower typically
depends upon income generated by the real estate to cover operating expenses and
debt service. The profitability of a property can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. NCSB attempts to reduce the risk associated with multifamily lending
by evaluating the creditworthiness of the borrower and the projected income from
the project. NCSB requires that borrowers submit rent rolls and financial
statements annually to enable NCSB to monitor the loan.
At September 30, 1997, loans secured by multifamily properties totaled
approximately $920,000, or 2.2%, of total loans.
NONRESIDENTIAL REAL ESTATE LOANS. At September 30, 1997, approximately $3.1
million, or 7.3%, of NCSB's total loans, were secured by nonresidential real
estate. NCSB's nonresidential real estate portfolio consists of 10 loans. The
largest nonresidential real estate loan outstanding at September 30, 1997, had a
principal balance of $750,000 and was secured by a building containing retail
and office facilities. Among the other properties securing NCSB's nonresidential
real estate loans are professional office buildings and mixed use buildings.
NCSB's nonresidential real estate loans have fixed or adjustable interest rates
and terms of up to 30 years.
Although the loans secured by nonresidential real estate typically have
higher interest rates and shorter terms to maturity than one- to four-family
residential real estate loans, nonresidential real estate lending is
generally considered to involve a higher degree of risk than residential
lending due to the relatively larger loan amounts and the effects of general
economic conditions on the successful operation of income-producing
properties. NCSB has endeavored to reduce such risk by evaluating the credit
history and past performance of the borrower, the location of the real
estate, the financial condition of the borrower, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation and by obtaining personal guarantees on
loans made to corporations and partnerships.
CONSUMER LOANS. NCSB makes loans to depositors on the security of their
deposit accounts at NCSB. At September 30, 1997, NCSB had approximately
$221,000, or 0.5%, of total loans, invested in passbook loans.
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<PAGE>
In 1996, NCSB introduced a home equity line of credit program. NCSB makes
home equity lines of credit in an amount which, when added to any prior
indebtedness secured by the real estate, does not exceed 90% of the estimated
value of the real estate and improvements thereon. NCSB's home equity loans have
terms of 10 years. Currently however, NCSB will make home equity loans in cases
where another lender holds the first mortgage. The interest rates charged by
NCSB on home equity loans adjust monthly and are tied to the base rate on
corporate loans, posted by at least 75% of the nation's 30 largest banks , as
reported in THE WALL STREET JOURNAL. As of September 30, 1997, NCSB had
authorized lines of credit with an aggregate principal amount of $427,000.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by NCSB's lending staff and
walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel. NCSB obtains a credit report, verification of employment and other
documentation concerning the creditworthiness of the borrower. An appraisal of
the fair market value of the real estate which will be given as security for the
loan is prepared by a fee appraiser approved by the Board of Directors. Upon the
completion of the appraisal and the receipt of information on the credit history
of the borrower, the application for a loan is submitted for review in
accordance with NCSB's underwriting guidelines to NCSB's Loan Committee, which
consists of NCSB's three executive officers.
If a real estate loan application is approved, either an attorney's opinion
or title insurance is obtained on the real estate which will secure the mortgage
loan. Borrowers are required to carry satisfactory fire and casualty insurance
and flood insurance, if applicable, and to name NCSB as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that the appraiser evaluates the building
plans, construction specifications and estimates of construction costs. NCSB
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
LOAN ORIGINATIONS, PURCHASES AND SALES. Currently, NCSB is originating both
fixed-rate and adjustable-rate loans for its portfolio and not with the
intention of selling such loans in the secondary market, although the
documentation for most of the loans in NCSB's portfolio conforms to the
secondary market standards of the FHLMC. NCSB has sold loans to the FHLMC in
prior years, and at September 30, 1997, NCSB serviced $6.8 million in loans sold
to the FHLMC and other investors. NCSB generally does not purchase whole loans
or participation interests in loans.
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<PAGE>
The following table presents NCSB's loan origination and sale activity for
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1997 1996 1995 1994
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Loans originated:
Adjustable-rate:
One- to four-family residential............................. $ 552 $ 1,596 $ 942 $ 1,147
Multifamily residential..................................... 465 1,169 -- --
Nonresidential.............................................. -- 2,845 -- --
------ --------- --------- ---------
Total adjustable-rate loans............................... 1,017 5,610 942 1,147
------ --------- --------- ---------
Fixed-rate:
One- to four-family residential............................. 4,903 2,821 7,188 11,449
Multifamily residential..................................... -- 300 -- --
Nonresidential.............................................. 200 -- -- --
Consumer and other.......................................... 361 482 259 125
------ --------- --------- ---------
Total fixed-rate loans.................................... 5,464 3,603 7,447 11,574
------ --------- --------- ---------
Total loans originated.......................................... 6,481 9,213 8,389 12,721
Loans sold in the secondary market.............................. -- (1,749) -- --
Principal repayments............................................ (3,095) (6,561) (2,940) (2,855)
Increase in other items, net (1)................................ 15 53 20 12
------ --------- --------- ---------
Net increase.................................................... $ 3,401 $ 956 $ 5,469 $ 9,878
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
- ------------------------
(1) Consists of deferred loan origination fees and allowance for loan losses.
LOAN ORIGINATION AND OTHER FEES. NCSB realizes loan origination fee and
other fee income from its lending activities and also realizes income from late
payment charges, application fees and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Delinquent
loans are loans for which payment has not been received within 30 days of the
payment due date. Loan payments are due on the first day of the month with the
interest portion of the payment applicable to interest accrued during the
previous month. Each of NCSB's loans bears a late payment penalty which is
assessed as soon as such loan is more than 15 days delinquent. The late penalty
for real estate loans is 5% of the payment due. When loan payments have not been
made by the 15th of the month, late notices are sent. If payment
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<PAGE>
is not received by the 20th day, a second notice is sent and telephone calls
are made to the borrower.
The following table reflects the amount of loans in a delinquent status at
the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------
1997 1996
--------------------------------------- ---------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS
------------- ----------- ----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days......... 4 $ 130 0.31% 2 $ 113 0.29%
60-89 days......... 1 99 0.24 -- -- --
90 days and over... 1 151 0.36 -- -- --
--- ----- ---- --- ----- ----
Total delinquent
loans.......... 6 $ 380 0.91% 2 $ 113 0.29%
--- ----- ---- --- ----- ----
--- ----- ---- --- ----- ----
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------
1995 1994
------------------------------------- ---------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
NUMBER AMOUNT LOANS NUMBER AMOUNT LOANS
------------- ---------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days......... -- $ -- -- 1 $ 17 0.05%
60-89 days......... -- -- -- -- -- --
90 days and over... -- -- -- -- -- --
--- --- --- --- ---- ----
Total delinquent
loans.......... -- $ -- -- 1 $ 17 0.05%
--- --- --- --- ---- ----
--- --- --- --- ---- ----
</TABLE>
When a loan secured by real estate becomes delinquent more than 90 days, the
Board of Directors reviews the loan and foreclosure proceedings are normally
instituted and an appraisal of the security is performed. If the appraisal
indicates that the value of the collateral is less than the book value of the
loan, a valuation allowance is established for such loan.
Real estate acquired by NCSB as a result of foreclosure proceedings is
classified as "other real estate owned" ("OREO") until it is sold. When property
is so acquired it is recorded by NCSB at the estimated fair value of the real
estate, less estimated selling expenses, at the date of acquisition and any
write-down resulting therefrom is charged to the book balance of the property.
Interest accrual, if any, ceases no later than the date of acquisition of the
real estate, and all costs incurred from such date in maintaining the property
are expensed. Costs relating to the development and improvement of the property
are capitalized to the extent of fair value. NCSB had no real estate owned at
September 30, 1997.
NCSB classifies its own assets on a regular basis in accordance with federal
regulations. Problem assets are classified as "substandard," "doubtful" or
"loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that NCSB will sustain some loss if
the deficiencies are not corrected. "Doubtful" assets have the same weaknesses
as "substandard" assets, with the additional characteristics that (i) the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of NCSB is not warranted.
NCSB had no classified assets at September 30, 1997, and December 31, 1996,
1995 and 1994.
-86-
<PAGE>
NCSB analyzes its assets on a quarterly basis to determine whether
classifications are appropriate under the circumstances. Such analysis focuses
on a variety of factors, including the amount of any delinquency and the reasons
for the delinquency, if any, the use of the real estate securing the loan, the
status of the borrower and the appraised value of the real estate. As such
factors change, the classification of the asset will change accordingly.
At September 30, 1997, NCSB had one nonperforming loan account totaling
$151,000, which is secured by a single-family residence and is in foreclosure.
At December 31, 1996, 1995 and 1994, NCSB had no nonaccruing loans and no other
nonperforming assets.
ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the
Board, reviews on a monthly basis the allowance for loan losses as it relates
to a number of relevant factors, including but not limited to, trends in the
level of delinquent and nonperforming assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single
borrowers and changes in the composition of the loan portfolio. NCSB
establishes general allowances for loan losses for any loan classified as
substandard or doubtful. If an asset, or portion thereof, is classified as
loss, NCSB establishes a specific allowance in the amount of 100% of the
portion of the asset classified loss. While management believes that it uses
the best information available to determine the allowance for loan losses,
unforeseen market conditions could result in adjustments, and earnings could
be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
The following table sets forth an analysis of NCSB's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1997 1996 1995 1994
--------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period.......................................... $ 51 $ 51 $ 51 $ 51
Charge-offs............................................................. -- -- -- --
Recoveries.............................................................. -- -- -- --
--------- --------- --------- ---------
Net charge-offs......................................................... -- -- -- --
Provision for loan losses............................................... -- -- -- --
--------- --------- --------- ---------
Balance at end of period................................................ $ 51 $ 51 $ 51 $ 51
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of net charge-offs to average loans outstanding during the
period................................................................ 0.00% 0.00% 0.00% 0.00%
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of allowance for loan losses to total loans....................... 0.12% 0.13% 0.14% 0.16%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
-87-
<PAGE>
The following table sets forth the allocation of NCSB's allowance for loan
losses by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
1997 1996 1995
-------------------------- ---------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------------- ----------- --------------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans......... $ 25 98.5% $ 25 99.3% $ 22 99.8%
Consumer loans............ 15 1.5 15 0.7 15 0.2
Unallocated............... 11 -- 11 -- 14 --
--- ------ --- ----- --- -----
Total................... $ 51 100.00% $ 51 100.0% $ 51 100.0%
--- ------ --- ----- --- -----
--- ------ --- ----- --- -----
<CAPTION>
AT DECEMBER 31,
--------------------------
1994
--------------------------
PERCENT OF
LOANS IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
--------------------------
<S> <C> <C>
Balance at year end
applicable to:
Real estate loans......... $ 20 99.8%
Consumer loans............ 12 0.2
Unallocated............... 19 --
--- -----
Total................... $ 51 100.0%
--- -----
--- -----
</TABLE>
Because the allowance for loan losses is based on estimates, it is monitored
monthly and adjusted as necessary to provide an adequate allowance.
INVESTMENT ACTIVITIES
Ohio law permits NCSB to invest in various types of investments. In recent
years, NCSB has had significant investments in mortgage-backed and related
securities, consisting primarily of collateralized mortgage obligations ("CMOs")
and FHLMC, FNMA and GNMA participation certificates ("PCs"). NCSB has also
invested in interest-bearing deposits in other financial institutions and U.S.
Government agency obligations, primarily bonds issued by the FNMA, FHLMC and the
Student Loan Marketing Association (the "SLMA").
The following table sets forth the composition of NCSB's investments at
amortized cost, excluding mortgage-backed securities, at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------ ----------------------------------------------------
1997 1996 1995
------------------------ -------------------------- ------------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
Interest-bearing deposits in other
financial institutions............. $ 973 20.3% $ 2,488 34.2% $1,305 16.5%
U.S. Government agency obligations
(1)................................ 999 20.8 1,999 27.5 3,004 37.9
FHLB stock........................... 499 10.3 473 6.5 442 5.6
----------- ----- ----------- ------------- ----------- -----
Total held to maturity............... 2,471 51.4 4,960 68.2 4,751 60.0
Available for sale:
U.S. Government agency obligations
(1)................................ 2,332 48.6 2,318 31.8 3,170 40.0
----------- ----- ----------- ------------- ----------- -----
Total investments.................... $ 4,803 100.0% $ 7,278 100.0% $ 7,921 100.0%
----------- ----- ----------- ------------- ----------- -----
----------- ----- ----------- ------------- ----------- -----
<CAPTION>
AT DECEMBER 31,
-----------------------
1994
-----------------------
CARRYING PERCENT
VALUE OF TOTAL
----------- -----------
<S> <C> <C>
Held to maturity:
Interest-bearing deposits in other
financial institutions............... $ 572 13.6%
U.S. Government agency obligations
(1).................................. 3,209 76.5
FHLB stock............................. 413 9.9
----------- -----
Total held to maturity................. 4,194 100.0
Available for sale:
U.S. Government agency obligations
(1).................................. -- --
----------- -----
Total investments...................... $ 4,194 100.0%
----------- -----
----------- -----
</TABLE>
- ------------------------
(1) Consists primarily of investments in FNMA, FHLMC and SLMA notes.
-88-
<PAGE>
The maturities of NCSB's investment securities, excluding mortgage-backed
securities, are indicated in the following table:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------------------------------------------------------
1 TO 3 YEARS 3 TO 5 YEARS 5 TO 10 YEARS 10 TO 20 YEARS
------------------------ -------------------------- ---------------------- ------------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ----------- ------------- ----------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government agency
obligations(1).......... $ -- $ -- $ -- $ -- $ 999 $ 1,000 $ -- $ --
Available for sale:
U.S. Government agency
obligations(2).......... 1,100 1,100 -- -- 747 741 499 491
----- ----- --- --- ----- --------- --- ---------
<CAPTION>
TOTAL INVESTMENT
SECURITIES
----------------------
AMORTIZED MARKET
COST VALUE
----------- ---------
<S> <C> <C>
Held to maturity:
U.S. Government agency
obligations(1).......... $ 999 $ 1,000
Available for sale:
U.S. Government agency
obligations(2).......... 2,346 2,332
----------- ---------
$ 3,345 $ 3,332
----------- ---------
----------- ---------
</TABLE>
- ------------------------
(1) Consists primarily of investments in FNMA, FHLMC and SLMA notes.
(2) Consists primarily of investments in FNMA and FHLMC notes.
-89-
<PAGE>
NCSB has been an active purchaser of mortgage-backed securities, including
PCs and CMOs. In 1991, NCSB implemented an investment strategy that called for
substantial investments in PCs and CMOs, and in 1991 and 1992 NCSB diverted
funds from loan originations and purchased a significant amount of PCs and CMOs.
Due to declining yields of the PCs, however, NCSB decided in 1994 to sell $7.7
million of mortgage-backed and related securities and in 1995 it continued its
strategy of seeking a higher yield from other investment alternatives by selling
$7.0 million in FHLMC, FNMA and GNMA PCs and investing the proceeds in
higher-yielding loans and mortgage-backed securities. In 1996, NCSB utilized
borrowings from the FHLB of Cincinnati to purchase adjustable-rate GNMA
participation certificates. Through the purchase of the GNMA participations,
management sought to offset the decline in deposits and its impact on earnings
by utilizing the 110 basis point spread between the rates paid by NCSB on the
FHLB advances and the rates earned on the mortgage-backed securities. At
September 30, 1997, most of NCSB's mortgage-backed securities were
adjustable-rate securities and were available for sale. Although adjustable-rate
securities generally have a lower yield at the time of origination than
fixed-rate securities, the interest rate risk associated with adjustable-rate
securities is lower. See "Asset and Liability Management."
-90-
<PAGE>
The following table sets forth certain information regarding NCSB's
investment in mortgage-backed and related securities at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT DECEMBER 31, 1996
------------------------------------------------------ ------------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
----------- ------------- ------------- ----------- ----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-
backed
securities
available
for sale:
FHLMC
participation
certificates.. $ -- $-- $ -- $ -- $ -- $-- $ -- $ --
FNMA
participation
certificates.. -- -- -- -- 540 -- 6 534
GNMA
participation
certificates.. 3,683 5 -- 3,688 5,096 15 5 5,106
Collateralized
mortgage
obligations.. 8,694 -- 668 8,026 8,694 -- 691 8,003
------- --- ---- ------- ------- --- ---- -------
12,377 5 668 11,714 14,330 15 702 13,643
Mortgage-
backed
securities
held to
maturity:
GNMA
participation
certificates.. 459 -- 1 458 520 4 -- 524
FNMA
participation
certificates.. 245 6 -- 251 -- -- -- --
------- --- ---- ------- ------- --- ---- -------
704 6 1 709 520 4 -- 524
------- --- ---- ------- ------- --- ---- -------
Total....... $13,081 $11 $669 $12,423 $14,850 $19 $702 $14,167
------- --- ---- ------- ------- --- ---- -------
------- --- ---- ------- ------- --- ---- -------
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
------------------------------------------------------ ----------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
----------- ------------- ------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-
backed
securities
available
for sale:
FHLMC
participation
certificates.. $ -- $ -- $ -- $ -- $ 1,215 $ -- $ 72 $ 1,143
FNMA
participation
certificates.. -- -- -- -- 5,531 -- 309 5,222
GNMA
participation
certificates.. -- -- -- -- 716 -- 68 648
Collateralized
mortgage
obligations.. 8,695 -- 278 8,417 8,696 -- 876 7,820
----------- --- ----- --------- --------- --- --------- ---------
8,695 -- 278 8,417 16,158 -- 1,325 14,833
Mortgage-
backed
securities
held to
maturity:
GNMA
participation
certificates.. 17 -- -- 17 23 -- -- 23
FNMA
participation
certificates.. -- -- -- -- -- -- -- --
----------- --- ----- --------- --------- --- --------- ---------
17 -- -- 17 23 -- -- 23
----------- --- ----- --------- --------- --- --------- ---------
Total....... $ 8,712 $ -- $ 278 $ 8,434 $ 16,181 $-- $ 1,325 $ 14,856
----------- --- ----- --------- --------- --- --------- ---------
----------- --- ----- --------- --------- --- --------- ---------
</TABLE>
-91-
<PAGE>
In 1993, when NCSB adopted SFAS No. 115, NCSB elected to classify
substantially all of its MBS portfolio as available for sale to maximize
flexibility in the management of the portfolio. In 1994 and 1995, the Board
of Governors of the Federal Reserve (the "FRB") implemented a series of
interest rate increases. Due to the nature of NCSB's MBS portfolio, where
adjustments in yield are limited due to established repricing intervals and
rate change caps as well as slower repayments of the underlying loans
securing the MBSs, the yield on NCSB's MBS portfolio did not keep pace with
interest rate increases generally. As a result, the market values of the MBSs
have been lower than NCSB's amortized cost. As of September 30, 1997, the
market value of NCSB's MBS portfolio was $658,000 below NCSB's amortized
cost. A portion of the deficiency is recorded as a net unrealized loss of
$553,000 on securities available for sale in the equity section of NCSB's
balance sheet.
NCSB currently intends to hold the CMOs in its portfolio, although it may
reduce its remaining CMOs as necessary for liquidity purposes and as market
conditions or NCSB's financial condition favor a sale. Proceeds from any
sales of mortgage-backed securities would be used for loan originations, if
adequate loan demand exists, or used to purchase U.S. Government agency
obligations.
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at September 30, 1997,
by contractual terms to maturity are shown below. Actual maturities will
differ from contractual maturities because borrowers generally may prepay
obligations without prepayment penalties. Also, the timing of cash flows will
be affected by management's intent to sell securities designated as available
for sale under certain economic conditions.
<TABLE>
<CAPTION>
AMORTIZED COST
AT
SEPTEMBER 30,
1997
----------------
(IN THOUSANDS)
<S> <C>
Due within one year............................................................................. $ 210
Due after one through three years............................................................... 460
Due after three years through five years........................................................ 522
Due after five years through ten years.......................................................... 1,620
Due after ten years through twenty years........................................................ 5,207
Due after twenty years.......................................................................... 5,062
-------
Total................................................................................... $ 13,081
-------
-------
</TABLE>
During the nine months ended September 30, 1997, NCSB sold $6.4 million
of mortgage-backed and related securities. NCSB realized a gain of $8,000 on
such sale. There were no sales of mortgage-backed and related securities
during the year ended December 31, 1996.
-92-
<PAGE>
DEPOSITS AND BORROWINGS
DEPOSITS. Deposits have traditionally been the primary source of NCSB's
funds for use in lending and other investment activities. Deposits are
attracted principally from within NCSB's primary market area through the
offering of a broad selection of deposit instruments, including NOW accounts,
money market deposit accounts, regular passbook savings accounts, term
certificate accounts and Individual Retirement Accounts ("IRAs"). Interest
rates paid, maturity terms, service fees and withdrawal penalties for the
various types of accounts are established periodically by management of NCSB
based on NCSB's liquidity requirements, growth goals and interest rates paid
by competitors. NCSB does not use brokers to attract deposits. The amount of
deposits from outside NCSB's primary market area is not significant.
At September 30, 1997, NCSB's certificates of deposit totaled $41.9
million, or 83.5% of total deposits. Of such amount, approximately $29.9
million in certificates of deposit mature within one year. Based on past
experience and NCSB's prevailing pricing strategies, management believes that
a substantial percentage of such certificates will renew with NCSB at
maturity. If there is a significant deviation from historical experience,
NCSB can utilize borrowings from the FHLB as an alternative source of funds.
-93-
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by NCSB at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1997 1996
---------------------- ----------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS
--------- ----------- --------- -----------
(DOLLARS IN THOUSAN
<S> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts(1)....................... $ 3,707 7.4% $ 3,926 7.9%
Demand, NOW and Super NOW accounts (2)..... 965 1.9 778 1.6
Money market deposit accounts (3).......... 3,583 7.2 4,145 8.4
--------- ----- --------- -----
Total transaction accounts............... 8,255 16.5 8,849 17.9
Certificates of deposit (4):
2.00--3.99%................................ -- -- -- --
4.00--5.99%................................ 25,775 51.4 30,131 61.1
6.00--7.99%................................ 16,096 32.1 10,381 21.0
8.00--9.99%................................ -- -- -- --
--------- ----- --------- -----
Total certificates of deposit (5)............ 41,871 83.5 40,512 82.1
--------- ----- --------- -----
Total deposits........................... $ 50,126 100.0% $ 49,361 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
<CAPTION>
AT DECEMBER 31,
1995 1994
---------------------- --------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS
--------- ----------- --------- -----------
DS)
<S> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts(1)....................... $ 3,861 7.3% $ 4,302 8.8%
Demand, NOW and Super NOW accounts (2)..... 865 1.6 565 1.1
Money market deposit accounts (3).......... 4,877 9.3 6,312 12.8
--------- ----- --------- -----
Total transaction accounts............... 9,603 18.2 11,179 22.7
Certificates of deposit (4):
2.00--3.99%................................ 57 .1 2,249 4.6
4.00--5.99%................................ 26,050 49.4 32,688 66.5
6.00--7.99%................................ 17,003 32.3 2,957 6.0
8.00--9.99%................................ -- -- 68 .2
--------- ----- --------- -----
Total certificates of deposit (5)............ 43,110 81.8 37,962 77.3
--------- ----- --------- -----
Total deposits........................... $ 52,713 100.0% $ 49,141 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
- ------------------------
(1) The weighted average interest rate on passbook accounts was 3.08% at
September 30, 1997.
(2) The weighted average interest rate on demand, NOW and Super NOW accounts was
2.45% at September 30, 1997.
(3) The weighted average interest rate on money market deposit accounts was
3.24% at September 30, 1997.
(4) Includes adjustable-rate certificates of deposit and IRAs.
(5) The weighted average rate on all certificates of deposit at September 30,
1997 was 5.79%.
The following table shows rate and maturity information for NCSB's
certificates of deposit at September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------------
OVER 2
UP TO ONE OVER 1 YEAR YEARS TO 3 OVER 3
YEAR TO 2 YEARS YEARS YEARS TOTAL
----------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
4.01--6.99% $ 23,104 $ 3,155 $ 1,249 $ 844 $ 28,352
6.01--8.00% 6,845 5,880 551 243 13,519
----------- ----------- ----------- --------- ---------
Total $ 29,949 $ 9,035 $ 1,800 $ 1,087 $ 41,871
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
-94-
<PAGE>
The following table presents the amount of NCSB's certificates of deposit of
$100,000 or more by the time remaining until maturity at September 30, 1997:
<TABLE>
<CAPTION>
MATURITY AMOUNT
- -------------------------------------------------------------------------------------------------- ---------------
(IN THOUSANDS)
<S> <C>
Three months or less.............................................................................. $ 672
Over 3 months to 6 months......................................................................... 665
Over 6 months to 12 months........................................................................ 1,509
Over 12 months.................................................................................... 1,621
------
Total........................................................................................... $ 4,467
------
------
</TABLE>
The following table sets forth NCSB's deposit account balance activity for
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1997 1996 1995 1994
------------------ --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Beginning balance............................................ $ 49,361 $ 52,713 $ 49,141 $ 50,291
Deposits..................................................... 24,113 38,016 37,295 24,981
Withdrawals.................................................. (25,366) (44,083) (36,296) (28,318)
------- --------- --------- ---------
Net decrease in deposits before interest credited............ (1,253) (6,067) (999) (3,337)
Interest credited............................................ 2,018 2,715 2,573 2,187
------- --------- --------- ---------
Ending balance............................................... $ 50,126 $ 49,361 $ 52,713 $ 49,141
------- --------- --------- ---------
------- --------- --------- ---------
Net increase (decrease)...................................... $ 765 $ (3,352) $ 3,572 $ (1,150)
------- --------- --------- ---------
------- --------- --------- ---------
Percent increase (decrease).................................. 1.55% (6.4)% 7.3% (2.3)%
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
BORROWINGS. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, NCSB is
authorized to apply for advances from the FHLB of Cincinnati, provided
certain standards of creditworthiness have been met. Under current
regulations, a FHLB member must meet certain qualifications to be eligible
for FHLB advances. The extent to which a FHLB member is eligible for such
advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL Test"). If a FHLB member meets the QTL Test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If a FHLB
member does not meet the QTL Test, it will be eligible for such advances only
to the extent it holds specified QTL Test assets. At September 30, 1997, NCSB
was in compliance with the QTL Test.
-95-
<PAGE>
The following table sets forth certain information as to NCSB's FHLB
advances at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ---------------------------------
1997 1996 1995 1994
----------------- --------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances......................................................... $ 4,390 $ 5,998 $ -- $ 1,100
------ --------- ----- ---------
------ --------- ----- ---------
Weighted average interest rate of FHLB advances....................... 5.88% 5.66% --% 7.00%
------ --------- ----- ---------
------ --------- ----- ---------
</TABLE>
The following table sets forth the maximum balance, the average balance and
the weighted average interest rate of NCSB's FHLB advances during the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------
1997 1996 1995 1994
------------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maximum balance.................................................. $ 5,748 $ 6,248 $ 4,400 $ 4,500
Average balance.................................................. 4,410 1,519 2,417 2,083
Weighted average interest rate................................... 5.77% 4.67% 6.29% 5.04%
</TABLE>
NCSB had no other borrowings during the nine months ended September 30,
1997, or the years ended December 31, 1996, 1995 or 1994.
COMPETITION
NCSB competes for deposits with other savings banks, savings
associations, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, NCSB competes with other
savings banks, savings associations, commercial banks, consumer finance
companies, credit unions, leasing companies and other lenders. NCSB competes
for loan originations primarily through the interest rates and loan fees it
charges and through the efficiency and quality of services it provides to
borrowers. Competition is intense and is affected by, among other things, the
general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not
readily predictable.
The size of financial institutions competing with NCSB is likely to
increase as a result of changes in statutes and regulations eliminating
various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon NCSB.
-96-
<PAGE>
EMPLOYEES
As of September 30, 1997, NCSB had approximately 10 full-time employees
and 1 part-time employee.
PROPERTIES
The property on which the main office of NCSB is located is leased by
NCSB. The lease is for a term of 12 years, expiring in 2003, with two
four-year renewal options. NCSB holds the second mortgage in the
nonresidential real estate loan made to the owner of the property. At
September 30, 1997, the loan had a book value of $438,000. NCSB also has an
option to purchase the property for approximately $1.2 million at the
expiration of the original lease term in 2003. NCSB's lease includes
approximately 5,700 square feet of space which is not used by NCSB. In 1993,
NCSB entered into two sublease agreements for the excess space. See Note E of
Notes to Consolidated Financial Statements.
The premises for the North College Hill branch are owned.
At September 30, 1997, NCSB's office premises and equipment had a total
net book value of $523,000. For additional information regarding NCSB's
office premises and equipment, see Note E of Notes to Consolidated Financial
Statements.
REGULATION OF NCSB
OHIO REGULATION
NCSB converted to a state savings bank charter in January 1993. As a
savings bank incorporated under Ohio law, NCSB is subject to regulation by
the Division. Such regulation affects the internal organization of NCSB, as
well as its savings, mortgage lending and other investment activities. Ohio
law requires that NCSB maintain federal deposit insurance as a condition of
doing business. As an insured depository institution, NCSB is subject to
regulation by the FDIC and the ability of NCSB to engage in certain
state-authorized investments is subject to oversight and approval by the
FDIC. See "Federal Regulation--State-Chartered Bank Activities."
Ohio law requires that NCSB maintain at least 60% of its assets in
housing-related and other specified investments. At September 30, 1997, NCSB
had more than 60% of its assets in such investments.
Ohio law generally limits the aggregate amount that a savings bank can
lend to one borrower to an amount equal to 15% of the institution's
unimpaired capital and surplus. Based on such limit, NCSB was able to lend
approximately $875,000 to one borrower at September 30, 1997. A savings bank
may lend to one borrower an additional amount not
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to exceed 10% of the institution's unimpaired capital and surplus, if the
additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral."
The Division conducts periodic examinations of NCSB, usually on a joint
basis with the FDIC examiners. The Division may initiate certain supervisory
measures or formal enforcement actions against an Ohio savings bank.
Ultimately, if the grounds provided by law exist, the Division may place an
Ohio savings bank in conservatorship or receivership. Any mergers or
acquisitions of control involving an Ohio savings bank must be approved by
the Division.
In addition to being governed by the laws of Ohio specifically governing
savings banks, NCSB is also governed by Ohio corporate law, to the extent
such law does not conflict with the laws specifically governing savings banks.
FEDERAL REGULATION
SUPERVISION AND EXAMINATION. The FDIC is responsible for the regulation
and supervision of all commercial banks and state savings banks that are not
members of the Federal Reserve System ("Non-member Banks"), including NCSB.
The FDIC issues regulations governing the operations of Non-member Banks,
examines such institutions and may initiate enforcement actions against such
institutions and certain persons affiliated with them for violations of laws
and regulations or for engaging in unsafe or unsound practices. If the
grounds provided by law exist, the FDIC may appoint a conservator or a
receiver for a Non-member Bank.
Non-member Banks are also subject to regulatory oversight by the FDIC
under various consumer protection and fair lending laws. These laws govern,
among other things, truth-in-lending disclosure, equal credit opportunity,
fair credit reporting and community reinvestment. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests within its designated service area, with particular emphasis on
low-to-moderate income areas and borrowers. Failure to abide by federal laws
and regulations governing community reinvestment could limit the ability of
an institution to open a new branch or engage in a merger transaction.
STATE-CHARTERED BANK ACTIVITIES. The ability of state-chartered banks to
engage in any state-authorized activities or make any state-authorized
investments as principal, is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject
to different terms and conditions than those imposed on, national banks.
Engaging as a principal in any such activity or investment not permissible
for a national bank is subject to approval by the FDIC. Such approval will not
be granted unless certain capital requirements are met and there is not a
significant risk to the FDIC insurance fund. Most equity investments and real
estate investments (excluding office space and other real estate owned)
authorized by state law are not permitted for national banks.
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Certain exceptions are granted for activities deemed by the FRB to be closely
related to banking and for FDIC-approved subsidiary activities. All of NCSB's
activities and investments at September 30, 1997, were permissible for a
national bank.
REGULATORY CAPITAL REQUIREMENTS. Savings banks generally are required by
FDIC regulations to meet certain minimum capital requirements, which include
a leverage capital requirement and a risk-based capital requirement. The
leverage capital requirement is a minimum level of Tier I capital to average
total consolidated assets of 3% for a bank that has the highest regulatory
examination rating, well diversified risk and minimal anticipated growth or
expansion. The required amount increases to between 4% and 5% of average
total consolidated assets if a bank does not meet those criteria. Tier 1
capital includes common shareholders' equity, noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, less all intangibles, other than includable purchased mortgage
servicing rights and credit card relationships. Pursuant to the risk-based
capital requirement, savings banks must maintain total capital, which
consists of Tier 1 capital and certain general valuation reserves, of 8% of
risk-weighted assets. For purposes of computing risk-based capital, each
asset and certain off-balance sheet items are weighted at percentage levels
ranging from 0% to 100%, depending on the relative risk. NCSB was in
compliance with its regulatory capital requirements at September 30, 1997.
The FDIC has adopted an interest rate risk component to the capital
requirements applicable to Non-member Banks. It includes a final rule to
allow for an increase in a Non-member Bank's risk-based capital requirements
on an individualized basis to address NCSB's exposure to a decline in the
economic value of its capital due to a change in interest rates. It also
includes a proposed policy to provide for measurement of such decline in
economic value by determining the amount of change in the present value of an
institution's assets, liabilities and off-balance sheet items as a result of
a 200 basis point change in interest rates, and taking into account an
institution's management of its interest rate risk and the overall risk
exposure of the institution. There is a proposed exemption from the policy
for small, well-managed institutions with moderate interest rate risk
exposure based on asset maturities or repricing schedules. Such institutions
must still measure and assess interest rate risk.
The FDIC has an outstanding proposal to add a market risk component to
the capital requirements of Non-member Banks. Such component would require
additional capital for general or specific market risk of trading portfolios
of debt and equity securities and other investments or assets. The policy
will apply to an institution with less than $5 billion in assets only if its
trading portfolio constitutes at least 10% of the institution's assets. NCSB
cannot predict in what form this market risk component will be adopted, if at
all. At September 30, 1997, NCSB did not have a trading portfolio. The FDIC
may also require additional capital to address concentrations of credit and
non-traditional activities on a case-by-case basis.
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The FDIC has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled Non-member
Banks. At each successively lower defined capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary
regulatory actions or limits, and the FDIC has less flexibility in
determining how to resolve the problems of the institution. The FDIC has
defined these capital levels as follows: (1) well-capitalized institutions
must have total risk-based capital of at least 10%, Tier 1 risk-based capital
(consisting only of items that qualify for inclusion in Tier 1 capital) of at
least 6% and Tier 1 capital of at least 5%; (2) adequately capitalized
institutions are those that meet the regulatory minimum of total risk-based
capital of at least 8%, Tier 1 risk-based capital (consisting only of items
that qualify for inclusion in Tier 1 capital) of at least 4% and Tier 1
capital of at least 4% (except for institutions receiving the highest
examination rating and with an acceptable level of risk, in which case the
Tier 1 capital level is at least 3%); (3) undercapitalized institutions are
those that do not meet regulatory limits, but that are not significantly
undercapitalized; (4) significantly undercapitalized institutions have total
risk-based capital of less than 6%, Tier 1 risk-based capital (consisting
only of items that qualify for inclusion in Tier 1 capital) of less than 3%
and Tier 1 capital of less than 3%; and (5) critically undercapitalized
institutions are those with Tier 1 capital of less than 2% of total assets.
The FDIC generally can downgrade an institution's capital category,
notwithstanding its capital level, if, after notice and opportunity for
hearing, the institution is deemed to be engaging in an unsafe or unsound
practice because it has not corrected deficiencies that resulted in it
receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition.
An undercapitalized institution must submit a capital restoration plan to
the FDIC within 45 days after it becomes undercapitalized. Such institution
will be subject to increased monitoring and asset growth restrictions and
will be required to obtain prior approval for acquisitions, branching and
engaging in new lines of business. Furthermore, critically undercapitalized
institutions must be placed in conservatorship or receivership within 90 days
of reaching that capitalization level, except under limited circumstances.
NCSB's capital levels at September 30, 1997, met the standards for an
adequately capitalized institution.
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control
of the institution if, after such distribution or payment, the institution
would be undercapitalized. In addition, each company controlling an
undercapitalized institution must guarantee that the institution will comply
with its capital restoration plan until the institution has been adequately
capitalized on an average during each of the four preceding calendar quarters
and must provide adequate assurances of performance. The aggregate liability
pursuant to such guarantee is limited to the lesser of (a) an amount equal to
5% of the institution's total assets at the time it became undercapitalized
or (b) the amount necessary to bring the institution into compliance with all
capital standards applicable to such institution at the time the institution
fails to comply with its capital restoration plan.
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FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured banks
and thrifts and safeguards the safety and soundness of NCSBing and thrift
industries. The FDIC administers two separate insurance funds, NCSB Insurance
Fund (the "BIF") for commercial banks and certain state savings banks and the
SAIF for savings associations and other financial institutions which hold
deposits that were previously insured by the Federal Savings and Loan
Insurance Corporation. NCSB is a member of the SAIF and its deposit accounts
are insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including NCSB, and has
authority to initiate enforcement actions against federally insured savings
associations if the FDIC does not believe the OTS has taken appropriate
action to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund and is authorized to establish separate annual assessment rates for
deposit insurance each for members of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC
has established a risk-based assessment system for both SAIF and BIF members.
Under this system, assessments vary based on the risk the institution poses
to its deposit insurance fund. The risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Prior to October 1, 1996, the reserves of the SAIF were below the level
required by law, because a significant portion of the assessments paid into
the fund have been and are being used to pay the cost of prior thrift
failures, while the reserves of the BIF met the level required by law in May
1995. Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by
healthy commercial banks by approximately $.19 per $100 in deposits in late
1995. Such excess equaled approximately $.23 per $100 in deposits beginning
in 1996.
Federal legislation, which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks holding SAIF deposits
are required to pay the same special assessment on 80% of deposits at March
31, 1995. In addition, part of the cost of prior thrift failures, which had
previously been paid only by SAIF members, will be paid by BIF members. As a
result, BIF assessments for healthy banks in 1997 will be $.013 per $100 in
deposits and SAIF assessments for healthy institutions in 1997 will be $.064
per $100 in deposits.
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NCSB had $46.8 million in deposits at March 31, 1995. NCSB paid a special
pre-tax assessment of $304,000 in November 1996, which was accounted for and
recorded as of September 30, 1996. This assessment was tax-deductible but
reduced earnings for the year ended December 31, 1996. Effective January 1,
1997, the FDIC premium rate for NCSB has been approximately $.0945 per $100 of
deposits
FRB REGULATIONS
RESERVE REQUIREMENTS. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts)
up to $49.3 million (subject to an exemption of up to $4.4 million), and 10%
of net transaction accounts in excess of $49.3 million. At September 30,
1997, NCSB was in compliance with its reserve requirements.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
Loans to executive officers, directors and principal shareholders and
their related interests must conform to the lending limit on loans to one
borrower, and the total of such loans to executive officers, directors,
principal shareholders and their related interests cannot exceed the
association's Lending Limit Capital (or 200% of Lending Limit Capital for
qualifying institutions with less than $100 million in assets). Most loans to
directors, executive officers and principal shareholders must be approved in
advance by a majority of the "disinterested" members of the board of
directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers
are subject to additional limitations. NCSBs were in compliance with such
restrictions at September 30, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate is any company or entity which controls, is controlled by or is
under common control with the financial institution. In a holding company
context, the parent holding company of a savings association and any
companies that are controlled by such parent holding company are affiliates
of the institution. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus for any one affiliate and 20% of
such capital stock and surplus for the aggregate of such transactions with
all affiliates, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or the
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 types of transactions. Exemptions from Sections 23A or
23B of the FRA may be granted only by the FRB. NCSB was in compliance with
these requirements at September 30, 1997.
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FEDERAL HOME LOAN BANK SYSTEM
The FHLBs provide credit to their members in the form of advances. As a
member of the FHLB of Cincinnati, NCSB is required to maintain an investment
in the capital stock of the FHLB of Cincinnati in an amount equal to the
greater of 1.0% of the aggregate outstanding principal amount of its
residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or 5% of its advances from the FHLB of
Cincinnati. NCSB is in compliance with this requirement with an aggregate
investment by NCSB in FHLB of Cincinnati stock of $499,000 at September 30,
1997.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required to obtain and to maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States Government or an agency thereof; deposits in
any FHLB; or other real estate related collateral (up to 30% of the member's
capital) acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance. The FHLBs have established
the "Affordable Housing Program" to subsidize the interest rate on advances
to member associations engaged in lending for long-term, low- and
moderate-income, owner-occupied and affordable rental housing at subsidized
rates. The FHLB of Cincinnati reviews and accepts proposals for subsidies
under that program twice a year. NCSB has not participated in this program.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally
related to domestic residential real estate and manufactured housing and
include credit card, student and small business loans, and stock issued by
any FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles,
property used to conduct business and 20% of liquid assets) must consist of
QTI on a monthly average basis in 9 out of every 12 months. Congress created
a second QTL test, effective September 30, 1996, pursuant to which a savings
association will qualify as a QTL thrift if at least 60% of the institution's
assets (on a tax basis) consist of specified assets (generally loans secured
by residential real estate or deposits, educational loans, cash and certain
governmental obligations). The OTS may grant exceptions to the QTL test under
certain circumstances. If a savings association fails to meet the QTL test,
the association and its holding company become subject to certain
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operating and regulatory restrictions. A savings association that fails to
meet the QTL test will not be eligible for new FHLB advances. At September
30, 1997, NCSB met the QTL test.
FEDERAL TAXATION
NCSB is subject to the federal tax laws and regulations which apply to
corporations generally. In addition to the regular income tax, NCSB may be
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. However, the
Taxpayer Relief Act of 197 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average
gross receipts of $5,000,000 or less for the three years ending with its
first tax year beginning after December 31, 1996. Once a corporation is
recognized as a small corporation, it will continue to be exempt from the
alternative minimum tax for as long as its average gross receipts for the
prior three-year period does not exceed $7,500,000. In determining if a
corporation meets this requirement, the first year that it achieved small
corporation status is not taken into consideration.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, including NCSB, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified
thrift institutions could compute deductions for bad debts using either the
specific charge off method of Section 166 of the Code, or one of the two
reserve methods of Section 593 of the Code. The reserve methods under Section
593 of the Code permitted a thrift institution annually to elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the
greater of (i) an amount based on its actual average experience for losses in
the current and five preceding taxable years, or (ii) an amount necessary to
restore the reserve to its balance as of the close of the base year. A thrift
institution could elect
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annually to compute its allowable addition to bad debt reserves for
qualifying loans either under the experience method or the percentage of
taxable income method. For tax years 1996, 1995 and 1994 NCSB used the
percentage of taxable income method because such method provided a higher bad
debt deduction than the experience method.
The Act eliminated the percentage of taxable income reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that would be treated as small
banks are allowed to utilize the experience method applicable to such
institutions, while thrift institutions that are treated as large banks are
required to use only the specific charge off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts
to be recaptured will be determined solely with respect to the "applicable
excess reserves" of the taxpayer. The amount of the applicable excess
reserves will be taken into account ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement described below. In the case of a thrift
institution that becomes 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 becomes a
small 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
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 then 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 real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of
the property.
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The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Act which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may
not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for
any other purpose (excess 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 NCSB to its shareholders is deemed
paid out of its pre-1988 reserves under these rules, the pre-1988 reserves
would be reduced and NCSB'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, NCSB's pre-1988
reserves for tax purposes totaled approximately $575,000. NCSB believes it
had approximately $2.2 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 NCSB will have
current or accumulated earnings and profits in subsequent years.
The tax returns of NCSB have been audited or closed without audit through
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 NCSB.
OHIO TAXATION
NCSB 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 NCSB's book net
worth determined in accordance with GAAP. For tax year 1999, however, the
franchise tax on financial institutions will be 1.4% of the book net worth
and for tax year 2000 and years thereafter the tax will be 1.3% of book net
worth. As a "financial institution," NCSB is not subject to any tax based
upon net income or net profits imposed by the State of Ohio.
DESCRIPTION OF BANCORP COMMON SHARES
The following is a summary of the material attributes of the Bancorp
Common Shares.
GENERAL
The Amended Articles of Incorporation of Bancorp (as amended, the
"Bancorp Articles") authorize 4,000,000 common shares, par value $0.01 per
share. As of November , 1997, 2,985,828 Bancorp Common Shares were
issued and outstanding. The Bancorp
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Common Shares are quoted on The Nasdaq National Market. The Bancorp Common
Shares are not savings accounts, deposits or other obligations of any bank or
non-bank subsidiary and are not insured by the FDIC or any other government
agency.
VOTING RIGHTS
Each Bancorp Common Share entitles the holder thereof to one vote for the
election of directors and for all other matters submitted to the shareholders
of Bancorp for their consideration. Bancorp shareholders are not entitled to
exercise cumulative voting in the election of directors.
The Code of Regulations of Bancorp (the "Bancorp Regulations") provides
that all matters, other than the election of directors, submitted to the
shareholders of Bancorp for their vote will be decided by the vote of such
proportion of the Bancorp Common Shares as is required by law, the Bancorp
Articles or the Bancorp Regulations.
Section 10 of Article II of the Bancorp Regulations provides that unless
otherwise provided in the Bancorp Articles, Bancorp Regulations or by
applicable law, a majority of the voting power of Bancorp may approve any
transaction or matter. Article XV of the Bancorp Articles provides that
certain business combinations (as defined in the Bancorp Articles) must be
approved by (i) at least 80% of the voting power of Bancorp and (ii) a
majority of the outstanding shares entitled to vote thereon not including
shares owned by a Related Person (as defined in the Bancorp Articles),
provided, however, such combination may be approved as otherwise provided in
the Bancorp Articles or other governing authority if such combination has
been approved by at least two-thirds of the Continuing Directors (as defined
in the Bancorp Articles). Article XVI of the Bancorp Articles provides that
not less than two-thirds of the voting power of Bancorp is necessary to amend
the Bancorp Regulations. Article XVII of the Bancorp Articles provides that
80 percent of the voting power of Bancorp is necessary to approve amendments
to certain provisions of the Bancorp Articles regarding (1) the number,
removal and duties of directors, (2) indemnification, (3) shareholder
meetings, (4) the Bancorp Board, (5) prohibition on purchases of Bancorp
Common Shares, (6) certain business combinations and (7) amendments to the
Bancorp Regulations and the Bancorp Articles; except that such amendment of
the foregoing provisions may be made by the affirmative vote of a majority of
the voting power of Bancorp if the same is first approved by a majority of
the Continuing Directors, as defined.
NOMINATION PROCEDURE; SHAREHOLDER PROPOSALS; NUMBER OF DIRECTORS;
CLASSIFIED BOARD OF DIRECTORS; REMOVAL OF DIRECTORS
The Bancorp Articles provide that shareholder nominations for election to
the Bancorp Board of Directors and proposals for any new business to be taken
up at any annual or special meeting of shareholders must be made in writing
and must be delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of Bancorp not less than thirty days nor more than
sixty days prior to any such meeting of shareholders;
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provided, however, that if less than forty days' notice of the meeting is
given to the shareholders, such written notice must be delivered or mailed,
as prescribed, to the Secretary of Bancorp not later than the close of
business on the tenth day following the day on which the notice of the
meeting was mailed. Notification given by a shareholder with respect to
nominations for the election of directors must contain the following
information to the extent known by the notifying shareholder: (a) the name,
age, business address and residence address of each proposed nominee; (b) the
principal occupation or employment of each proposed nominee; (c) the total
number of Bancorp Common Shares beneficially owned by each proposed nominee;
and (d) any other information reasonably requested by Bancorp.
Pursuant to the Bancorp Articles, the number of Bancorp directors is
currently six, but may be changed to a number between six and twelve by
approval of two-thirds of the directors then in office or by approval of 80
percent of the voting power of Bancorp.
The Bancorp Board of Directors is divided into two classes, each
containing three directors; and the election of each class of directors
constitutes a separate election. However, should the Bancorp Board consist of
nine or more members, the Board shall be divided into three classes, nearly
equal in number as such total number of members shall permit. Directors serve
for terms of three years and until their respective successors are duly
elected and qualified, or until their earlier resignation, removal from
office or death. As a result of the classification of the Bancorp Board, a
minimum of two annual meetings of shareholders will be necessary for a
majority of the members of the Bancorp Board to stand for election.
A director or directors of Bancorp may be removed from office, only for
cause, by the affirmative vote of the holders of at least 50% of the voting
power of Bancorp entitled to vote generally in the election of directors
(considered for such purpose as one class) cast at a meeting of the
shareholders for that purpose.
PRE-EMPTIVE RIGHTS
Holders of Bancorp Common Shares do not have pre-emptive rights.
REPURCHASES
Bancorp has the right to repurchase, from time to time, pursuant to
authorization by the Bancorp Board and without action by the shareholders,
shares of any class, or other securities of Bancorp in such manner, upon such
terms, and in such amounts as the Bancorp Board shall determine.
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DIVIDEND RIGHTS
Holders of outstanding Bancorp Common Shares are entitled to receive
dividends when and as declared by the Board of Directors of Bancorp from
funds legally available therefor. An Ohio corporation, such as Bancorp, may
pay dividends out of surplus, however created, but must notify its
shareholders if a dividend is paid out of capital surplus.
LIQUIDATION RIGHTS
In the event of liquidation, dissolution or winding up of Bancorp, after
payment in full of all amounts required to be paid to creditors or provision
for such payment, each holder of Bancorp Common Shares will be entitled to
share ratably, according to the number of Bancorp Common Shares held by such
shareholder, in all remaining assets of Bancorp legally available for
distribution to its shareholders.
COMPARISON OF RIGHTS OF HOLDERS OF BANCORP COMMON SHARES AND
HOLDERS OF NCSB COMMON STOCK
GENERAL
The rights of holders of Bancorp Common Shares are governed by the OGCL
and the Bancorp Articles and Bancorp Regulations, while the rights of holders
of NCSB Common Stock are governed by NCSB's Articles of Incorporation, as
amended ("Articles"), and Constitution, as amended ("Constitution"), and the
OGCL. Upon consummation of the Merger, shareholders of NCSB will become
shareholders of Bancorp and their rights as shareholders of Bancorp will be
governed by the Bancorp Articles, the Bancorp Regulations and will continue
to be governed by the OGCL.
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE
DIFFERENCES AFFECTING THE RIGHTS OF NCSB'S SHAREHOLDERS, BUT RATHER
SUMMARIZES THE MORE SIGNIFICANT DIFFERENCES AFFECTING THE RIGHTS OF SUCH
SHAREHOLDERS AND CERTAIN IMPORTANT SIMILARITIES. THE SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE BANCORP ARTICLES AND BANCORP REGULATIONS,
THE ARTICLES AND CONSTITUTION OF NCSB AND APPLICABLE LAWS AND REGULATIONS.
AUTHORIZED CAPITAL STOCK
Bancorp's authorized capital stock consists of 4,000,000 Bancorp Common
Shares, of which 1,985,828 shares were outstanding on November , 1997.
The Bancorp Common Shares are quoted on The Nasdaq National Market.
NCSB's authorized capital stock consists of 5,000,000 shares of NCSB
Common Stock, of which 396,750 shares were outstanding on November ,
1997, and 1,000,000 shares of
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preferred stock, par value $1.00 per share ("NCSB Preferred Stock"), of which
no shares were issued and outstanding. The NCSB Preferred Stock is issuable
in series, each series having such rights and preferences as NCSB's Board may
fix and determine. The shares of NCSB Common Stock are traded through
participating brokers on the National Daily Quotation Service.
ISSUANCE OF CAPITAL STOCK
Under the OGCL, Bancorp and NCSB may issue shares of their common stock
and rights or options for the purchase of shares of their common stock on
such terms and for such consideration as may be determined by the respective
Boards. Neither the OGCL nor the Bancorp Articles and Bancorp Regulations,
nor the NCSB Articles and Constitution require shareholder approval of any
such issuance unless such issuance (i) results in a control share
acquisition, (ii) is in connection with a merger, combination or majority
share acquisition and involves shares entitling the holders thereof to
exercise at least one-sixth of the voting power of Bancorp following the
consummation of the transaction or (iii) necessitates an increase in the
authorized number of Bancorp Common Shares or NCSB Common Stock. Shareholder
approval of stock-related compensation plans also may be sought in certain
instances in order to qualify such plans for favorable federal income tax
and/or securities law treatment under current laws and regulations. In
addition, the Rules of Nasdaq generally require corporations, such as
Bancorp, with securities which are quoted on Nasdaq to obtain shareholder
approval of issuances resulting in a change in control of Bancorp or in
connection with certain transactions involving issuances of shares
representing at least 20% of the voting power of Bancorp and most stock
compensation plans for directors and officers of Bancorp.
The NCSB Board of Directors has the authority to establish series of
unissued or treasury shares of any class of capital stock and thereby fix or
change the designation and authorized number of each series, the dividend
rate, the dates of payment of dividends and the dates from which they are
cumulative, the liquidation price, the redemption rights and price, the
sinking fund requirements, the conversion rights, and the restrictions on the
issuance of shares at any class or series. The Bancorp Board is authorized to
provide, by resolution or resolutions, out of the unissued shares of
preferred stock, for series of preferred stock. The Bancorp Board also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
VOTING RIGHTS
Except as set forth in Bancorp's and NCSB's respective Articles, holders
of both Bancorp Common Shares and NCSB Common Stock are entitled to one vote
per share on all matters properly presented at meetings of shareholders.
Neither Bancorp's Articles nor NCSB's Articles permit shareholders to
cumulate their votes in an election of directors.
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BOARD OF DIRECTORS
GENERAL
The Bancorp Articles provide for a classified Board of Directors
consisting of not less than six nor more than twelve members (exclusive of
directors, if any, to be elected by holders of preferred stock of Bancorp,
voting separately as a class), divided into either two classes (if six to
eight directors) or three classes (if nine to twelve directors) and elected
for three-year terms. The number of directors may be fixed or changed at a
meeting of the shareholders upon the approval of 80 percent of the voting
power of Bancorp. The number of directors may also be fixed or changed by the
Bancorp Board of Directors by the affirmative vote of two-thirds of the
authorized number of directors; however, the Bancorp Board may not increase
the number of directors to more than twelve or reduce the number to fewer
than six.
The Constitution of NCSB provides for a classified Board of Directors
which currently consists of six directors, divided into three classes as
nearly equal in number as possible, with one class to be elected annually.
The number of directors may be determined by resolution of the Board of
Directors as provided in NCSB's Constitution, as may be amended from time to
time, provided, however, that the Board of Directors may not increase the
number to more than ten nor decrease the number to fewer than five. The
number of directors may also be fixed or changed at a meeting of the
shareholders of NCSB, called for the purpose of electing directors, by the
majority of the voting power of NCSB; provided, however, that 75 percent of
the voting power of NCSB would be necessary if NCSB's Board of Directors
recommended against approval of the change in number.
NOMINATIONS
The Bancorp Articles provide that nominations for the election of
directors may be made by the Bancorp Board or any shareholder of Bancorp.
Shareholder nominations for election to the Bancorp Board of Directors must
be made in writing and must be delivered or mailed by first class United
States mail, postage prepaid, to the Secretary of Bancorp not less than
thirty days nor more than sixty days prior to any such meeting of
shareholders; provided, however, that if less than forty days' notice of the
meeting is given to the shareholders, such written notice must be delivered
or mailed, as prescribed, to the Secretary of Bancorp not later than the
close of business on the tenth day following the day on which the notice of
the meeting was mailed. Notification given by a shareholder must contain the
following information to the extent known by the notifying shareholder; (a)
the name, age, business address and, if known, residence address of each
proposed nominee; (b) the principal occupation or employment of each proposed
nominee; (c) the total number of Bancorp Common Shares beneficially owned by
each proposed nominee; and (d) any other information reasonably requested by
Bancorp.
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Section 3 of Article Five of the NCSB Constitution governs nominations
for election to the Board, and provides that nominations for election to the
Board of Directors may be made by, or at the direction of, a majority of the
NCSB Board or by a shareholder eligible to vote at an annual meeting of
shareholders who has complied with the notice provisions in that section. In
the case of a nominee proposed for election at an annual meeting of
shareholders, written notice of a shareholder nomination must be delivered
to, or mailed by first class United States mail, postage prepaid, to the
Secretary of NCSB at the principal offices of NCSB not less than 60 days
prior to the anniversary date of the immediately preceding annual meeting. In
the case of a nominee proposed for election at a special meeting of
shareholders at which directors are to be elected, such written notice shall
be received by the Secretary of NCSB not later than the close of business 60
days prior to such meeting. Each such notice shall set forth as to each
person whom the shareholder proposes to nominate as a director (i) the name,
age, business or residence address of such person; (ii) the principal
occupation or employment of such person; and (iii) the number of shares of
the NCSB Common Stock beneficially owned by such person and the length of
time such shares have been so owned.
REMOVAL AND FILLING OF VACANCIES
A director or directors of Bancorp may be removed from office, only for
cause, by the affirmative vote of the holders of at least 50% of the voting
power of Bancorp entitled to vote generally in the election of directors cast
at a meeting of the shareholders for that purpose. Vacancies in the Board of
Directors of Bancorp and any newly-created directorships resulting from an
increase in the number of Bancorp directors may be filled by the Bancorp
Board, acting by the vote of two-thirds of the directors then in office, even
if less than a quorum. A director elected to the Bancorp Board to fill a
vacancy or a newly created directorship will hold office until the next
election of the class for which the director was elected.
Directors of NCSB may be removed from office, with or without assigning
any cause, only by the vote of the holders of 75 percent of the voting power
of NCSB entitled to elect directors in place of those to be removed. In case
of any such removal, a new director may be elected at the same meeting for
the unexpired term of each director removed. Failure to elect a director to
fill the unexpired term of any director removed shall be deemed to create a
vacancy in the NCSB Board. The directors of NCSB have the right to fill all
vacancies occurring in the NCSB Board.
PAYMENT OF DIVIDENDS
Both Bancorp and NCSB can pay dividends on their outstanding common
shares in accordance with the terms of the OGCL. The OGCL generally provides
that, subject to any restrictions in the corporation's articles of
incorporation, a corporation may make distributions to its shareholders,
provided that the dividend does not exceed the combination
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of the surplus of the corporation (defined generally as the excess of a
corporation's assets plus stated capital over its liabilities); and provided
further that no dividend or distribution shall be paid to the holders of
shares of any class in violation of the rights of the holders of shares of
any other class, or when the corporation is insolvent or there is reasonable
grounds to believe that by such payment the corporation would be rendered
insolvent.
SPECIAL MEETINGS OF SHAREHOLDERS
The Bancorp Regulations contain a provision pursuant to which special
meetings of shareholders may only be called by the chairman of the board, the
president, the directors by action in a meeting, a majority of the directors
acting without a meeting or upon the written request of the holders of 50
percent of all shares outstanding and entitled to vote at the meeting.
Article Four of the NCSB Constitution provides that special meetings of
the NCSB shareholders may only be called by the chairman of the board, the
president, a majority of the members of the board of directors or by persons
who hold at least twenty-five percent of all NSCB Common Stock outstanding
and entitled to vote thereat.
SHAREHOLDER ACTION WITHOUT A MEETING
The Bancorp Articles specifically deny the power of shareholders to
approve action, which otherwise is required or may be taken at any annual or
special meeting of shareholders, by written consent in lieu of such meeting.
The NCSB Constitution provides that any action permitted to be taken by
the shareholders at a meeting may be taken without a meeting if a consent in
writing setting forth the action so taken is signed by all of the
shareholders who would be entitled to vote at a meeting for such purpose and
filed with or entered upon the records of NCSB.
PRE-EMPTIVE RIGHTS
Neither the shareholders of Bancorp nor the shareholders of NCSB have
pre-emptive rights.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
Under the OGCL, an agreement of merger or consolidation must be approved
by the directors of each constituent corporation and adopted by the
shareholders of each constituent Ohio corporation (other than the surviving
corporation) holding at least two-thirds of the corporation's voting power,
or a different proportion but not less than a majority of the voting power,
as provided in the articles of the constituent corporations. In the case of a
merger, the agreement must also be adopted by the shareholders of the
surviving corporation by similar vote, if one or more of the following
conditions exist: (a) the articles or regulations of the
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surviving corporation then in effect require that the agreement be adopted by
the shareholders or by the holders of a particular class of shares of that
corporation; (b) the agreement conflicts with the articles or regulations of
the surviving corporation then in effect, or changes the articles or
regulations, or authorizes any action that, if it were being made or
authorized apart from the merger, would otherwise require adoption by the
shareholders or by the holders of a particular class of shares of that
corporation; (c) the merger involves the issuance or transfer by the
surviving corporation to the shareholders of the other constituent
corporation or corporations of such number of shares of the surviving
corporation as will entitle the holders of the shares immediately after the
consummation of the merger to exercise one-sixth or more of the voting power
of that corporation in the election of directors; or (d) the agreement of
merger makes such change in the directors of the surviving corporation as
would otherwise require action by the shareholders or by the holders of a
particular class of shares of that corporation.
Bancorp's Articles do not provide for a lesser vote in the case of
mergers, consolidations or sales of assets. NCSB's Articles, however, do
provide that mergers, consolidations and sales of assets may be approved by a
majority of the voting power of NCSB; provided, however, that if the NCSB
Board recommends against approval of such action, the affirmative vote of not
less than 75 percent of the voting power of NCSB shall be required.
BUSINESS COMBINATIONS AND SHARE ACQUISITIONS
Subject to certain exceptions, under the OGCL, the approval or two-thirds
of the voting power of the corporation, or a different proportion (not less
than a majority of the corporation's voting power) as provided in the
articles, is required for (i) the consummation of combinations and majority
share acquisitions involving the transfer or issuance of such number of
shares as would entitle the holders thereof to exercise at least one-sixth of
the voting power of such corporation in the election of directors immediately
after the consummation of such transaction, (ii) the disposition of all or
substantially all of the corporation's assets other than in the regular
course of business and (iii) voluntary dissolutions. The Bancorp Articles
provide for different shareholder approvals for certain business combinations
and certain acquisitions of Bancorp Common Shares as described below.
Articles XIV of the Bancorp Articles provides that for a period of five
years from the effective date of the completion of the conversion of the Bank
from the mutual to stock form, October 14, 1994, no person may directly or
indirectly acquire the beneficial ownership of more than 10% of any class of
equity security of Bancorp. This provision does not apply to (i) any
underwriter or member of an underwriting or selling group involving a public
sale or resale of securities of Bancorp or a subsidiary of Bancorp, (ii) any
proxy granted to one or more of Bancorp's "Continuing Directors," as defined,
by a shareholder of Bancorp, or (iii) any employee benefit plans of Bancorp
of a subsidiary thereof. In addition, for a period of five years following
October 14, 1994, each share beneficially
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owned in violation of the foregoing percentage limitation, as determined by
Bancorp's Board of Directors, shall not be entitled to vote in connection
with any matter submitted to shareholders for a vote. Additionally, Article
XIV provides for further restrictions on voting rights of shares owned in
excess of 10% of any class of equity security of Bancorp beyond five years
after October 14, 1994. Specifically, Article XIV provides that if, at any
time after five years from October 14, 1994, any person acquires the
beneficial ownership of more than 10% of any class of equity security of
Bancorp without the prior approval by two-thirds of the Continuing Directors,
then, with respect to each vote in excess of 10%, the record holders of
voting stock of Bancorp beneficially owned by such person shall be entitled
to cast only one-hundredth of one vote with respect to each vote in excess of
10% of the voting power of the outstanding shares of voting stock of Bancorp
with such record holders would otherwise be entitled to cast without giving
effect to the provision, and the aggregate voting power of such record
holders shall be allocated proportionately among such record holder. Article
XIV would not affect the ability of any holder of less than 10% of Bancorp's
Common Stock to merely solicit revocable proxies and to vote the shares
represented by such proxies.
Article XV of Bancorp's Articles requires the approval of the holders of
at least 80% of Bancorp's outstanding shares of voting stock, and a majority
of such shares not including shares deemed beneficially owned by a "Related
Person," as defined therein, to approve certain "Business Combinations," as
defined therein. Under Ohio law, absent this provision, mergers, share
exchanges and sales of substantially all of the assets of Bancorp generally
would require approval by the vote of the holders of two-thirds of the
outstanding shares of common stock of Bancorp, except that under the Ohio
Business Combination Statute an "interested shareholder" (generally defined
to include any shareholder owning 10% or more of Bancorp's outstanding voting
stock) may not engage in a business combination (as broadly defined in the
statute) with Bancorp for a period of three years following the date he
became an interested shareholder unless the business combination or the
transaction by which the interested shareholder became an interested
shareholder was approved prior to such date by Bancorp's Board of Directors.
Article XV requires approval of the shareholders in accordance with the
increased voting requirements in connection with any such transactions except
in cases where the proposed transaction has been approved in advance by at
least two-thirds of Bancorp's Continuing Directors (generally, those members
of Bancorp's Board of Directors who are not affiliated with the Related
Person and were directors before the Related Person became a Related Person).
The provisions of Articles XV apply to any "Business Combination" which is
defined to include (i) any merger or consolidation of Bancorp with or into a
Related Person; (ii) any sale, lease, exchange, mortgage, transfer or other
disposition of all or a substantial part of the assets of Bancorp or of a
subsidiary of a Related Person (the term "substantial part" is defined to
include more than 25% of Bancorp's total assets); (iii) any merger or
consolidation of a Related Person with or into Bancorp or a subsidiary; (iv)
any sale, lease, exchange, mortgage, transfer or other disposition of all or
any substantial part of the assets of a Related Person to Bancorp or a
subsidiary; (v) the issuance of any securities of Bancorp or a subsidiary to
a Related Person; (vi) the acquisition by Bancorp or a subsidiary of any
securities of a Related Person;
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(vii) any reclassification of Bancorp Common Shares, or any recapitalization
involving the Bancorp Common Shares; and (viii) any agreement, contract or
other arrangement providing for any of the foregoing transactions.
The Articles of NCSB provide that proposed combinations or majority share
acquisitions involving the issuance of shares of NCSB and requiring
shareholder approval, may be approved by a majority of the voting power of
NCSB; provided, however, that if the NCSB Board of Directors recommends
against approval of such action, the affirmative vote of not less than 75
percent of the voting power of NCSB shall be required.
AMENDMENT OF ARTICLES
Under the OGCL, an amendment to the articles must be adopted by the
affirmative vote of the holders of shares entitling them to exercise
two-thirds of the voting power of the corporation on the proposal, or a
different proportion, but not less than a majority of the voting power, as
provided in the articles. The Bancorp Articles provide that a majority of the
voting power of Bancorp may approve a proposal to amend the Bancorp Articles.
Notwithstanding the foregoing, 80 percent of the voting power of Bancorp is
necessary to approve amendments to certain provisions of the Bancorp Articles
regarding (1) the number, removal and duties of directors, (2)
indemnification, (3) shareholder meetings, (4) the Bancorp Board, (5)
prohibition on purchases of Bancorp Common Shares, (6) certain business
combinations and (7) amendments to the Bancorp Regulations and the Bancorp
Articles; except that such amendment of the foregoing provisions may be made
by the affirmative vote of a majority of the voting power of Bancorp if the
same is first approved by a majority of the Continuing Directors, as defined.
NCSB's Articles provide that the Articles may be amended by a majority of
the voting power of NCSB; provided, however, that if the Board of Directors
of NCSB recommends against approval of the amendment not less than 75 percent
of the voting power of NCSB is required.
ANTITAKEOVER STATUTES
The statutes described below apply to both Bancorp and NCSB.
OHIO CONTROL SHARE ACQUISITION ACT
Section 1701.831 of the Ohio Revised Code (the "Ohio Control Share
Acquisition Act") provides that certain notice and informational filings and
special shareholder meetings and voting procedures must occur prior to
consummation of a proposed "control share acquisition," which is defined as
any acquisition of shares of an "issuing public corporation" that would
entitle the acquirer, directly or indirectly, alone or with others, to
exercise or direct the voting power of the issuing public corporation in the
election of directors within any of the following ranges: (a) one-fifth or
more but less than one-third of such voting
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power; (b) one-third or more but less than a majority of such voting power;
or (c) a majority or more of such voting power. An "issuing public
corporation" is defined as an Ohio corporation with fifty or more
shareholders that has its principal place of business, principal executive
offices, or substantial assets within the State of Ohio, and as to which no
valid close corporation agreement exists. Assuming compliance with the notice
and informational filing requirements prescribed by the Ohio Control Share
Acquisition Act, the proposed control share acquisition may take place only
if, at a duly convened special meeting of shareholders, the acquisition is
approved by both a majority of the voting power of the issuing public
corporation in the election of directors represented at the meeting and a
majority of such voting power remaining after excluding the voting shares
owned by the acquiring shareholder and certain "interested shares," including
shares owned by officers elected or appointed by the directors of the issuing
public corporation and by directors who are also employees of the issuing
public corporation. "Interested shares" also include those shares acquired by
a person or group between the date of the first disclosure of a proposed
control share acquisition or change-in-control transaction and the date of
the special meeting of shareholders held pursuant to the Ohio Control Share
Acquisition Statute. Shares acquired during that period by a person or group
will be deemed "interested shares" only if (i) the amount paid for the shares
by such person or group exceeds $250,000 or (ii) the number of shares
acquired by such person or group exceeds 1/2 of 1% of the outstanding voting
shares.
The Ohio Control Share Acquisition Act does not apply to a corporation
whose articles of incorporation or regulations so provide. The Ohio Control
Share Acquisition Act applies to Bancorp and NCSB since neither have taken
any corporate action to opt out of it.
OHIO BUSINESS COMBINATION STATUTE
Chapter 1704 of the Ohio Revised Code (the "Ohio Business Combinations
Statute") prohibits certain business combinations and transactions between an
"issuing public corporation" and a beneficial owner of shares representing
10% or more of the voting power of the corporation (an "Interested
Shareholder") for at least three years after the Interested Shareholder
becomes such, unless the board of directors of the issuing public corporation
approves either (i) the transaction or (ii) the acquisition of the
corporation's shares that resulted in the person becoming an Interested
Shareholder, in each case before the Interested Shareholder became such.
Examples of transactions regulated by the Ohio Business Combination Statute
include asset sales, mergers, consolidations, loans, voluntary dissolutions,
and the transfer of shares ("Moratorium Transactions"). After the three-year
period, a Moratorium Transaction may take place provided that certain
conditions are satisfied, including that (a) the board of directors approves
the transaction, (b) the transaction is approved by the holders of shares
with at least two-thirds of the voting power of the corporation (or a
different proportion set forth in the articles of incorporation), including
at least a majority of the outstanding shares after excluding shares
controlled by
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the Interested Shareholder, or (c) the business combination results in
shareholders, other than the Interested Shareholder, receiving a "fair price"
plus interest for their shares.
A corporation may elect not to be covered by the Ohio Business
Combination Statute by the adoption of an appropriate amendment to its
articles of incorporation. The Ohio Business Combination Statute applies to
Bancorp and NCSB since neither have taken any corporate action to opt out of
it.
LIMITATIONS ON LIABILITY
Article XIII of the Bancorp Articles provide that a director shall not be
found to have violated his or her duties to Bancorp unless it is shown by
clear and convincing evidence that the director has not acted in good faith,
in a manner he or she reasonably believes to be in or not opposed to the best
interests of Bancorp, or with the care that an ordinarily prudent person in a
like position would use under similar circumstances, in any action brought
against a director. Article XIII further provides that a director, in
determining what he or she believes to be in the best interests of Bancorp,
shall consider the Bancorp's shareholders and in his or her discretion, may
consider the following: (a) the interests of Bancorp's employees, suppliers,
creditors, and customers; (b) the economy of the state and nation; (c)
community and societal considerations; and (d) the long term as well as the
short term interests of Bancorp and its shareholders, including the
possibility that these interests may be best served by the continued
independence of the Company.
The Articles and Constitution of NCSB do not contain provisions limiting
the personal liability of NCSB directors. Section 1701.59 of the OGCL
currently provides that directors generally will not be liable for any action
taken as a director, or any failure to take any action, unless (i) the
director has failed to perform the duties of the director's office in
compliance with said section (i.e., in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances and in a manner the director reasonably believes to be in the
best interest of the corporation) and (ii) the breach or failure to act is
undertaken with deliberate intent to cause injury to the corporation or
undertaken with reckless disregard for the best interest of the corporation.
The foregoing limitation on the liability of directors does not apply to
certain actions set forth in Section 1701.60 and 1701.95 of the OGCL.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Article VII of the Bancorp Articles provide that Bancorp will indemnify
any person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of Bancorp, by reason of the fact that he is or was a director,
officer, employee, or agent of Bancorp, or is or was serving at the request
of Bancorp as a director, trustee, officer, or agent of another corporation,
domestic or foreign, nonprofit or for profit, partnership, joint venture,
trust, or other enterprise, against expenses,
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including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit,
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of Bancorp, and with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, or conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of Bancorp and, with
respect to any criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
Article VII of the Bancorp Articles further provide that Bancorp will
indemnify any person who was or is a party or is threatened to be made a
party, to any threatened, pending, or completed action or suit by or in the
right of Bancorp to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee, or agent of Bancorp, or is
or was serving at the request of Bancorp as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or
for profit, partnership, joint venture, trust or other enterprise against
expenses, including attorney's fees, actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of Bancorp, except that no indemnification
shall be made in respect of any of the following: (i) any claim, issue or
matter as to which such person is adjudged to be liable for negligence or
misconduct in the performance of his duty to Bancorp unless, and only to the
extent that the court of common pleas or the court in which such action or
suit was brought determines upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses as the court
of common pleas or such other court shall deem proper or (ii) any action or
suit in which the only liability asserted against a director is pursuant to
Section 1701.95 of the Revised Code of Ohio.
Article VII also provides that to the extent that a Bancorp director,
trustee, officer, employee, or agent has been successful on the merits or
otherwise in defense of any action, suit, or proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses, including attorney's fees,
actually and reasonably incurred by him in connection with the action, suit
or proceeding. Any indemnification pursuant to subsections (1) and (2) of
Article VII, unless ordered by a court, shall be made by Bancorp only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (1) and (2) of Article VII. Such determination shall be made
by the directors of Bancorp in the manner set forth in division (E) of
Section 1701.13 of the Revised Code of Ohio.
-119-
<PAGE>
Article Eight of the NCSB Constitution provides that NCSB shall indemnify
or agree to indemnify any person who was or is a party or is threatened to be
made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other
than an action by or in the right of NCSB, by reason of the fact that he is
or was a director or officer of NCSB, or is or was serving at the request of
NCSB as a director, trustee, officer, employee or agent of another
corporation, domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust or other enterprise, against expenses, including attorney's
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of NCSB and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of NCSB and, with respect to any criminal
action or proceeding, he had reasonable cause to believe that his conduct was
unlawful.
Article Eight further provides that NCSB shall indemnify or agree to
indemnify any person who was or is a party or is threatened to be made a
party, to any threatened, pending or completed action or suit by or in the
right of NCSB to procure a judgment in its favor by reason of the fact that
he is or was a director or officer of NCSB or is or was serving at the
request of NCSB, as a director, trustee, officer, employee or agent of
another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of NCSB, except that no indemnification shall be made
in respect of any of the following: (i) any claim, issue or matter as to
which such person is adjudged to be liable for negligence or misconduct in
the performance of his duty to NCSB unless, and only to the extent that, the
court of Common Pleas of Hamilton County, Ohio, or the court in which such
action or suit was brought determines upon application that, despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
as the Court of Common Pleas of Hamilton County, Ohio, or such other court
shall deem proper, or (ii) any action or suit in which the only liability
asserted against a director is pursuant to 1701.95 of the Ohio Revised Code.
Any indemnification not precluded by the NCSB Constitution will be made
by NCSB only upon a determination that the indemnified person has met the
applicable standard of conduct. Such determination may be made only (a) by a
majority vote of a quorum consisting of directors of NCSB who were not and
are not parties to or threatened with any such action, suit or proceeding,
(b) if such a quorum is not obtainable or if a majority of a quorum of
disinterested directors so directs, in a written opinion by independent legal
-120-
<PAGE>
counsel, (c) by the shareholders, or (d) by the court, if any, in which such
action was brought. Expenses incurred in defending any action, suit or
proceeding will be paid by NCSB in advance upon receipt of an undertaking by
or on behalf of the director to (i) repay such amount if it is proved by
clear and convincing evidence in court that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause injury
to NCSB or undertaken with reckless disregard for the best interests of NCSB
and (ii) reasonably cooperate with NCSB concerning the action, suit or
proceeding.
The NCSB Constitution states that the indemnification provided thereby is
not exclusive, and shall be in addition to, any other rights to which any
person seeking indemnification may be entitled. Additionally, the NCSB
Constitution provides that NCSB may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of NCSB,
or who is or was serving another entity at the request of NCSB, against any
liability asserted against him or her and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not Bancorp
would have the obligation or power to indemnify him or her under the NCSB
Constitution.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have included in the proxy
materials of NCSB relating to the next annual meeting of shareholders if the
Merger is not consummated, should be sent to NCSB by certified mail and must
be received by NCSB not later than January 5, 1998.
LEGAL OPINIONS
The legality of the Bancorp Common Shares to be issued in the Merger,
certain federal income tax consequences of the Merger and certain other legal
matters relating to the Merger are being passed upon by Elias, Matz, Tiernan
& Herrick L.L.P., special counsel to Bancorp.
EXPERTS
The consolidated financial statements of Bancorp at September 30, 1997
and 1996, and for each of the three years in the period ended September 30,
1997, incorporated by reference in the Proxy Statement which is referred to
and made a part of this Prospectus and Registration Statement, have been
audited by Grant Thornton LLP, independent auditors, as set forth in their
reports thereon incorporated by reference herein, and are included in
reliance upon such reports given upon the authority of such firms as experts
in accounting and auditing.
-121-
<PAGE>
The consolidated financial statements of NCSB as of December 31, 1996 and
1995, and for the years ended December 31, 1996, 1995 and 1994 have been
included in this Proxy Statement/Prospectus in reliance upon the report of
Grant Thornton LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
-122-
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................................................... F-2
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (As of September 30, 1997 (unaudited) and December 31, 1996
and 1995).............................................................................................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS (For the nine months ended September 30, 1997 and 1996 (unaudited)
and the years ended December 31, 1996, 1995 and 1994).................................................. F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (For the nine months ended September 30, 1997 (unaudited)
and the years ended December 31, 1996, 1995 and 1994).................................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS (For the nine months ended September 30, 1997 and 1996 (unaudited)
and the years ended December 31, 1996, 1995 and 1994).................................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (For the nine months ended September 30, 1997 (unaudited) and
the years ended December 31, 1996, 1995 and 1994)...................................................... F-8
</TABLE>
SCHEDULES: All schedules are omitted as the required information is either
not applicable or is included in the accompanying financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
North Cincinnati Savings Bank
We have audited the accompanying consolidated statements of financial
condition of the North Cincinnati Savings Bank as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years ended December 31, 1996, 1995 and
1994. These consolidated financial statements are the responsibility of the
Savings Bank's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of North
Cincinnati Savings Bank as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the years ended
December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton L.L.P.
Cincinnati, Ohio
February 11, 1997
F-2
<PAGE>
NORTH CINCINNATI SAVINGS BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
ASSETS 1997 1996 1995
- --------------------------------------------------------------------------------- ------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash and due from banks.......................................................... $ 455 $ 478 $ 541
Interest-bearing deposits in other financial institutions........................ 973 2,488 1,305
------------- --------- ---------
Total cash and cash equivalents.................................................. 1,428 2,966 1,846
Investment securities--at amortized cost, approximate market value of $1,000
(unaudited), $2,000 and $3,012 at September 30, 1997 and December 31, 1996 and
1995........................................................................... 999 1,999 3,004
Investment securities available for sale--at market.............................. 2,332 2,318 3,170
Mortgage-backed securities--at cost, approximate market value of $709
(unaudited), $524 and $17 at September 30, 1997 and December 31, 1996 and 1995 704 520 17
Mortgage-backed and related securities available for sale -at market............. 11,714 13,643 8,417
Loans receivable--net............................................................ 41,757 38,356 37,400
Office premises and equipment--net............................................... 523 559 624
Federal Home Loan Bank stock--at cost............................................ 499 473 442
Accrued interest receivable...................................................... 371 367 353
Prepaid expenses and other assets................................................ 258 182 503
------------- --------- ---------
Total assets..................................................................... $ 60,585 $ 61,383 $ 55,776
------------- --------- ---------
------------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits......................................................................... $ 50,126 $ 49,361 $ 52,713
Advances from the Federal Home Loan Bank......................................... 4,390 5,998 --
Accounts payable on mortgage loans serviced for others........................... 39 44 94
Advances by borrowers for taxes and insurance.................................... 130 233 259
Other liabilities................................................................ 109 186 64
------------- --------- ---------
Total liabilities................................................................ 54,794 55,822 53,130
Commitments...................................................................... -- -- --
Shareholders' equity
Preferred stock--$1.00 par value; authorized 1,000,000 shares, none issued....... -- -- --
Common stock--$1.00 par value; authorized 5,000,000 shares, 396,750 shares issued
and outstanding at September 30, 1997 and December 31, 1996.................... 397 397 --
Additional paid-in capital....................................................... 3,156 3,156 --
Unrealized losses on securities designated as available for sale, net of related
tax effects.................................................................... (553) (591) (218)
Retained earnings................................................................ 2,791 2,599 2,864
------------- --------- ---------
Total shareholders' equity....................................................... 5,791 5,561 2,646
------------- --------- ---------
Total liabilities and shareholders' equity....................................... $ 60,585 $ 61,383 $ 55,776
------------- --------- ---------
------------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
NORTH CINCINNATI SAVINGS BANK
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income
Loans............................................................ $ 2,320 $ 2,219 $ 2,955 $ 2,655 $ 2,098
Mortgage-backed and related securities........................... 656 433 637 820 1,148
Investment securities............................................ 173 271 350 229 160
Interest-bearing deposits and other.............................. 120 125 160 103 65
--------- --------- --------- --------- ---------
Total interest income............................................ 3,269 3,048 4,102 3,807 3,471
Interest expense
Deposits......................................................... 2,009 2,071 2,715 2,573 2,187
Borrowings....................................................... 196 4 71 152 105
--------- --------- --------- --------- ---------
Total interest expense........................................... 2,205 2,075 2,786 2,725 2,292
--------- --------- --------- --------- ---------
Net interest income.............................................. 1,064 973 1,316 1,082 1,179
Other income (loss)
Gain (loss) on sale of mortgage-backed and related securities.... 8 -- -- (270) (470)
Loss on sale of investment securities............................ -- (9) (9) -- --
Gain on sale of mortgage loans................................... -- 21 21 -- --
Other operating.................................................. 46 55 71 57 51
--------- --------- --------- --------- ---------
Total other income (loss)........................................ 54 67 83 (213) (419)
General, administrative and other expense
Employee compensation and benefits............................... 396 450 644 638 661
Occupancy and equipment.......................................... 216 224 295 332 335
Federal deposit insurance premiums............................... 35 407 410 127 115
Franchise taxes.................................................. 58 24 32 32 44
Data processing.................................................. 69 65 86 72 55
Other operating.................................................. 152 141 197 200 184
--------- --------- --------- --------- ---------
Total general, administrative and other expense.................. 926 1,311 1,664 1,401 1,394
--------- --------- --------- --------- ---------
Earnings (loss) before income tax credits........................ 192 (271) (265) (532) (634)
Federal income tax credits
Current.......................................................... -- -- -- (18) (188)
Deferred......................................................... -- -- -- 18 (2)
--------- --------- --------- --------- ---------
Total federal income tax credits................................. -- -- -- -- (190)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS).............................................. $ 192 $ (271) $ (265) $ (532) $ (444)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE........................................ $ .48 $ N/A $ N/A $ N/A $ N/A
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
NORTH CINCINNATI SAVINGS BANK
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1997 (unaudited)
and the years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON SECURITIES
ADDITIONAL DESIGNATED AS
COMMON PAID-IN AVAILABLE RETAINED
STOCK CAPITAL FOR SALE EARNINGS TOTAL
--------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994....................... $ -- $ -- $ (95) $ 3,840 $ 3,745
Net loss for the year ended December 31, 1994.... -- -- -- (444) (444)
Unrealized loss on securities designated as
available for sale............................. -- -- (1,135) -- (1,135)
-------- ----------- ------ ----------- ---------
Balance at December 31, 1994..................... -- -- (1,230) 3,396 2,166
Net loss for the year ended December 31, 1995.... -- -- -- (532) (532)
Recovery of unrealized losses on securities
designated as available for sale............... -- -- 1,012 -- 1,012
-------- ----------- ------ ----------- ---------
Balance at December 31, 1995..................... -- -- (218) 2,864 2,646
Net loss for the year ended December 31, 1996.... -- -- -- (265) (265)
Net proceeds from issuance of common stock....... 397 3,156 -- -- 3,553
Unrealized loss on securities designated as
available for sale............................. -- -- (373) -- (373)
-------- ----------- ------ ----------- ---------
Balance at December 31, 1996..................... 397 3,156 (591) 2,599 5,561
Net earnings for the nine months ended September
30, 1997 (unaudited)........................... -- -- -- 192 192
Recovery of unrealized losses on securities
designated as available for sale (unaudited)... -- -- 38 -- 38
-------- ----------- ------ ----------- ---------
Balance at September 30, 1997, (unaudited)....... $397 $ 3,156 $ (553) $ 2,791 $ 5,791
-------- ----------- ------ ----------- ---------
-------- ----------- ------ ----------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
NORTH CINCINNATI SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) for the period................................... $ 192 $ (271) $ (265) $ (532) $ (444)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Amortization of premiums on investments and mortgage-backed and
related securities................................................. 8 16 26 10 94
Amortization of deferred loan origination fees....................... (15) (21) (25) (23) (23)
Depreciation and amortization........................................ 58 61 80 90 80
Gain on sale of mortgage loans....................................... -- (21) (4) -- --
(Gain) loss on sale of mortgage-backed and related securities........ (8) -- -- 270 470
Loss on sale of investment securities................................ -- 9 9 -- --
Loans originated for sale in the secondary market.................... -- (1,732) (1,749) -- --
Proceeds from sale of mortgage loans in the secondary market......... -- 1,753 1,753 -- --
Federal Home Loan Bank stock dividends............................... (26) (23) (32) (29) (23)
Amortization of deferred premiums on loans sold...................... -- -- 2 2 12
Increase (decrease) in cash due to changes in:
Accrued interest receivable.......................................... (4) 6 (15) (81) 41
Prepaid expenses and other assets.................................... (76) (417) 321 (151) (144)
Accounts payable on mortgage loans serviced for others............... (5) 1,023 (50) 34 (17)
Other liabilities.................................................... (77) 20 122 (58) 18
--------- --------- --------- --------- ----------
Net cash provided by (used in) operating activities.................. 47 403 173 (466) 64
Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed and related securities designated as
available for sale................................................. (5,117) (1,030) (6,247) -- (2,484)
Purchase of mortgage-backed and related securities designated as held
to maturity........................................................ (261) (575) (575) -- --
Principal repayments on mortgage-backed and related securities
designated as available for sale................................... 614 316 596 502 5,286
Principal repayments on mortgage-backed and related securities
designated as held to maturity..................................... 77 47 72 6 9
Proceeds from sale of mortgage-backed and related securities
designated as available for sale................................... 6,456 -- -- 6,684 7,211
Purchase of investment securities designated as available for sale... -- (1,245) (1,245) -- --
Proceeds from sale of investment securities designated as available
for sale........................................................... -- 491 491 -- --
Proceeds from maturity of investment securities designated as
available for sale................................................. -- 1,600 1,600 -- --
Purchase of investment securities designated as held to maturity..... -- -- -- (3,504) --
Proceeds from maturity of investment securities designated as held to
maturity........................................................... 1,000 500 1,000 500 --
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loan principal repayments............................................ 3,095 4,218 6,561 2,940 2,855
Loan disbursements................................................... (6,481) (5,738) (7,464) (8,389) (12,721)
Purchase of office premises and equipment............................ (22) (12) (15) (28) (99)
--------- --------- --------- --------- ----------
Net cash provided by (used in) investing activities.................. (639) (1,428) (5,226) (1,289) 57
--------- --------- --------- --------- ----------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward)......................................... (592) (1,025) (5,053) (1,755) 121
--------- --------- --------- --------- ----------
</TABLE>
<PAGE>
NORTH CINCINNATI SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating and investing
activities (subtotal brought forward).................... $ (592) $ (1,025) $ (5,053) $ (1,755) $ 121
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits........................ 765 (3,002) (3,352) 3,572 (1,150)
Proceeds from Federal Home Loan Bank advances.............. 3,490 1,007 6,498 10,400 13,600
Repayment of Federal Home Loan Bank advances............... (5,098) -- (500) (11,500) (12,500)
Advances by borrowers for taxes and insurance.............. (103) (121) (26) 9 43
Net proceeds from issuance of common stock................. -- 3,553 3,553 -- --
--------- --------- --------- --------- ----------
Net cash provided by (used in) financing activities........ (946) 1,437 6,173 2,481 (7)
--------- --------- --------- --------- ----------
Net increase (decrease) in cash and cash equivalents....... (1,538) 412 1,120 726 114
Cash and cash equivalents at beginning of period........... 2,966 1,846 1,846 1,120 1,006
--------- --------- --------- --------- ----------
Cash and cash equivalents at end of period................. $ 1,428 $ 2,258 $ 2,966 $ 1,846 $ 1,120
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes....................................... $ -- $ -- $ -- $ 11 $ --
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Interest on deposits and borrowings........................ $ 2,217 $ 2,087 $ 2,769 $ 2,744 $ 2,283
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Supplemental disclosure of noncash investing activities:
Transfer of investment and mortgage-backed and related
securities to an available for sale classification....... $ -- $ -- $ -- $ 3,170 $ --
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Unrealized (losses) recoveries on securities designated as
available for sale....................................... $ (38) $ (561) $ (373) $ 1,012 $ (1,135)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Recognition of mortgage servicing rights in accordance with
SFAS No. 122............................................. $ -- $ 17 $ 17 $ -- $ --
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In April 1995, the Savings Bank's Board of Directors adopted a plan of
conversion (the Plan) whereby the Savings Bank would convert to the stock
form of ownership. Pursuant to the Plan, as amended, the Savings Bank
offered for sale up to 396,750 common shares to its depositors and
members of the community. The offering was completed in April 1996,
whereby the Savings Bank issued 396,750 common shares which, after
consideration of expenses totaling approximately $400,000, resulted in
net capital proceeds of $3.6 million.
North Cincinnati Savings Bank (the "Savings Bank") 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 primarily residential and consumer purposes. The
Savings Bank'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 Savings Bank can be
significantly influenced by a number of competitive 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 financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of 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 Savings
Bank and its wholly-owned subsidiary, North Cincinnati Service
Corporation (the "Service Corporation"). During 1989, the Service
Corporation sold its remaining interest in real estate held for
development and, subsequent to the sale, the preponderance of the Service
Corporation's remaining assets were distributed to the Savings Bank. The
Service Corporation continues to retain its corporate charter, however,
it was inactive during the nine months ended September 30, 1997 and the
years ended December 31, 1996, 1995 and 1994 and, at September 30, 1997
and December 31, 1996, was capitalized on a nominal basis. All
intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.
F-8
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED SECURITIES HELD
TO MATURITY
The Savings Bank accounts for investment and mortgage-backed and related
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115.
Pursuant to the provisions of SFAS No. 115, investment securities and
mortgage-backed and related securities which the Savings Bank has the
positive intent and ability to hold to maturity, are designated as
held-to-maturity securities. Such securities may be sold or transferred to
the available-for-sale classification only as a result of isolated,
nonrecurring, or unusual changes in circumstances which the Savings Bank
could not have reasonably anticipated, such as a change in statutory or
regulatory requirements regarding investment limitations, or a
significant deterioration in a security issuer's credit-worthiness.
Investment securities and mortgage-backed and related securities held to
maturity are carried at amortized cost.
3. INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED SECURITIES
AVAILABLE FOR SALE
In accordance with SFAS No. 115, investment securities and
mortgage-backed and related securities available for sale are carried at
fair value (market value), inclusive of unrealized gains and/or losses,
and net of discount accretion and premium amortization computed using the
level yield method. Aggregated unrealized gains and losses are reflected
as a separate component of shareholders' equity, net of applicable tax
effects. Realized gains and losses on sale of securities are recognized
using the specific identification method.
Subsequent to the adoption of SFAS No. 115, investment securities and
mortgage-backed and related securities portfolios are designated as
available for sale at the time of purchase. During 1995, management
decided to sell the preponderance of U.S. Government agency guaranteed
mortgage-backed securities. Accordingly, the $270,000 loss with respect
to such securities was charged to operations in the year ended December
31, 1995.
In December 1995, pursuant to the Financial Accounting Standards Board
(the "FASB") Implementation Guide on SFAS No. 115, the Savings Bank
elected to transfer $3.2 million of investment securities previously
identified as held to maturity, to an available for sale classification.
The Savings Bank recorded an unrealized loss of $34,000 at the date of
transfer which, after consideration of applicable tax effects, reduced
retained earnings by $22,000 at that date.
At September 30, 1997 and December 31, 1996 and 1995, the Savings Bank's
shareholders' equity reflected net unrealized losses on securities
designated as available for sale totaling $553,000, $591,000 and
$218,000, respectively.
F-9
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan
losses, and premiums and discounts on loans purchased and sold. Premiums
and discounts on loans purchased and sold are amortized and accreted to
operations using the interest method over the average 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.
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, all origination fees
received from loans, net of certain direct origination costs, are
deferred and amortized to interest income using the level-yield method,
giving effect to actual loan prepayments. Additionally, SFAS No. 91
generally limits the definition of loan origination costs to the direct
costs attributable to originating a loan, i.e., principally actual
personnel costs.
5. MORTGAGE-BANKING ACTIVITIES
From time to time, the Savings Bank conducts mortgage banking operations
via the sale of certain loans or participating interests in loans in
order to generate servicing income and to provide additional funds for
lending. Loans held for sale are identified at the point of origination
and carried at the lower of cost or market, determined in the aggregate.
In computing cost, deferred loan origination fees are deducted from the
principal balances of the related loans. The Savings Bank had not
identified any loans as being held for sale at September 30, 1997 or at
December 31, 1996 or 1995.
The Savings Bank retains the servicing on loans sold and agrees to remit
to the investor loan principal and interest at agreed-upon rates. These
rates can differ from the loan's contractual interest rate resulting in a
"yield differential". In addition to previously deferred loan origination
fees and cash gains, gains on sale of loans can represent the present
value of the future yield differential less a normal servicing fee,
capitalized over the estimated life of the loans sold. Normal servicing
fees are determined by reference to the stipulated minimum servicing fee
set forth by the government agency loan sale agreement. The resulting
capitalized excess servicing fee is amortized to operations over the life
of the loans using the interest method. If prepayments are higher than
expected, an immediate charge to operations is made. If prepayments are
lower, the related adjustments are made prospectively.
F-10
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. MORTGAGE-BANKING ACTIVITIES (CONTINUED)
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that the Savings Bank 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 securitization 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 effective for fiscal years beginning after December 15,
1995, (January 1, 1996, as to the Savings Bank) 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. Management adopted SFAS
No. 122 as of January 1, 1996, as required, without material effect on
the Savings Bank's consolidated financial condition or results of
operations.
At September 30, 1997 and December 31, 1996 and 1995, unamortized
deferred excess servicing fees totaled approximately $23,000, $26,000 and
$13,000, respectively. Amortization of mortgage servicing rights
totaled $3,000 and $1,000 for the nine months ended September 30, 1997
and 1996, and $5,000, $2,000 and $12,000 during the years ended December
31, 1996, 1995, and 1994, respectively.
6. ALLOWANCE FOR LOAN LOSSES
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, current trends
in the level of delinquent and problem loans, loan concentrations to
single borrowers, changes in the composition of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. When the collection of a
loan becomes doubtful, or otherwise troubled, the Savings Bank records a
loan loss provision equal to the difference between the fair value of the
property securing the loan and the loan's carrying value. In providing
valuation allowances, costs of holding real estate, including the cost of
capital, are considered. 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 May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114 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 loans observable market price or fair value of the collateral. The
Savings Bank adopted the Statement effective January 1, 1995, without
material effect on consolidated financial condition or results of
operations.
F-11
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
6. ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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 multi-family and nonresidential loans, and
its evaluation of impairment thereof, such loans are collateral dependent
and, as a result, are carried as a practical expedient at the lower of
cost or fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
At September 30, 1997 and December 31, 1996 and 1995, the Savings Bank
had no loans that would be defined as impaired under SFAS No. 114.
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. A loan charge-off is
recorded for any writedown in the loan's carrying value to fair value at
the date of acquisition. Loss provisions are recorded if the properties'
fair value subsequently declines below the value determined at the
recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property
are considered. Costs relating to holding real estate acquired through
foreclosure, net of rental income, are charged against earnings as
incurred.
8. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include
expenditures which extend the useful lives of existing assets.
Maintenance, repairs and minor renewals are expensed as incurred. For
financial reporting, depreciation and amortization are provided on the
straight-line method over the useful lives of the assets, estimated to be
thirty-five to fifty years for buildings, five to forty-four years for
building and leasehold improvements, and three to fifteen years for
furniture and equipment. An accelerated depreciation method is used for
tax reporting purposes.
F-12
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
9. FEDERAL INCOME TAXES
The Savings Bank 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 Savings Bank'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
expected statutory tax rates to net taxable or deductible differences
between the tax basis of an asset or liability and its reported amount in
the financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax assets are recorded only to the
extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings,
carried back against prior years' earnings, offset against taxable
temporary differences reversing in future periods, or utilized to the
extent of management's estimate of future taxable income. A valuation
allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
Deferral of federal income taxes results primarily from different methods
of accounting for deferred loan origination fees, Federal Home Loan Bank
stock dividends and the general loan loss allowance. Additionally, a
temporary difference is recognized for depreciation utilizing accelerated
methods for federal income tax purposes.
10. PENSION PLAN
The Savings Bank provided retirement benefits through a defined benefit
pension plan to all employees who have attained the age of 21 and
completed one year of service. This plan was terminated in 1995 upon
receipt of all required regulatory approvals. It was the Savings Bank's
policy to fund pension costs accrued up through the date of termination.
The provision for pension expense totaled $3,000 and $42,000 for the
years ended December 31, 1995 and 1994, respectively. These amounts
reflect the expense computed by the Savings Bank's actuaries utilizing
the entry age normal method and implicitly assuming a 6% rate of return
on plan assets. The Savings Bank has not provided the disclosure relative
to SFAS No. 87 based on materiality.
The Savings Bank implemented a 401(k)/Profit Sharing Plan in January 1995
to provide retirement benefits to employees who have attained the age of
21 and completed one year of service. Expense recognized under the 401(k)
plan totaled approximately $5,000 and $12,000 for the nine month periods
ended September 30, 1997 and 1996, and $16,000 and $14,000 for the years
ended December 31, 1996 and 1995, respectively.
F-13
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks and interest-bearing deposits due from other
financial institutions with original terms to maturity of less than
ninety days.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of 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 Savings Bank in
estimating its fair value disclosures for financial instruments at
December 31, 1996 and 1995:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statement of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES: For
investment and mortgage-backed and related securities, fair
value is deemed to equal the quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four
family residential, multi-family residential and nonresidential real
estate. These loan categories were further delineated into fixed-rate
and adjustable-rate loans. The fair values for the resultant loan
categories were computed via discounted cash flow analysis, using
current interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit accounts,
and consumer and other loans, fair values were deemed to equal the
historic carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
F-14
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
consolidated statement of financial condition is deemed to
approximate fair value.
DEPOSITS: The fair value of demand deposits, passbook and money market
accounts, and advances by borrowers for taxes and insurance are
deemed to approximate the amount payable on demand at December 31,
1996 and 1995. Fair values for fixed-rate certificates of deposit
have been estimated using a discounted cash flow calculation using
the interest rates currently offered for deposits of similar
remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK: The fair value of advances
from the Federal Home Loan Bank is estimated using the rates currently
offered for similar advances of similar remaining maturities or,
when available, quoted market prices.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference
between current levels of interest rates and committed rates. At
December 31, 1996 and 1995, the difference between the fair value
and notional amount of outstanding loan commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Savings Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents......................... $2,966 $2,966 $1,846 $1,846
Investment securities--at cost.................... 1,999 2,000 3,004 3,012
Investment securities designated as available for
sale............................................ 2,318 2,318 3,170 3,170
Mortgage-backed securities--at cost............... 520 524 17 17
Mortgage-backed securities designated as available
for sale........................................ 13,643 13,643 8,417 8,417
Loans receivable--net............................. 38,356 37,269 37,400 37,646
Federal Home Loan Bank stock...................... 473 473 442 442
------- ------- ------- -------
$60,275 $59,193 $54,296 $54,550
------- ------- ------- -------
------- ------- ------- -------
Financial liabilities
Deposits.......................................... $49,361 $49,416 $52,713 $52,868
Advances from the Federal Home Loan Bank.......... 5,998 5,994 -- --
Advances by borrowers for taxes and insurance..... 277 277 353 353
------- ------- ------- -------
$55,636 $55,687 $53,066 $53,221
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
F-15
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
13. EARNINGS PER SHARE
Earnings per share for the nine month period ended September 30, 1997 is
computed based upon 396,750 weighted-average shares outstanding.
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share" are not applicable to the nine month period ended September 30,
1996, and the years ended December 31, 1996, 1995 and 1994, as the
Savings Bank completed its conversion from mutual to stock form in April
1996.
14. BASIS OF PRESENTATION
The financial statements as of September 30, 1997, and for the nine
months ended September 30, 1997 and 1996, are unaudited. In the opinion
of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of financial position and
results of operations have been made. The results of operations for the
nine months ended September 30, 1997 and 1996, are not necessarily
indicative of annualized results which may be expected for an entire
fiscal year.
15. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
NOTE B--INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES
Amortized cost and approximate market values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------- -------------------------------------------------
1997 1996 1995
---------------------- --------------------- --------------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government agency obligations
Due in three to five years........... $ -- $ -- $ -- $ -- $ 500 $ 501
Due in five to ten years............. 999 1,000 999 996 1,498 1,501
Due in ten to twenty years........... -- -- 1,000 1,004 1,006 1,010
----------- --------- ----------- --------- ----------- --------
999 1,000 1,999 2,000 3,004 3,012
Available for sale:
U.S. Government agency obligations
Due in one to three years........... 1,100 1,100 1,100 1,092 3,205 3,170
Due in five to ten years............ 747 741 747 739 -- --
Due in ten to twenty years.......... 499 491 499 487 -- --
----------- --------- ----------- --------- ----------- --------
2,346 2,332 2,346 2,318 3,205 3,170
----------- --------- ----------- --------- ----------- --------
$ 3,345 $ 3,332 $ 4,345 $ 4,318 $ 6,209 $ 6,182
----------- --------- ----------- --------- ----------- --------
----------- --------- ----------- --------- ----------- --------
</TABLE>
F-16
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE B--INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES (CONTINUED)
At September 30, 1997, the amortized cost of the Savings Bank's investment
securities in excess of fair value, totaling $13,000, was comprised of
unrealized losses totaling $15,000 and unrealized gains totaling $2,000.
At December 31, 1996, the amortized cost of the Savings Bank's investment
securities in excess of fair value, totaling $27,000, was comprised of
unrealized losses totaling $31,000 and unrealized gains totaling $4,000.
At December 31, 1995, the amortized cost of the Savings Bank's investment
securities in excess of fair value, totaling $27,000, was comprised of
unrealized losses totaling $35,000 and unrealized gains totaling $8,000.
Proceeds from sales of investment securities designated as available for
sale during December 31, 1996 totaled $491,000, resulting in realized
losses totaling $9,000 during 1996.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed and related securities available
for sale at September 30, 1997 and December 31, 1996 and 1995 are shown
below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- --------- ---------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Collateralized mortgage obligations............................. $ 8,694 $ -- $ 668 $ 8,026
Government National Mortgage Association
participation certificates.................................... 3,683 5 -- 3,688
---------- ---------- ---------- ----------
$ 12,377 $ 5 $ 668 $ 11,714
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Collateralized mortgage obligations................................ $ 8,694 $ -- $ 691 $ 8,003
Government National Mortgage
Association participation certificates........................... 5,096 15 5 5,106
Federal National Mortgage Association
participation certificates....................................... 540 -- 6 534
---------- ---------- ---------- ----------
$ 14,330 $ 15 $ 702 $ 13,643
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-17
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE B--INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations................................ $ 8,695 $ -- $ 278 $ 8,417
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities held to maturity at
September 30, 1997 and December 31, 1996 and 1995 are shown below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (UNAUDITED)
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Government National
Mortgage Association participation certificates.................... $ 459 $ -- $ 1 $ 458
Federal National Mortgage
Association participation certificates............................. 245 6 -- 251
--------- --------- --------- ---------
$ 704 $ 6 $ 1 $ 709
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- --------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Government National
Mortgage Association participation certificates.................... $ 520 $ 4 $ -- $ 524
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Government National Mortgage Association participation
certificates..................................................... $ 17 $ -- $ -- $ 17
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
F-18
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE B--INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES (CONTINUED)
The amortized cost of mortgage-backed and related securities, including
those designated as held to maturity at December 31, 1996, by contractual
terms to maturity are shown below. Actual maturities will differ from
contractual maturities because borrowers may generally prepay obligations
without prepayment penalties. Also, the timing of cash flows will be
affected by management's intent to sell securities designated as available
for sale under certain economic conditions.
<TABLE>
<CAPTION>
AMORTIZED COST
---------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Due within five years.............................................................. $ 1,192 $ 1,277
Due from five to twenty years...................................................... 6,827 7,154
Due after twenty years............................................................. 5,062 6,419
------------- ------------
$ 13,081 $ 14,850
------------- ------------
------------- ------------
</TABLE>
Proceeds from sales of mortgage-backed and related securities designated as
available for sale during the nine months ended September 30, 1997 and the
years ended December 31, 1995 and 1994 totaled $6.5 million, $6.7 million
and $7.2 million, respectively. The sale of mortgage-backed and related
securities resulted in a net realized gain of $8,000 and net realized losses
of $270,000 and $470,000 during the respective periods.
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION> DECEMBER 31,
SEPTEMBER 30, -----------------------
1997 1996 1995
------------- ------------ ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Residential real estate--one-to-four family........................ $ 37,793 $ 35,561 $ 36,406
Residential real estate--multi-family.............................. 920 469 233
Nonresidential real estate......................................... 3,055 2,911 864
Consumer and other................................................. 648 275 83
------------- ------------ ---------
42,416 39,216 37,586
Less:
Undisbursed portion of loans in process.......................... 512 696 --
Deferred loan origination fees................................... 96 113 135
Allowance for loan losses........................................ 51 51 51
------------- ------------ ---------
$ 41,757 $ 38,356 $ 37,400
------------- ------------ ---------
------------- ------------ ---------
</TABLE>
F-19
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE C--LOANS RECEIVABLE (CONTINUED)
The Savings Bank's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately $37.1
million, or 91%, of the total loan portfolio at September 30, 1997, $34.7
million, or 90%, of the total loan portfolio at December 31, 1996, and
$36.2 million, or 97%, of the total loan portfolio at December 31, 1995.
Historically, such loans have been underwritten with cash down payments
sufficient to provide 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 residential real estate
values could deteriorate in its primary lending area of southwestern
Ohio, thereby impairing collateral values. However, management is of the
belief that real estate values in the Savings Bank's primary lending area
are presently stable.
As stated previously, the Savings Bank has sold whole loans and
participating interests in loans in the secondary market, retaining
servicing on the loans sold. Loans sold and serviced for others totaled
approximately $6.8 million, $7.7 million and $7.0 million at September
30, 1997, December 31, 1996 and 1995.
In the ordinary course of business, the Savings Bank has granted loans to
some of the officers, directors, employees and their related interests.
Related party loans are made on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of these loans
was approximately $355,000, $402,000 and $335,000 at September 30, 1997
and December 31, 1996 and 1995, respectively.
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -------------------------------
1997 1996 1996 1995 1994
----- ----- ----- ----- -----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................. $ 51 $ 51 $ 51 $ 51 $ 51
Provision for losses on loans................. -- -- -- -- --
--- --- --- --- ---
Balance at end of year........................ $ 51 $ 51 $ 51 $ 51 $ 51
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
At September 30, 1997 and December 31, 1996, the Savings Bank's allowance
for loan losses was considered general in nature, which is includible as
a component of regulatory risk-based capital.
The Savings Bank had nonperforming loans totaling $151,000 at September
30, 1997, and had no nonperforming loans at December 31, 1996, 1995 and
1994. The Savings Bank realized no loss of interest income on
nonperforming loans during the nine months ended September 30, 1997 and
1996, and the years ended December 31, 1996, 1995 and 1994.
F-20
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE E--OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 30,
1997 1996 1995
--------------- --------- ---------
<S> <C> <C> <C>
(Unaudited)
(In thousands)
Land and buildings............................................... $ 181 $ 178 $ 178
Leasehold improvements........................................... 570 560 552
Furniture and equipment.......................................... 446 437 430
----- --------- ---------
1,197 1,175 1,160
Less accumulated depreciation and amortization................. 674 616 536
----- --------- ---------
$ 523 $ 559 $ 624
----- --------- ---------
----- --------- ---------
</TABLE>
The Savings Bank leases its main office facility from a local builder
following a transaction whereby the Savings Bank constructed the building and,
upon the builder obtaining permanent financing, the Savings Bank sold the
building at cost of construction. The Savings Bank retained title to constructed
assets that constituted personalty under federal tax laws.
The Savings Bank elected to participate in $500,000 of the builder's total
$1.0 million permanent loan. Such loan is included in the Savings Bank's
nonresidential loans at September 30, 1997, December 31, 1996 and 1995.
The Savings Bank accounts for the lease agreement on the land and building
as an operating lease. The lease provides for minimum annual payments of
approximately $124,000 per annum over the original 12 year term, which commenced
in 1991, with two four year renewal options at cost adjusted market rates
thereafter. Total rental expense under such operating lease was approximately
$93,000 for each of the nine month periods ended September 30, 1997 and 1996,
and $124,000 for each of the years ended December 31, 1996, 1995 and 1994.
The Savings Bank has the right to purchase the land and building at a cost
of approximately $1.23 million at the expiration of the original lease term,
$1.28 million at the end of the first renewal period and $1.3 million at the end
of the second renewal period.
During 1993, the Savings Bank entered into two sublease agreements which
provided for annual rental income of $47,000 for each of the next three years.
Thereafter, one of the sublease agreements provides for a renewal option, while
the other sublease remains in effect through 1999. Total sublease income was
approximately $38,000 and $37,000 for the nine month periods ended September 30,
1997 and 1996, and $50,000, $49,000 and $46,000 during the years ended December
31, 1996, 1995 and 1994, respectively.
F-21
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE F--DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
DEPOSITS BY TYPE 1997 1996 1995
AND WEIGHTED-AVERAGE ---------------- ---------------- ----------------
INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits
1997--2.45%........................... $ 965 1.9
1996--2.48%........................... $ 778 1.6
1995--2.49%........................... $ 865 1.6
Passbook
1997--3.08%........................... 3,707 7.4
1996--3.08%........................... 3,926 7.9
1995--3.08%........................... 3,861 7.3
Daily money market deposit
1997--3.24%........................... 3,583 7.2
1996--3.24%........................... 4,145 8.4
1995--3.68%........................... 4,877 9.3
------- ------- ------- ------- ------- -------
Total demand, passbook and transaction
accounts.............................. 8,255 16.5 8,849 17.9 9,603 18.2
Certificates of deposit
Original maturities of:
6--11 month certificates
1997--5.67%......................... 6,265 12.5
1996--5.20%......................... 2,274 4.7
1995--5.31%......................... 3,694 7.0
91-day certificates
1997--5.03%......................... 552 1.1
1996--4.90%......................... 824 1.7
1995--5.07%......................... 369 .7
12--18 month certificates
1997--5.71%......................... 11,313 22.6
1996--5.51%......................... 11,786 23.9
1995--5.98%......................... 7,715 14.6
18--20 month certificates
1997--6.00%......................... 3,929 7.8
1996--6.07%......................... 9,345 18.9
1995--6.46%......................... 10,442 19.8
24--30 month certificates
1997--5.86%......................... 12,329 24.6
1996--5.76%......................... 8,871 18.0
1995--5.52%......................... 12,851 24.4
3--5 year certificates
1997--5.75%......................... 1,353 2.7
1996--5.27%......................... 1,342 2.7
1995--5.24%......................... 1,790 3.4
Individual retirement
1997--5.81%......................... 6,130 12.2
1996--5.65%......................... 6,070 12.2
1995--5.88%......................... 6,249 11.9
------- ------- ------- ------- ------- -------
Total certificates of deposit......... 41,871 83.5 40,512 82.1 43,110 81.8
------- ------- ------- ------- ------- -------
Total deposits........................ $50,126 100.0 $49,361 100.0 $52,713 100.0
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
F-22
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
At September 30, 1997, December 31, 1996 and 1995, the Savings Bank had
deposit accounts with balances greater than $100,000 totaling $4.5 million, $3.9
million and $4.4 million, respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Passbook................................. $ 90 $ 102 $ 131 $ 120 $ 129
Demand deposits and money
market deposit accounts................ 112 130 167 220 207
Certificates of deposit.................. 1,807 1,839 2,417 2,233 1,851
--------- --------- --------- --------- ---------
$ 2,009 $ 2,071 $ 2,715 $ 2,573 $ 2,187
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996 1995
------------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
Less than one year....................... $ 29,949 $ 26,894 $ 30,630
One year to three years.................. 10,835 11,994 10,911
More than three years.................... 1,087 1,624 1,569
------------- --------- ---------
$ 41,871 $ 40,512 $ 43,110
------------- --------- ---------
------------- --------- ---------
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1997 and December 31, 1996, by pledges of certain residential mortgage loans
totaling $6.6 million and $9.0 million, and the Savings Bank's investment in
Federal Home Loan Bank stock, are summarized as follows:
MATURING YEAR SEPTEMBER 30, DECEMBER 31,
INTEREST RATE ENDING DECEMBER 31, 1997 1996 1997
- -------------- ------------------- --------------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
5.65%--5.90% 1997 $ 750 $ 758 $ --
5.66%--5.91% 1998 3,640 5,240 --
-------- -------- -------
$ 4,390 $ 5,998 $ --
-------- -------- -------
-------- -------- -------
F-23
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE H--FEDERAL INCOME TAXES
The provision for federal income taxes (credits) differs from that computed
at the statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- -------------------------------
1997 1996 1996 1995 1994
----- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal income taxes (credits) at statutory rate........................ $ 65 $ (92) $ (90) $ (181) $ (215)
Valuation allowance relative to deferred tax assets..................... (65) 92 90 181 25
--- --- --------- --------- ---------
Federal income tax provision (credits) per consolidated financial
statements............................................................ $ -- $ -- $ -- $ -- $ (190)
--- --- --------- --------- ---------
--- --- --------- --------- ---------
</TABLE>
The composition of the Savings Bank's net deferred tax asset (liability) is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY SEPTEMBER 30, --------------------
DIFFERENCES AT ESTIMATED CORPORATE TAX RATE: 1997 1996 1995
- ------------------------------------------------------------------------------ ---------------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends........................................ $ (93) $ (84) $ (73)
Percentage of earnings bad debt deduction..................................... (29) (29) (29)
Book/tax depreciation......................................................... (21) (21) (22)
Installment sale.............................................................. (51) (51) (52)
---------- ---------- ----------
Total deferred tax liabilities.............................................. (194) (185) (176)
Deferred tax assets:
Unrealized losses on securities designated as available for sale (net of
valuation allowance of $106,000, $119,000 and $12,000, respectively)...... 124 124 94
Deferred loan origination fees.............................................. 33 40 46
General loan loss allowance................................................. 17 17 17
Other....................................................................... 50 34 19
---------- ---------- ----------
Total deferred tax assets................................................. 224 215 176
---------- ---------- ----------
Net deferred tax asset........................................................ $ 30 $ 30 $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At September 30, 1997, the Savings Bank had approximately $10,000 of financial
statement operating loss carryforwards.
F-24
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE H--FEDERAL INCOME TAXES (continued)
The Savings Bank was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income, or
the amount of qualifying and nonqualifying loans outstanding and subject to
certain limitations based on aggregate loans and savings account balances at the
end of the year. This percentage of earnings bad debt deduction had accumulated
to approximately $660,000 as of September 30, 1997. If the amounts that qualify
as deductions for federal income tax purposes 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. The amount of the unrecognized deferred tax liability relating to the
cumulative bad debt deduction was approximately $195,000 at September 30, 1997
and December 31, 1996. See Note J for additional information regarding future
percentage of earnings bad debt deductions.
NOTE I--COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the 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 and December 31, 1996, the Savings Bank had no
outstanding commitments to originate loans. The Savings Bank had commitments
under unused lines of credit totaling $454,000 and $487,000 at those respective
dates. Management believes that all loan commitments are able to be funded
through cash flow from operations and existing excess liquidity. Fees received
in conjunction with these commitments have not been recognized in earnings.
F-25
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE J--REGULATORY CAPITAL REQUIREMENTS
The Savings Bank is subject to minimum regulatory capital standards
promulgated by The Federal Deposit Insurance Corporation (FDIC). Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the 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.
The FDIC has adopted risk-based capital ratio guidelines to which the
Savings Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings banks are required to maintain a
total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The
FDIC may, however, set higher capital requirements when particular circumstances
warrant. Savings banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings banks that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other savings banks are required to
maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least
100 to 200 basis points.
F-26
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE J--REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
As of September 30, 1997 and December 31, 1996, management believes that the
Savings Bank met all regulatory capital requirements to which it is subject:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(UNAUDITED)
---------------------------------------------------------------------------------------
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------------- ---------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
----------- --------- -------------------------------- -----------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets)... $ 6.395 22.7% greater than or equal to $2,251 greater than or equal to 8.0%
Tier I Capital (to risk-weighted assets).. $ 6,344 22.6% greater than or equal to $1,125 greater than or equal to 4.0%
Tier I Leverage........................... $ 6,344 10.4% greater than or equal to $2,401 greater than or equal to 4.0%
<CAPTION>
SEPTEMBER 30, 1997
(UNAUDITED)
--------------------------------------------------------------------
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
--------------------------------------------------------------------
AMOUNT RATIO
--------------------------------- ------------------------------
<S> <C> <C>
Total capital (to risk-weighted assets)... greater than or equal to $ 2,813 greater than or equal to 10.0%
Tier I Capital (to risk-weighted assets).. greater than or equal to $ 1,688 greater than or equal to 6.0%
Tier I Leverage........................... greater than or equal to $ 3,002 greater than or equal to 5.0%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------------------
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------------- --------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
----------- --------- ------------------------------- -----------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets).. $ 6,203 23.3% greater than or equal to $2,130 greater than or equal to 8.0%
Tier I Capital (to risk-weighted assets). $ 6,152 23.1% greater than or equal to $1,065 greater than or equal to 4.0%
Tier I Leverage.......................... $ 6,152 9.9% greater than or equal to $3,099 greater than or equal to 4.0%
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
--------------------------------------------------------------------
AMOUNT RATIO
--------------------------------- ------------------------------
<S> <C> <C>
Total capital (to risk-weighted assets).. greater than or equal to $ 2,663 greater than or equal to 10.0%
Tier I Capital (to risk-weighted assets). greater than or equal to $ 1,598 greater than or equal to 6.0%
Tier I Leverage.......................... greater than or equal to $ 3,107 greater than or equal to 5.0%
</TABLE>
At September 30, 1997 the Savings Bank met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0% and Tier 1 capital of 5.0%.
The Savings Bank's capital exceeded the minimum required amounts for
classifications as a "well-capitalized" institution by $3.1 million and $4.1
million, respectively.
The deposit accounts of the Savings Bank and of other savings
associations are insured up to certain defined limits 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, no BIF assessments were required for healthy
commercial banks except for a $2,000 minimum fee.
F-27
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE J--REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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 $46.8 million in deposits at March 31, 1995, resulting in a charge to
operations of $304,000 in 1996. The recapitalization legislation will reduce
federal deposit insurance premiums from $.23 per $100 in deposits to $.065 per
$100 in deposits, effective January 1, 1997.
Under other proposed legislation, the Savings Bank would be regulated as a
bank under federal laws which would subject it to the more restrictive activity
limits imposed on national banks. Under separate legislation related to the
recapitalization plan, the Savings Bank is required to recapture approximately
$85,000 of its bad debt reserve as taxable income, 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.
NOTE K--CORPORATE REORGANIZATION TO STOCK FORM
In April 1995, the Savings Bank's Board of Directors adopted a plan of
conversion (the Plan) whereby the Savings Bank would convert to the stock form
of ownership. Pursuant to the Plan, as amended, the Savings Bank offered for
sale up to 396,750 common shares to its depositors and members of the community.
The offering was completed in April 1996, whereby the Savings Bank issued
396,750 common shares which, after consideration of expenses totaling
approximately $400,000, resulted in net capital proceeds of $3.6 million.
At the completion of the conversion to stock form, the Savings Bank
established a liquidation account in the amount of retained earnings contained
in the final offering circular. The liquidation account will be maintained for
the benefit of eligible savings account holders who maintain deposit accounts in
the Savings Bank after conversion.
In the event of a complete liquidation (and only in such event), each
eligible member will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted balance of
deposit accounts held, before any liquidation distribution may be made with
respect to common stock. Except for the repurchase of stock and payment of
dividends by the Savings Bank, the existence of the liquidation account will not
restrict the use or application of such retained earnings.
The Savings Bank may not declare, pay a cash dividend on, or repurchase any
of its common stock, if the effect thereof would cause retained earnings to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for SAIF insured institutions.
F-28
<PAGE>
NORTH CINCINNATI SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE L--PENDING ACQUISITION
In July 1997, the Savings Bank entered into a definitive agreement with
Enterprise Federal Bancorp, Inc., whereby Enterprise has agreed to acquire all
of the outstanding shares of the Savings Bank in a transaction that will be
accounted for using the purchase method of accounting. Consummation of the
pending combination is anticipated in January 1998 following the receipt of
requisite regulatory and stockholder approval.
F-29
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of July 18, 1997
("Agreement"), between Enterprise Federal Bancorp, Inc. ("Bancorp"), an Ohio
corporation and Enterprise Federal Savings Bank (the "Bank), a federally
chartered savings bank and a wholly-owned subsidiary of Bancorp, and North
Cincinnati Savings Bank ("NCSB"), an Ohio chartered savings bank.
WITNESSETH:
WHEREAS, the Boards of Directors of Bancorp, the Bank and NCSB have
determined that it is in the best interests of their respective companies and
their shareholders to consummate the business combination transactions
provided for herein, including the merger of NCSB with and into the Bank
subject to the terms and conditions set forth herein; and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby; and
WHEREAS, as a condition and inducement to the willingness of Bancorp and
the Bank to enter into this Agreement, certain directors and stockholders of
NCSB are concurrently entering into a Stockholder Agreement with Bancorp and
the Bank (the "Stockholder Agreement"), in substantially the form attached
hereto as Appendix A, pursuant to which, among other things, such
stockholders agree to vote their shares of NCSB Common Stock (as defined
below) in favor of this Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.01. The Merger. Subject to the terms and conditions of this
Agreement and the Agreement of Merger, dated as of the date hereof, between
the Bank and NCSB, a copy of which is attached hereto as Appendix B, at the
Effective Time (as defined in Section 1.02 hereof), NCSB shall be merged with
and into the Bank in accordance with Title 11, Chapter 1161 and Title 17,
Chapter 1701 of the Ohio Revised Code ("ORC") and 12 C.F.R. Section 563.22
(the "Merger"), with the Bank as the surviving corporation (hereinafter
sometimes called the "Surviving Corporation"). Each share of common stock,
par value $1.00 per share, of NCSB ("NCSB Common Stock") outstanding
immediately prior to the Effective
<PAGE>
Time (other than shares as to which dissenters' rights have been asserted and
duly perfected in accordance with Ohio law (the "NCSB Dissenting Shares") and
shares held by NCSB (including treasury shares) or Bancorp or any of their
respective wholly-owned subsidiaries) shall, by virtue of the Merger and
without any further action by the holder thereof, be converted into and
represent the right to receive either shares of common stock, par value $.01
per share, of Bancorp ("Bancorp Common Stock"), $18.50 in cash or a
combination thereof ("Merger Consideration"), as provided in Section 1.03
hereof and subject to the terms, conditions, limitations and procedures set
forth in this Agreement and the Agreement of Merger.
1.02. Effective Time. The Merger shall become effective upon the
occurrence of the filing of Articles of Combination with the Office of Thrift
Supervision ("OTS") and a Certificate of Merger with the Secretary of State
of Ohio, unless a later date and time is specified as the effective time in
such Articles of Combination and Certificate of Merger ("Effective Time"). A
closing (the "Closing") shall take place immediately prior to the Effective
Time at 10:00 a.m., on the fifth business day following the receipt of all
necessary regulatory or governmental approvals and consents and the
expiration of all statutory waiting periods in respect thereof and the
satisfaction or waiver, to the extent permitted hereunder, of the conditions
to the consummation of the Merger specified in Article V of this Agreement
(other than the delivery of certificates, opinions and other instruments and
documents to be delivered at the Closing), at the offices of Bancorp in West
Chester, Ohio or at such other place, at such other time, or on such other
date as the parties may mutually agree upon. At the Closing, there shall be
delivered to Bancorp, the Bank and NCSB the opinions, certificates and other
documents required to be delivered under Article V hereof.
1.03. Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of a holder of shares of NCSB
Common Stock:
(a) Each share of Bancorp Common Stock that is issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding
and shall be unchanged by the Merger.
(b) All shares of NCSB Common Stock owned by NCSB (including treasury
shares) or Bancorp or any of their respective wholly-owned subsidiaries shall
be cancelled and retired and shall not represent capital stock of the
Surviving Corporation and shall not be exchanged for shares of Bancorp Common
Stock, cash or other consideration.
(c) (1) Subject to Sections 1.05, 1.07 and 1.08 hereof each share of
NCSB Common Stock issued and outstanding at the Effective Time (other than
shares to be cancelled in accordance with Section 1.03(b) or NCSB Dissenting
Shares) shall be converted into, and shall be cancelled in exchange for, the
right to receive, at the election of the holder thereof:
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(i) the number of shares of Bancorp Common Stock which is equal to
(the "Exchange Ratio") (A) if the Average Share Price (as defined below) is
equal to or less than $22.00 but equal to or greater than $15.00, the
quotient, rounded to four decimal places, determined by dividing (x) $18.50
by (y) the Average Share Price, (B) if the Average Share Price is less
than $15.00, 1.2333 shares or (C) if the Average Share Price is greater
than $22.00, 0.8409 shares (the "Per Share Stock Consideration"), or
(ii) a cash amount equal to $18.50 per share of NCSB Common Stock
(the "Per Share Cash Consideration").
(2) For purposes of this Agreement the "Average Share Price" shall
mean the daily average of the high bid and low asked price per share of
Bancorp Common Stock, as reported on the Nasdaq Stock Market's National
Market (as reported by an authoritative source), as of the close of trading
for each of the 20 trading days ending at the close of business on the
business day immediately preceding the Effective Time.
1.04 Election and Exchange Procedures
(a) Bancorp shall designate an exchange agent to act as agent (the
"Exchange Agent") for purposes of conducting the election procedure and the
exchange procedure as described in this section and Section 1.05. No later
than three business days following the Effective Time, Bancorp shall cause
the Exchange Agent to mail or make available to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented issued and outstanding shares of NCSB Common Stock (i) a notice
and letter of transmittal (which shall specify that delivery shall be
effected and risk of loss and title to the certificates theretofore
representing shares of NCSB Common Stock shall pass only upon proper delivery
of such certificates to the Exchange Agent) advising such holder of the
effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent such certificate or certificates which immediately prior to
the Effective Time represented issued and outstanding shares of NCSB Common
Stock in exchange for the consideration set forth in Section 1.03(c) hereof
deliverable in respect thereof pursuant to this Agreement and (ii) an
election form in such form as Bancorp and NCSB shall mutually agree
("Election Form"). Each Election Form shall permit the holder (or in the
case of nominee record holders, the beneficial owner through proper
instructions and documentation) (i) to elect to receive the Per Share Stock
Consideration (a "Stock Election") with respect to all such holder's NCSB
Common Stock as hereinabove provided (the "Stock Election Shares"), (ii) to
elect to receive the Per Share Cash Consideration (a "Cash Election") with
respect to all such holder's NCSB Common Stock as hereinabove provided (the
"Cash Election Shares"), or (iii) to indicate that such holder makes no such
election with respect to such holder's shares of NCSB Common Stock (the
"No-Election Shares"). Any shares of NCSB Common Stock with respect to which
the holder thereof shall not, as of the Election Deadline (as hereinafter
defined), have made such an election
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by submission to the Exchange Agent of an effective, properly completed
Election Form shall be deemed to be No-Election Shares. Any NCSB Dissenting
Shares shall be deemed to be Cash Election Shares.
(b) The term "Election Deadline," as used below, shall mean 5:00 p.m.,
Eastern Time, on the 15th business day following but not including the date
of mailing of the Election Form or such other date as Bancorp and NCSB shall
mutually agree upon.
(c) Any election to receive the Per Share Stock Consideration or the Per
Share Cash Consideration shall have been properly made only if the Exchange
Agent shall have actually received a properly completed Election Form by the
Election Deadline. An Election Form will be properly completed only if
accompanied by certificates representing all shares of NCSB Common Stock
covered thereby, subject to the provisions of subsection (h) below of this
Section 1.04. Any Election Form may be revoked or changed by the person
submitting such Election Form to the Exchange Agent by written notice to the
Exchange Agent only if such notice is actually received by the Exchange Agent
at or prior to the Election Deadline. The certificate or certificates
representing NCSB Common Stock relating to any revoked Election Form shall be
promptly returned without charge to the person submitting the Election Form
to the Exchange Agent. The Exchange Agent shall have reasonable discretion
to determine when any election, modification or revocation is received and
whether any such election, modification or revocation has been properly made.
(d) Notwithstanding any other provision contained herein or in any
Election Form, the effectiveness of elections to receive the Per Share Stock
Consideration or the Per Share Cash Consideration by holders of NCSB Common
Stock herein provided for shall be subject to the following:
(i) the aggregate number of Cash Election Shares may not exceed
the number of shares of NCSB Common Stock equal to 40% of the shares of NCSB
Common Stock outstanding at the Effective Time (the "Maximum Cash Election
Number"); and
(ii) the aggregate number of Stock Election Shares may not exceed
the number of shares of NCSB Common Stock equal to 75% of the shares of NCSB
Common Stock outstanding at the Effective Time, provided, however, that
Bancorp may permit a greater percentage in its sole discretion (the "Maximum
Stock Election Number").
(e) If the aggregate number of Cash Election Shares exceeds the Maximum
Cash Election Number, all Stock Election Shares and all No-Election Shares
outstanding at the Effective Time shall be converted into the right to
receive the Per Share Stock Consideration, and the Cash Election Shares shall
be converted into the right to receive the Per Share Stock Consideration and
the Per Share Cash Consideration in the following manner:
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each Cash Election Share shall be converted into the right
to receive (i) an amount in cash, without interest, equal to
the product, rounded to the nearest $.01, of (x) the Per
Share Cash Consideration and (y) a fraction (the "Cash
Fraction"), the numerator of which shall be the Maximum Cash
Election Number and the denominator of which shall be the
total number of Cash Election Shares, and (ii) a number of
shares of Bancorp Common Stock equal to the product, rounded
to four decimal places, of (x) the Per Share Stock
Consideration and (y) a number equal to one minus the Cash
Fraction.
(f) If the aggregate number of Stock Election Shares exceeds the Maximum
Stock Election Number, all Cash Election Shares and all No-Election Shares
shall be converted into the right to receive the Per Share Cash
Consideration, and all Stock Election Shares shall be converted into the
right to receive the Per Share Stock Consideration and the Per Share Cash
Consideration in the following manner:
each Stock Election Share shall be converted into the right
to receive (i) a number of shares of Bancorp Common Stock
equal to the product, rounded to four decimal places, of (x)
the Per Share Stock Consideration and (y) a fraction (the
"Stock Fraction"), the numerator of which shall be the
Maximum Stock Election Number and the denominator of which
shall be the total number of Stock Election Shares, and (ii)
an amount of cash, without interest, equal to the product,
rounded to the nearest $.01 of (x) the Per Share Cash
Consideration and (y) a number equal to one minus the Stock
Fraction.
(g) In the event that the number of Cash Election Shares does not exceed
the Maximum Cash Election Number and the number of Stock Election Shares does
not exceed the Maximum Stock Election Number, all Cash Election Shares shall
be converted into the right to receive the Per Share Cash Consideration and
all Stock Election Shares shall be converted into the right to receive the
Per Share Stock Consideration. The Exchange Agent shall consider the
allocation with respect to No-Election Shares only following consideration of
those NCSB stockholders who have made Stock Elections and Cash Elections.
With respect to NCSB stockholders who have No-Election Shares, the Exchange
Agent will attempt to provide for Per Share Cash Consideration equal to 100%
of the Merger Consideration; provided, however, that to the extent that it is
not possible to provide for such allocation and still stay within the
parameters in Section 1.04(d), the Exchange Agent will allocate on a pro rata
basis so that the result provided in Section 1.04(d) will be attained.
(h) At the Effective Time, Bancorp shall deliver to the Exchange Agent
the number of shares of Bancorp Common Stock issuable and the amount of cash
payable in
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the Merger (which shall be held by the Exchange Agent in trust for the
holders of NCSB Common Stock and invested only in FDIC-insured deposit
accounts issued by the Exchange Agent (or an FDIC-insured affiliate of the
Exchange Agent), direct obligations of the U.S. Government or obligations
issued or guaranteed by an agency thereof which carry the full faith and
credit of the United States). Within five business days after the Election
Deadline, the Exchange Agent shall distribute Bancorp Common Stock and cash
as provided herein. The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the shares of Bancorp Common
Stock held by it from time to time hereunder, except that it shall receive
and hold all dividends or other distributions paid or distributed with
respect to such shares for the account of the persons entitled thereto.
(i) After the completion of the foregoing allocation, each holder of an
outstanding certificate or certificates which prior thereto represented
shares of NCSB Common Stock who surrenders such certificate or certificates
to the Exchange Agent will, upon acceptance thereof by the Exchange Agent, be
entitled to a certificate or certificates representing the number of full
shares of Bancorp Common Stock and/or the amount of cash into which the
aggregate number of shares of NCSB Common Stock previously represented by
such certificate or certificates surrendered shall have been converted
pursuant to this Agreement and, if such holder's shares of NCSB Common Stock
have been converted into Bancorp Common Stock, any other distribution
theretofore paid with respect to Bancorp Common Stock issuable in the Merger,
in each case without interest. The Exchange Agent shall accept such
certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. Each outstanding certificate which prior to
the Effective Time represented NCSB Common Stock (other than NCSB Dissenting
Shares) and which is not surrendered to the Exchange Agent in accordance with
the procedures provided for herein shall, except as otherwise herein
provided, until duly surrendered to the Exchange Agent be deemed to evidence
ownership of the number of shares of Bancorp Common Stock and/or the right to
receive the amount of cash into which such NCSB Common Stock shall have been
converted. After the Effective Time, there shall be no further transfer on
the records of NCSB of certificates representing shares of NCSB Common Stock
and if such certificates are presented to NCSB for transfer, they shall be
cancelled against delivery of certificates for Bancorp Common Stock or cash
as hereinabove provided. No dividends which have been declared will be
remitted to any person entitled to receive shares of Bancorp Common Stock
under this Section 1.04 until such person surrenders the certificate or
certificates representing NCSB Common Stock, at which time such dividends
shall be remitted to such person, without interest.
(j) Bancorp shall not be obligated to deliver cash and/or a certificate
or certificates representing shares of Bancorp Common Stock to which a holder
of NCSB Common Stock would otherwise be entitled as a result of the Merger
until such holder surrenders the certificate or certificates representing the
shares of NCSB Common Stock for exchange as provided in this Section 1.04,
or, in lieu thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond as may be required in each case by Bancorp. If
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any certificates evidencing shares of Bancorp Common Stock are to be issued
in a name other than that in which the certificate evidencing NCSB Common
Stock surrendered in exchange therefor is registered, it shall be a condition
of the issuance thereof that the certificate so surrendered shall be properly
endorsed or accompanied by an executed form of assignment separate from the
certificate and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Bancorp
Common Stock in any name other than that of the registered holder of the
certificate surrendered or otherwise establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
(k) Any portion of the shares of Bancorp Common Stock and cash delivered
to the Exchange Agent by Bancorp pursuant to Section 1.04(h) that remains
unclaimed by the shareholders of NCSB for six months after the Effective Time
(as well as any proceeds from any investment thereof) shall be delivered by
the Exchange Agent to Bancorp. Any shareholders of NCSB who have not
theretofore complied with Section 1.04(i) shall thereafter look only to
Bancorp for the consideration deliverable in respect of each share of NCSB
Common Stock such shareholder holds as determined pursuant to this Agreement
without any interest thereon. If outstanding certificates for shares of NCSB
Common Stock are not surrendered or the payment for them is not claimed prior
to the date on which such shares of Bancorp Common Stock or cash would
otherwise escheat to or become the property of any governmental unit or
agency, the unclaimed items shall, to the extent permitted by abandoned
property and any other applicable law, become the property of Bancorp (and to
the extent not in its possession shall be delivered to it), free and clear of
all claims or interest of any person previously entitled to such property.
Neither the Exchange Agent nor any party to this Agreement shall be liable to
any holder of stock represented by any certificate for any consideration paid
to a public official pursuant to applicable abandoned property, escheat or
similar laws. Bancorp and the Exchange Agent shall be entitled to rely upon
the stock transfer books of NCSB to establish the identity of those persons
entitled to receive consideration specified in this Agreement, which books
shall be conclusive with respect thereto. In the event of a dispute with
respect to ownership of stock represented by any certificate, Bancorp and the
Exchange Agent shall be entitled to deposit any consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
1.05 No Fractional Shares. Notwithstanding any other provision of
this Agreement, neither certificates nor scrip for fractional shares of
Bancorp Common Stock shall be issued in the Merger. Each holder who
otherwise would have been entitled to a fraction of a share of Bancorp Common
Stock shall receive in lieu thereof cash (without interest) in an amount
determined by multiplying the fractional share interest to which such holder
would otherwise be entitled by the Average Share Price. No such holder shall
be entitled to dividends, voting rights or any other rights in respect of any
fractional share.
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1.06 Withholding Rights. Bancorp (through the Exchange Agent, if
applicable) shall be entitled to deduct and withhold from any amounts
otherwise payable pursuant to this Agreement to any holder of shares of NCSB
Common Stock such amounts as Bancorp is required under the Internal Revenue
Code of 1986, as amended ("Code") or any provision of state, local or foreign
tax law to deduct and withhold with respect to the making of such payment.
Any amounts so withheld shall be treated for all purposes of this Agreement
as having been paid to the holder of NCSB Common Stock in respect of which
such deduction and withholding was made by Bancorp.
1.07 Dissenting Shares.
(a) Each outstanding share of NCSB Common Stock the holder of which
has perfected his right to dissent under the Ohio General Corporation Law
("OGCL") and has not effectively withdrawn or lost such rights as of the
Effective Time shall not be converted into or represent a right to receive
the Merger Consideration, and the holder thereof shall be entitled only to
such rights as are granted by the OGCL. NCSB shall give Bancorp prompt
notice upon receipt by NCSB of any such written demands for payment of the
fair value of such shares of NCSB Common Stock and of withdrawals of such
demands and any other instruments provided pursuant to the OGCL (any
shareholder duly making such demand being hereinafter called a "Dissenting
NCSB Shareholder"). Any payments made in respect of NCSB Dissenting Shares
shall be made by the Surviving Corporation or Bancorp. If any NCSB
Dissenting Shareholder shall effectively withdraw or lose (through failure to
perfect or otherwise) his right to such payment at or prior to the Effective
Time, such holder's shares of NCSB Common Stock shall be converted into a
right to receive the Merger Consideration in accordance with the applicable
provisions of this Agreement and shall be treated as No-Election Shares. If
such holder shall effectively withdraw or lose (through failure to perfect or
otherwise) his right to such payment after the Effective Time, each share of
Bancorp Common Stock of such holder shall be converted on a share by share
basis into either the right to receive the Per Share Cash Consideration or
the Per Share Stock Consideration as Bancorp shall determine.
(b) No holder of Bancorp Common Stock shall be entitled to relief as a
dissenting shareholder pursuant to Section 1701.85 of the OGCL or otherwise.
1.08 Anti-Dilution Provisions. The Exchange Ratio shall be subject
to appropriate proportionate adjustments in the event that, subsequent to the
date of this Agreement but prior to the Effective Time, the outstanding
shares of Bancorp Common Stock shall have been increased, decreased, changed
into or exchanged for a different number or kind of shares or securities
through reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other like changes in Bancorp's
capitalization.
1.09 Additional Actions. If at any time after the Effective Time
the Surviving Corporation shall consider that any further assignments or
assurances in law or any other acts are necessary or desirable to (i) vest,
perfect or confirm, of record or otherwise, in the
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Surviving Corporation its rights, title or interest in, to or under any of
the rights, properties or assets of NCSB acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger, or
(ii) otherwise carry out the purposes of this Agreement, NCSB and its proper
officers and directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all such
proper deeds, assignments and assurances in law and to do all acts necessary
or proper to vest, perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to carry out
the purposes of this Agreement; and the proper officers and directors of the
Surviving Corporation are fully authorized in the name of NCSB or otherwise
to take any and all such action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF NCSB
References to "NCSB Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article II, dated as of the date hereof
and referenced to the specific sections and subsections of Article II of this
Agreement, which have been delivered by NCSB to Bancorp and the Bank. NCSB
hereby represents and warrants to Bancorp as follows as of the date hereof:
2.01. Corporate Organization.
(a) NCSB is a stock savings bank duly organized, validly existing and in
good standing under the laws of the State of Ohio. NCSB has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted and is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location
of the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed,
qualified or in good standing would not have a material adverse effect on the
business, operations, assets or financial condition of NCSB. NCSB Disclosure
Schedule 2.01(a) sets forth true and complete copies of the Amended Articles
of Incorporation, Constitution and Bylaws of NCSB as in effect on the date
hereof.
(b) The only direct or indirect subsidiary of NCSB is North Cincinnati
Service Corporation (the "NCSB Subsidiary"). The NCSB Subsidiary (i) is duly
organized, validly existing and in good standing under the laws of Ohio (ii)
has the corporate power and authority to own or lease all of its properties
and assets, and (ii) since January 1, 1992, has not conducted any business
and has had only nominal assets. Except as set forth in NCSB Disclosure
Schedule 2.01(b), NCSB does not own or control, directly or indirectly,
greater than a 5% equity interest in any corporation, company, association,
partnership, joint venture or other entity.
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2.02. Capitalization. The authorized capital stock of NCSB consists
of 5,000,000 shares of NCSB Common Stock, of which 396,750 are issued and
outstanding as of the date hereof, and 1,000,000 shares of preferred stock,
$1.00 par value, of which no shares are issued and outstanding as of the date
hereof. All issued and outstanding shares of capital stock of NCSB have been
duly authorized and validly issued and are fully paid, nonassessable and free
of preemptive rights. NCSB does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the transfer, purchase or issuance of any shares of
capital stock of NCSB or any securities representing the right to purchase or
otherwise receive any shares of such capital stock or any securities
convertible into or representing the right to purchase or subscribe for any
such stock.
2.03. Authority; No Violation.
(a) Subject to the adoption of this Agreement and the Agreement of
Merger by the stockholders of NCSB, NCSB has full corporate power and
authority to execute and deliver this Agreement and the Agreement of Merger
and to consummate the transactions contemplated hereby and thereby in
accordance with the terms hereof and thereof. The execution and delivery of
this Agreement and the Agreement of Merger and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
approved by the Board of Directors of NCSB. Except for the adoption by
NCSB's stockholders of this Agreement and the Agreement of Merger, no other
corporate proceedings on the part of NCSB are necessary to consummate the
transactions so contemplated. This Agreement and the Agreement of Merger
have been duly and validly executed and delivered by NCSB and constitute
valid and binding obligations of NCSB, enforceable against it in accordance
with and subject to their terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally, and except that the availability of equitable
remedies (including, without limitation, specific performance) is within the
discretion of the appropriate court.
(b) Neither the execution and delivery of this Agreement and the
Agreement of Merger by NCSB, nor the consummation by NCSB of the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof, or compliance by NCSB with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Amended Articles of
Incorporation, Constitution or Bylaws of NCSB, (ii) assuming that the
consents and approvals set forth below are duly obtained, violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to NCSB or any of its properties or assets, or (iii)
except as disclosed in NCSB Disclosure Schedule 2.03(b), violate, conflict
with, result in a breach of any provisions of, constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge
or other encumbrance upon any of the properties or assets of NCSB under any
of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
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obligation to which NCSB is a party, or by which any of its properties or
assets may be bound or affected, except, with respect to (ii) and (iii)
above, such as individually or in the aggregate will not have a material
adverse effect on the business, operations, assets or financial condition of
NCSB and which will not prevent or delay the consummation of the transactions
contemplated hereby. Except as set forth in NCSB Disclosure Schedule 2.03(b)
and for consents and approvals of or filings or registrations with or notices
to the Ohio Superintendent of Savings Banks (the "Superintendent"), the
Federal Deposit Insurance Corporation ("FDIC"), the Secretary of State of the
State of Ohio and the stockholders of NCSB, no consents or approvals of or
filings or registrations with or notices to any federal, state, municipal or
other governmental or regulatory commission, board, agency, or
non-governmental third party are required on behalf of NCSB in connection
with (a) the execution and delivery of this Agreement and the Agreement of
Merger by NCSB and (b) the consummation by NCSB of the Merger and the other
transactions contemplated hereby and by the Agreement of Merger.
2.04. Financial Statements.
(a) NCSB has previously delivered to Bancorp copies of the
consolidated statements of financial condition of NCSB as of December 31,
1996, 1995 and 1994 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1996,
1995 and 1994, in each case accompanied by the audit reports of Grant
Thornton LLP, independent public accountants, as well as the unaudited
consolidated statement of financial condition of NCSB as of March 31, 1997
and the related unaudited consolidated statement of operations, shareholders'
equity and cash flows for the three months ended March 31, 1997 and 1996.
The consolidated statements of financial condition of NCSB referred to herein
(including the related notes, where applicable), as well as the consolidated
financial statements contained in the reports of NCSB to be delivered by NCSB
pursuant to Section 4.04 hereof, fairly present or will fairly present, as
the case may be, the consolidated financial condition of NCSB as of the
respective dates set forth therein, and the related consolidated statements
of operations, shareholders' equity and cash flows (including the related
notes, where applicable) fairly present or will fairly present, as the case
may be, the results of the consolidated operations, shareholders' equity and
cash flows of NCSB for the respective periods or as of the respective dates
set forth therein (it being understood that NCSB's interim financial
statements are not audited and are not prepared with all related notes but
reflect all adjustments which are, in the opinion of NCSB, necessary for a
fair presentation of such financial statements).
(b) Each of the financial statements referred to in this Section
2.04 (including the related notes, where applicable) has been or will be, as
the case may be, prepared in accordance with generally accepted accounting
principles consistently applied during the periods involved. The books and
records of NCSB are being maintained in material compliance with applicable
legal and accounting requirements.
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(c) Except to the extent reflected, disclosed or reserved against
in the consolidated financial statements referred to in the first sentence of
Section 2.04(a) or the notes thereto, and except for liabilities incurred
since March 31, 1997 in the ordinary course of business and consistent with
past practice, NCSB does not have any obligation or liability, whether
absolute, accrued, contingent or otherwise, material to the business,
operations, assets or financial condition of NCSB.
2.05. Absence of Certain Changes or Events.
(a) There has not been any material adverse change in the business,
operations, prospects, assets or financial condition of NCSB since March 31,
1997 and to the best knowledge of NCSB, no fact or condition exists which
NCSB believes will cause such a material adverse change in the future.
(b) Except as set forth in NCSB Disclosure Schedule 2.05(a), NCSB
has not taken or permitted any of the actions set forth in Section 4.02
hereof between March 31, 1997 and the date hereof.
2.06. Legal Proceedings. Except as disclosed in NCSB Disclosure
Schedule 2.06, NCSB is not a party to any, and there are no pending or, to
the best knowledge of NCSB, threatened legal, administrative, arbitration or
other proceedings, claims, actions or governmental investigations of any
nature against NCSB, except such proceedings, claims, actions or governmental
investigations which in the good faith judgment of NCSB will not have a
material adverse effect on the business, operations, assets or financial
condition of NCSB. NCSB is not a party to any order, judgment or decree
which materially adversely affects the business, operations, assets or
financial condition of NCSB.
2.07. Taxes and Tax Returns.
(a) NCSB has duly filed (and until the Effective Time will so
file) all returns, declarations, reports, information returns and statements
("Returns") required to be filed or sent by or with respect to it in respect
of any Taxes (as hereinafter defined), and has duly paid (and until the
Effective Time will so pay) all Taxes due and payable other than Taxes or
other charges which (i) are being contested in good faith (and disclosed in
writing to Bancorp) and (ii) have not finally been determined. NCSB has
established (and until the Effective Time will establish) on its books and
records reserves that are adequate for the payment of all Taxes not yet due
and payable, whether or not disputed, accrued or applicable. Except as set
forth in NCSB Disclosure Schedule 2.07(a), (i) the federal income tax returns
of NCSB have been examined by the Internal Revenue Service ("IRS") (or are
closed to examination due to the expiration of the applicable statute of
limitations), and (ii) the Ohio income tax returns of NCSB have been examined
by applicable authorities (or are closed to examination due to the expiration
of the statute of limitations), and in the case of both (i) and (ii) no
deficiencies were asserted as a result of such examinations which have not
been resolved and paid in full. There are no audits or other administrative
or court
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proceedings presently pending nor any other disputes pending, or claims
asserted for, Taxes or assessments upon NCSB, nor has NCSB given any
currently outstanding waivers or comparable consents regarding the
application of the statute of limitations with respect to any Taxes or
Returns.
(b) Except as set forth in NCSB Disclosure Schedule 2.07(b), NCSB
(i) has not requested any extension of time within which to file any Return
which Return has not since been filed, (ii) is a party to any agreement
providing for the allocation or sharing of Taxes, (iii) is required to
include in income any adjustment pursuant to Section 481(a) of the Code, by
reason of a voluntary change in accounting method initiated by NCSB (nor does
NCSB have any knowledge that the IRS has proposed any such adjustment or
change of accounting method), or (iv) has filed a consent pursuant to Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply.
(c) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation,
all net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, withholding, payroll, employment
(including withholding, payroll and employment taxes required to be withheld
with respect to income paid to employees), excise, estimated, severance,
stamp, occupation, property or other taxes, customs duties, fees, assessments
or charges of any kind whatsoever, together with any interest and any
penalties, additions to tax or additional amounts imposed by any taxing
authority (domestic or foreign) upon NCSB.
2.08. Employee Benefit Plans.
(a) Each employee benefit plan currently maintained by NCSB or
arrangement of NCSB which is an "employee benefit plan" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), is listed in NCSB Disclosure Schedule 2.08(a) ("NCSB
Plans"). NCSB has previously furnished to Bancorp true and complete copies
of each of the NCSB Plans together with (i) the most recent actuarial and
financial reports prepared with respect to any qualified NCSB Plans, (ii) the
most recent annual reports filed with any government agency, and (iii) all
rulings and determination letters and any open requests for rulings or
letters that pertain to any qualified NCSB Plans.
(b) Each NCSB Plan has been operated in compliance in all material
respects with the applicable provisions of ERISA, the Code, all regulations,
rulings and announcements promulgated or issued thereunder, and all other
applicable governmental laws and regulations.
(c) Neither NCSB nor the NCSB Subsidiary participates in or has
incurred any liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multi-employer plan (as such term is defined in ERISA).
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(d) Neither NCSB nor, to the best knowledge of NCSB, any trustee,
fiduciary or administrator of an NCSB Plan or any trust created thereunder,
has engaged in a "prohibited transaction," as such term is defined in Section
4975 of the Code, which could subject NCSB, or, to the best knowledge of
NCSB, any trustee, fiduciary or administrator thereof, to the tax or penalty
on prohibited transactions imposed by said Section 4975.
(e) No NCSB Plan or any trust created thereunder has been
terminated.
(f) No NCSB Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA.
(g) Each of the NCSB Plans which is intended to be a qualified plan
within the meaning of Section 401(a) of the Code has been determined by the
IRS to be so qualified, and NCSB is not aware of any fact or circumstance
which would adversely affect the qualified status of any such Plan.
2.09. Securities Documents and Regulatory Reports.
(a) NCSB has previously delivered or made available to Bancorp a
complete copy of each final registration statement, offering circular,
annual, quarterly or current report and definitive proxy statement or other
communication (other than general advertising materials) filed pursuant to
the Securities Act of 1933, as amended ("1933 Act"), or the Securities
Exchange Act of 1934, as amended ("1934 Act"), or mailed by NCSB to its
stockholders as a class since January 1, 1996, and each such final
registration statement, prospectus, annual, quarterly or current report and
definitive proxy statement or other communication, as of its date, complied
in all material respects with all applicable statutes, rules and regulations
and did not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they
were made, not misleading; provided that information as of a later date shall
be deemed to modify information as of an earlier date.
(b) NCSB has duly filed with the FDIC in correct form the monthly,
quarterly and annual reports required to be filed under applicable laws and
regulations, and NCSB has delivered or made available to Bancorp accurate and
complete copies of such reports. NCSB Disclosure Schedule 2.09(b) lists all
examinations of NCSB conducted by the applicable regulatory authorities since
January 1, 1992 and the dates of any responses thereto submitted by NCSB. In
connection with the most recent examinations of NCSB by the applicable
regulatory authorities, NCSB was not required to correct or change any
action, procedure or proceeding which NCSB believes has not been now
corrected or changed as required.
2.10. NCSB Information. None of the information relating to NCSB to
be contained in (i) the Registration Statement on Form S-4 to be filed by
Bancorp in
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connection with the issuance of shares of Bancorp Common Stock pursuant to
the Merger, as amended or supplemented (or on any successor or other
appropriate form) ("Form S-4"), will, at the time the Form S-4 becomes
effective, contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) the proxy
statement/prospectus contained in the Form S-4, as amended or supplemented,
and to be delivered to stockholders of NCSB in connection with the
solicitation of their adoption of this Agreement, the Agreement of Merger and
the transactions contemplated hereby and thereby ("Proxy
Statement/Prospectus"), as of the date(s) such Proxy Statement/Prospectus is
mailed to stockholders of NCSB and up to and including the date(s) of the
meetings of stockholders to which such Proxy Statement/Prospectus relates,
will contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided that
information as of a later date shall be deemed to modify information as of an
earlier date.
2.11. Compliance with Applicable Law.
(a) NCSB has all permits, licenses, certificates of authority,
orders and approvals of, and has made all filings, applications and
registrations with, federal, state, local and foreign governmental or
regulatory bodies that are required in order to permit it to carry on its
business as it is presently being conducted and the absence of which could
have a material adverse effect on the business, operations, assets or
financial condition of NCSB taken as a whole; all such permits, licenses,
certificates of authority, orders and approvals are in full force and effect;
and to the best knowledge of NCSB, no suspension or cancellation of any of
the same is threatened.
(b) NCSB is not in violation of its Amended Articles of
Incorporation, Code of Regulation or Bylaws, or of any applicable federal,
state or local law or ordinance or any order, rule or regulation of any
federal, state, local or other governmental agency or body (including,
without limitation, all banking, securities, municipal securities, safety,
health, zoning, anti-discrimination, antitrust, and wage and hour laws,
ordinances, orders, rules and regulations), or in default with respect to any
order, writ, injunction or decree of any court, or in default under any
order, license, regulation or demand of any governmental agency, any of which
violations or defaults could have a material adverse effect on the business,
operations, assets or financial condition of NCSB, and NCSB has not received
any notice or communication from any federal, state or local governmental
authority asserting that NCSB is in violation of any of the foregoing which
could have a material adverse effect on the business, operations, assets or
financial condition of NCSB. NCSB is not subject to any regulatory or
supervisory cease and desist order, agreement, written directive, memorandum
of understanding or written commitment (other than those of general
applicability to all savings associations issued by governmental
authorities), and has not received any written communication requesting that
it enter into any of the foregoing.
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2.12. Deposit Insurance and Other Regulatory Matters.
(a) The deposit accounts of NCSB are insured by the Savings
Association Insurance Fund administered by the FDIC to the maximum extent
permitted by the Federal Deposit Insurance Act, as amended ("FDIA"), and NCSB
has paid all premiums and assessments required by the FDIA and the
regulations thereunder.
(b) NCSB is a member in good standing of the Federal Home Loan Bank
("FHLB") of Cincinnati and owns the requisite amount of stock in the FHLB of
Cincinnati.
(c) NCSB is a "qualified thrift lender," as such term is defined in
the Home Owners' Loan Act ("HOLA") and the regulations thereunder.
(d) NCSB has at all times qualified as a "domestic building and
loan association," as such term is defined in Section 7701(a)(19) of the
Code, for purposes of Section 593 of the Code.
2.13. Certain Contracts.
(a) Except as disclosed in NCSB Disclosure Schedule 2.13(a), NCSB
is not a party to, is not bound or affected by, does not receive, or is not
obligated to pay benefits under, (i) any agreement, arrangement or
commitment, including without limitation, any agreement, indenture or other
instrument relating to the borrowing of money by NCSB or the guarantee by
NCSB of any obligation, (ii) any agreement, arrangement or commitment
relating to the employment of a consultant or the employment, election or
retention in office of any present or former director or officer of NCSB,
(iii) any contract, agreement or understanding with a labor union, (iv) any
agreement, arrangement or understanding pursuant to which any payment
(whether of severance pay or otherwise) became or may become due to any
director, officer or employee of NCSB upon execution of this Agreement or
upon or following consummation of the transactions contemplated by this
Agreement (either alone or in connection with the occurrence of any
additional acts or events), (v) any agreement, arrangement or understanding
to which NCSB is a party or by which any of the same is bound which limits
the freedom of NCSB to compete in any line of business or with any person,
(vi) any assistance agreement, supervisory agreement, memorandum of
understanding, consent order, cease and desist order or condition of any
regulatory order or decree with or by the Superintendent, the FDIC or any
other regulatory agency, (vii) any other agreement, arrangement or
understanding which would be required to be filed as an exhibit to NCSB's
Annual Report on Form F-2 under the 1934 Act and which has not been so filed,
or (viii) any other agreement, arrangement or understanding to which NCSB is
a party and which is material to the business, operations, assets or
financial condition of NCSB (excluding loan agreements or agreements relating
to deposit accounts), in each of the foregoing cases whether written or oral.
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(b) NCSB is not in default or in non-compliance under any contract,
agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party or by which its assets, business or
operations may be bound or affected, whether entered into in the ordinary
course of business or otherwise and whether written or oral, which default or
non-compliance would have a material adverse effect on the business,
operations, assets or financial condition of NCSB or the transactions
contemplated hereby, and there has not occurred any event that with the lapse
of time or the giving of notice, or both, would constitute such a default or
non-compliance.
2.14. Properties and Insurance.
(a) All real and personal property owned by NCSB or presently used
by it in its business is in an adequate condition (ordinary wear and tear
excepted) and is sufficient to carry on the business of NCSB in the ordinary
course of business consistent with its past practices. NCSB has good and, as
to owned real property, marketable title to all material assets and
properties, whether real or personal, tangible or intangible, reflected in
NCSB's consolidated statement of financial condition as of March 31, 1997, or
owned and acquired subsequent thereto (except to the extent that such assets
and properties have been disposed of for fair value in the ordinary course of
business since March 31, 1997), subject to no encumbrances, liens, mortgages,
security interests or pledges, except (i) those items that secure liabilities
that are reflected in said consolidated statement of financial condition or
the notes thereto or have been incurred in the ordinary course of business
after the date of such consolidated statement of financial condition, (ii)
statutory liens for amounts not yet delinquent or which are being contested
in good faith, (iii) such encumbrances, liens, mortgages, security interests,
pledges and title imperfections that are not in the aggregate material to the
business, operations, assets or financial condition of NCSB, and (iv) with
respect to owned real property, title imperfections noted in title reports
prior to the date hereof. NCSB as lessee has the right under valid and
subsisting leases to occupy, use, possess and control all property leased by
it in all material respects as presently occupied, used, possessed and
controlled by NCSB and the consummation of the transactions contemplated
hereby and by the Agreement of Merger will not affect any such right. NCSB
Disclosure Schedule 2.14(a) sets forth an accurate listing of each lease
pursuant to which NCSB acts as lessor or lessee, including the expiration
date and the terms of any renewal options which relate to the same.
(b) The business operations and all insurable properties and assets
of NCSB are insured for its benefit against all risks which, in the
reasonable judgment of the management of NCSB, should be insured against, in
each case under valid, binding and enforceable policies or bonds issued by
insurers of recognized responsibility, in such amounts with such deductibles
and against such risks and losses as are in the opinion of the management of
NCSB adequate for the business engaged in by NCSB. As of the date hereof,
NCSB has not received any notice of cancellation or notice of a material
amendment of any such insurance policy or bond or is in default under such
policy or bond, no coverage thereunder is being disputed and all material
claims thereunder have been filed in a timely fashion.
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2.15. Environmental Matters. For purposes of this Agreement, the
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any
governmental entity relating to (1) the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource), and/or
(2) the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of Hazardous
Substances. The term Environmental Law includes without limitation (1) the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, 42 U.S.C. Section 9601, et seq; the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. Section 6901, et seq; the Clean Air Act,
as amended, 42 U.S.C. Section 7401, et seq; the Federal Water Pollution
Control Act, as amended, 33 U.S.C. Section 1251, et seq; the Toxic Substances
Control Act, as amended, 15 U.S.C. Section 9601, et seq; the Emergency
Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et seq;
the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq; and all
comparable state and local laws, and (2) any common law (including without
limitation common law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any regulated material containing any such substance as a
component. Hazardous Substances include without limitation petroleum
(including crude oil or any fraction thereof), asbestos, radioactive
material, and polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, leased or operated by NCSB or those properties which serve
as collateral for loans owned by NCSB.
(a) To the actual knowledge of NCSB, NCSB has not been and is not
in violation of or liable under any Environmental Law, except as set forth in
NCSB Disclosure Schedule 2.15(a).
(b) To the actual knowledge of NCSB, none of the Loan Portfolio
Properties and Other Properties Owned by NCSB has been or is in violation of
or liable under any Environmental Law, except as set forth in NCSB Disclosure
Schedule 2.15(b).
(c) To the best knowledge of NCSB, there are no actions, suits,
demands, notices, claims, investigations or proceedings pending or threatened
relating to the liability of the Loan Portfolio Properties and Other
Properties Owned by NCSB under any Environmental
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Law, including without limitation any notices, demand letters or requests for
information from any federal or state environmental agency relating to any
such liabilities under or violations of Environmental Law, except such which
would not have or result in a material adverse effect on the business,
operations, assets or financial condition of NCSB.
2.16. Allowance for Loan Losses and Real Estate Owned. The allowance
for loan losses reflected on NCSB's consolidated statements of financial
condition included in the consolidated financial statements referred to in
Section 2.04 hereof is, or will be in the case of subsequently delivered
financial statements, as the case may be, in the opinion of NCSB's management
adequate in all material respects as of their respective dates under the
requirements of generally accepted accounting principles to provide for
reasonably anticipated losses on outstanding loans net of recoveries. The
real estate owned reflected on the consolidated statements of financial
condition included in the consolidated financial statements referred to in
Section 2.04 hereof is, or will be in the case of subsequently delivered
financial statements, as the case may be, carried at the lower of cost or
fair value, or the lower of cost or net realizable value, as required by
generally accepted accounting principles.
2.17. Minute Books. Since January 1, 1994, the minute books of NCSB
contain complete and accurate records of all meetings and other corporate
action held or taken by its Boards of Directors (including committees of its
Board of Directors) and stockholders.
2.18. Broker Fees. Except as set forth in NCSB Disclosure Schedule
2.18, none of NCSB, the NCSB Subsidiary or any of the respective directors or
officers of such companies has employed any consultant, broker or finder or
incurred any liability for any consultant's, broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
2.19. Disclosures. No representation or warranty contained in
Article II of this Agreement, and no statement contained in the NCSB
Disclosure Schedules, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
herein or therein not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BANCORP AND THE BANK
References to "Bancorp Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article III, dated as of the date
hereof and referenced to the specific sections and subsections of Article III
of this Agreement, which have been delivered by Bancorp to NCSB. Bancorp and
the Bank hereby represent and warrant to NCSB as follows as of the date
hereof:
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3.01. Corporate Organization.
(a) Bancorp is a corporation duly organized, validly existing and
in good standing under the laws of the State of Ohio. Bancorp has the
corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted and is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it
makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a material
adverse effect on the business, operations, assets or financial condition of
Bancorp and the Bank taken as a whole. Bancorp is registered as a thrift
holding company under the HOLA. Bancorp Disclosure Schedule 3.01(a) sets
forth true and complete copies of the Articles of Incorporation or other
governing instrument and Bylaws of Bancorp and the Bank as in effect on the
date hereof.
(b) The only direct or indirect active subsidiary of Bancorp is the
Bank. The Bank (i) is duly organized, validly existing and in good standing
under the laws of the United States of America, (ii) has the corporate power
and authority to own or lease all of its properties and assets and to conduct
its business as it is now being conducted, and (iii) is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location
of the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed,
qualified or in good standing would not have a material adverse effect on the
business, operations, assets or financial condition of Bancorp and the Bank
taken as a whole. Bancorp and the Bank are in good standing with their
appropriate federal thrift regulatory agencies, and each has satisfied in all
material respects all commitments, financial or otherwise, as may have been
agreed upon with such thrift regulatory agencies. Other than the Bank and
Mid-Miami Service Corp. (which is currently inactive), Bancorp does not own
or control, directly or indirectly, greater than a 5% equity interest in any
corporation, company, association, partnership, joint venture or other entity.
3.02. Capitalization. The authorized capital stock of Bancorp
consists of 4,000,000 shares of Bancorp Common Stock, of which 2,000,828 are
issued and outstanding as of the date hereof, and 1,000,000 shares of
preferred stock, no par value, of which no shares are issued and outstanding
as of the date hereof. All issued and outstanding shares of capital stock of
Bancorp, and all issued and outstanding shares of capital stock of the Bank,
have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. All of the outstanding shares
of capital stock of the Bank are owned by Bancorp free and clear of any
liens, encumbrances, charges, restrictions or rights of third parties of any
kind whatsoever. Except for options to purchase 226,860 shares of Bancorp
Common Stock which have been granted pursuant to Bancorp's 1994 Stock Option
Plan (or options granted by Bancorp pursuant thereto after the date hereof),
and except for unvested awards for 55,537 shares of Bancorp Common Stock
(which are included in the number of issued and outstanding shares) which
have been granted pursuant to Bancorp's Recognition
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and Retention Plan and Trust (or awards granted by Bancorp pursuant thereto
after the date hereof), neither Bancorp nor the Bank has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the transfer, purchase or issuance of
any shares of capital stock of Bancorp or the Bank or any securities
representing the right to purchase or otherwise receive any shares of such
capital stock or any securities convertible into or representing the right to
purchase or subscribe for any such stock.
3.03. Authority; No Violation.
(a) Each of Bancorp and the Bank has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby in accordance with the terms hereof. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Bancorp and the Bank, and no other corporate
proceedings on the part of Bancorp and the Bank are necessary to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Bancorp and the Bank and constitutes a valid and
binding obligation of Bancorp and the Bank, enforceable against them in
accordance with and subject to its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
(b) The Bank has full corporate power and authority to execute and
deliver the Agreement of Merger and to consummate the transactions
contemplated thereby in accordance with the terms thereof. The execution and
delivery of the Agreement of Merger by the Bank and the consummation of the
transactions contemplated thereby have been duly and validly approved by the
Board of Directors of the Bank and by Bancorp as the sole stockholder of the
Bank, and no other corporate proceedings on the part of the Bank are
necessary to consummate the transactions so contemplated. The Agreement of
Merger has been duly and validly executed and delivered by the Bank and
constitutes a valid and binding obligation of the Bank, enforceable against
it in accordance with and subject to its terms, except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally, and except that the
availability of equitable remedies (including, without limitation, specific
performance) is within the direction of the appropriate court.
(c) None of the execution and delivery of this Agreement by Bancorp
and the Bank and of the Agreement of Merger by the Bank, nor the consummation
by Bancorp and the Bank of the transactions contemplated hereby and thereby
in accordance with the terms hereof and thereof, or compliance by Bancorp
with any of the terms or provisions hereof or thereof, will (i) violate any
provision of the Articles of Incorporation or other governing instrument or
Bylaws of Bancorp or the Bank, (ii) assuming that the consents and approvals
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set forth below are duly obtained, violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree or injunction applicable to
Bancorp or the Bank or any of their respective properties or assets, or (iii)
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the respective properties
or assets of Bancorp or the Bank under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Bancorp or the
Bank is a party, or by which any of their respective properties or assets may
be bound or affected, except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a material adverse effect on
the business, operations, assets or financial condition of Bancorp and the
Bank taken as a whole and which will not prevent or delay the consummation of
the transactions contemplated hereby. Except for consents and approvals of
or filings or registrations with or notices to the Commission, the
Superintendent and the OTS, no consents or approvals of or filings or
registrations with or notices to any federal, state, municipal or other
governmental or regulatory commission, board, agency or non-governmental
third party are required on behalf of Bancorp or the Bank in connection with
(a) the execution and delivery of this Agreement by Bancorp and the Bank and
of the Agreement of Merger by the Bank and (b) the consummation by Bancorp
and the Bank of the transactions contemplated hereby and by the Agreement of
Merger.
3.04. Financial Statements.
(a) Bancorp has previously delivered to NCSB copies of the
consolidated statements of financial condition of Bancorp as of September 30,
1996 and 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended September 30, 1996,
1995 and 1994, in each case accompanied by the audit report of Grant Thornton
LLP, independent public accountants, as well as the unaudited consolidated
statement of financial condition of Bancorp as of March 31, 1997 and the
related unaudited consolidated statements of earnings, stockholders' equity
and cash flows for the six months ended March 31, 1997 and 1996. The
consolidated statements of financial condition of Bancorp referred to herein
(including the related notes, where applicable), as well as the consolidated
financial statements contained in the reports of Bancorp to be delivered by
Bancorp pursuant to Section 4.04 hereof, fairly present or will fairly
present, as the case may be, the consolidated financial condition of Bancorp
as of the respective dates set forth therein, and the related consolidated
statements of earnings, stockholders' equity and cash flows (including the
related notes, where applicable) fairly present or will fairly present, as
the case may be, the results of the consolidated earnings, stockholders'
equity and cash flows of Bancorp for the respective periods or as of the
respective dates set forth therein (it being understood that Bancorp's
interim financial statements are not audited and are not prepared with all
related notes but reflect all adjustments which are, in the opinion of
Bancorp, necessary for a fair presentation of such financial statements).
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(b) Each of the financial statements referred to in this Section
3.04 (including the related notes, where applicable) has been or will be, as
the case may be, prepared in accordance with generally accepted accounting
principles consistently applied during the periods involved. The books and
records of Bancorp and the Bank are being maintained in material compliance
with applicable legal and accounting requirements and reflect only actual
transactions.
(c) Except to the extent reflected, disclosed or reserved against
in the consolidated financial statements referred to in the first sentence of
this Section 3.04 or the notes thereto or liabilities incurred since March 31,
1997 in the ordinary course of business and consistent with past practice,
neither Bancorp nor the Bank has any obligation or liability, whether
absolute, accrued, contingent or otherwise, material to the business,
operations, assets or financial condition of Bancorp and the Bank taken as a
whole.
3.05. Absence of Certain Changes or Events. There has not been any
material adverse change in the business, operations, prospects, assets or
financial condition of Bancorp and the Bank taken as a whole since March 31,
1997 and to the best knowledge of Bancorp and the Bank, no fact or condition
exists which Bancorp or the Bank believes will cause such a material adverse
change in the future.
3.06. Legal Proceedings. Neither Bancorp nor the Bank is a party to
any, and there are no pending or, to the best knowledge of Bancorp and the
Bank, threatened legal, administrative, arbitration or other proceedings,
claims, actions or governmental investigations of any nature against Bancorp
or the Bank, except such proceedings, claims actions or governmental
investigations which in the good faith judgment of Bancorp and the Bank will
not have a material adverse effect on the business, operations, assets or
financial condition of Bancorp and the Bank taken as a whole. Neither Bancorp
nor the Bank is a party to any order, judgment or decree which materially
adversely affects the business, operations, assets or financial condition of
Bancorp and the Bank taken as a whole.
3.07. Securities Documents and Regulatory Reports.
(a) Bancorp has previously delivered or made available to NCSB a
complete copy of each final registration statement, prospectus, annual,
quarterly or current report and definitive proxy statement or other
communication (other than general advertising materials) filed pursuant to the
1933 Act or the 1934 Act or mailed by Bancorp to its stockholders as a class
since January 1, 1994, and each such final registration statement, prospectus,
annual, quarterly or current report and definitive proxy statement or other
communication, as of its date, complied in all material respects with all
applicable statutes, rules and regulations and did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading;
provided that information as of a later date shall be deemed to modify
information as of an earlier date.
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(b) Each of Bancorp and the Bank has duly filed with the OTS and
the FDIC in correct form the monthly, quarterly and annual reports required to
be filed under applicable laws and regulations, and Bancorp and the Bank have
delivered or made available to NCSB accurate and complete copies of such
reports. Bancorp Disclosure Schedule 3.07(b) lists all examinations of
Bancorp or of the Bank conducted by the applicable thrift regulatory
authorities since January 1, 1994 and the dates of any responses thereto
submitted by Bancorp or the Bank. In connection with the most recent
examinations of Bancorp or the Bank by the applicable thrift regulatory
authorities, neither Bancorp nor the Bank was required to correct or change
any action, procedure or proceeding which Bancorp or the Bank believes has not
been now corrected or changed as required.
3.08. Bancorp Information. None of the information relating to
Bancorp and the Bank to be contained in (i) the Form S-4 will, at the time the
Form S-4 becomes effective, contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
(ii) the Proxy Statement/Prospectus, as of the date such Proxy
Statement/Prospectus is mailed to stockholders of NCSB and up to and including
the date of the meeting of stockholders to which such Proxy
Statement/Prospectus relates, will contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, provided that information as of a later date shall be deemed to
modify information as of an earlier date.
3.09. Compliance with Applicable Law.
(a) Each of Bancorp and the Bank has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could have a material adverse effect on the business, operations, assets
or financial condition of Bancorp and the Bank taken as a whole; all such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect; and to the best knowledge of Bancorp and the Bank, no
suspension or cancellation of any of the same is threatened.
(b) Neither Bancorp nor the Bank is in violation of its respective
Articles of Incorporation or other governing instrument or Bylaws, or of any
applicable federal, state or local law or ordinance or any order, rule or
regulation of any federal, state, local or other governmental agency or body
(including, without limitation, all banking, securities, municipal securities,
safety, health, zoning, anti-discrimination, antitrust, and wage and hour
laws, ordinances, orders, rules and regulations), or in default with respect
to any order, writ, injunction or decree of any court, or in default under any
order, license, regulation or demand of any governmental agency, any of which
violations or defaults could have a material adverse effect on the business,
operations, assets or financial condition of Bancorp
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and the Bank taken as a whole; and neither Bancorp nor the Bank has received
any notice or communication from any federal, state or local governmental
authority asserting that Bancorp or the Bank is in violation of any of the
foregoing which could have a material adverse effect on the business,
operations, assets or financial condition of Bancorp and the Bank taken as a
whole. Neither Bancorp nor the Bank is subject to any regulatory or
supervisory cease and desist order, agreement, written directive, memorandum
of understanding or written commitment (other than those of general
applicability to all savings associations issued by governmental authorities),
and none of them has received any written communication requesting that they
enter into any of the foregoing.
3.10. Deposit Insurance and Other Regulatory Matters.
(a) The deposit accounts of the Bank are insured by the Savings
Association Insurance Fund administered by the FDIC to the maximum extent
permitted by the FDIA, and the Bank has paid all premiums and assessments
required by the FDIA and the regulations thereunder.
(b) The Bank is a member in good standing of the FHLB of Cincinnati
and owns the requisite amount of stock in the FHLB of Cincinnati.
(c) The Bank is a "qualified thrift lender," as such term is
defined in the HOLA and the regulations thereunder.
(d) The Bank has at all times qualified as a "domestic building and
loan association," as such term is defined in Section 7701(a)(19) of the Code,
for purposes of Section 593 of the Code.
3.11. Broker Fees. Except as set forth in Bancorp Disclosure
Schedule 3.11, neither Bancorp nor the Bank, nor any of their respective
directors or officers, has employed any consultant, broker or finder or
incurred any liability for any consultant's, broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
3.12. Disclosures. No representation or warranty contained in
Article III of this Agreement, and no statement contained in the Bancorp
Disclosure Schedules, contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
herein or therein not misleading.
3.13. Minute Books. Since January 1, 1994, the minute books of
Bancorp and the Bank contain complete and accurate records of all meetings and
other corporate action held or taken by their Boards of Directors (including
committees of their Board of Directors) and stockholders.
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ARTICLE IV
COVENANTS OF THE PARTIES
4.01. Conduct of the Business of NCSB. During the period from the
date hereof to the Effective Time, NCSB shall conduct its business and engage
in transactions permitted hereunder or only in the ordinary course and
consistent with past practice, except with the prior written consent of
Bancorp, which consent shall not be unreasonably withheld. NCSB shall use its
best efforts to (i) preserve its business organization intact, (ii) keep
available for itself, Bancorp and the Bank the present services of the
employees of NCSB, and (iii) preserve for itself, Bancorp and the Bank the
goodwill of the customers of itself and others with whom business
relationships exist.
4.02. Negative Covenants. NCSB agrees that from the date hereof to
the Effective Time, except as otherwise approved by Bancorp in writing or as
permitted or required by this Agreement, NCSB will not:
(i) change any provision of the Articles of Incorporation, Code of
Regulations or Bylaws of NCSB;
(ii) change the number of shares of its authorized or issued capital
stock or issue or grant any option, warrant, call, commitment, subscription,
award, right to purchase or agreement of any character relating to the
authorized or issued capital stock of NCSB, or any securities convertible into
shares of such capital stock, or split, combine or reclassify any shares of
its capital stock, or redeem or otherwise acquire any shares of such capital
stock;
(iii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
the capital stock of NCSB;
(iv) grant any severance or termination pay (other than pursuant to
binding contracts of NCSB in effect on the date hereof and disclosed to
Bancorp on NCSB Disclosure Schedule 2.13(a)) to, or enter into or amend any
employment, consulting or compensation agreement with, any of its directors,
officers or employees; or award any increase in compensation or benefits to
its directors, officers or employees, except, in the case of non-officer
employees, such as may be granted in the ordinary course of business and
consistent with past practices and policies;
(v) enter into or modify (except as may be required by applicable
law or as may be required by Section 4.12 hereof, with the prior written
consent of Bancorp, which shall not be unreasonably withheld) any pension,
retirement, stock option, stock purchase, stock grant, stock appreciation
right, savings, profit sharing, deferred compensation, consulting, bonus,
group insurance or other employee benefit, incentive or welfare contract, plan
or arrangement, or any trust agreement related thereto, in respect of any of
its directors, officers or employees; or make any contributions to any defined
contribution plan or any
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defined benefit pension or retirement plan other than in the ordinary course
of business consistent with past practice;
(vi) sell or dispose of any material assets other than in the
ordinary course of business consistent with past practices and policies, or
acquire in any manner whatsoever (other than to realize upon collateral for a
defaulted loan) any business or entity;
(vii) enter into any new capital commitments or make any capital
expenditures other than pursuant to binding commitments existing on the date
hereof, other than expenditures necessary to maintain existing assets in good
repair and other than as set forth in NCSB Disclosure Schedule 4.02(vii);
(viii) file any applications or make any contract with respect to
branching or site location or relocation;
(ix) make any material change in its accounting methods or
practices, other than changes required by generally accepted accounting
principles, or change any of its methods of reporting income and deductions
for federal income tax purposes, except as required by changes in laws or
regulations;
(x) change its lending, investment, deposit or asset and liability
management or other banking policies in any material respect except as may be
required by applicable law;
(xi) engage in any transaction with an "affiliated person" or
"affiliate," in each case as defined in 12 C.F.R. Section 561.5 and 12 C.F.R.
Section 563.41, respectively;
(xii) enter into any futures contract, option or other agreement or
take any other action for purposes of hedging the exposure of its
interest-earning assets and interest-bearing liabilities to changes in market
rates of interest;
(xiii) NCSB shall not incur any liability for borrowed money except
extensions of credit from the FHLB of Cincinnati (in which no single
transaction shall exceed $2,000,000) in the ordinary course of business, or
place upon or permit any lien or encumbrance upon any of its properties or
assets, except liens of the type permitted in the exceptions to
Section 2.14(a).
(xiv) take any action that would result in any of its representations
and warranties contained in Article II of this Agreement not being true and
correct in any material respect at the Effective Time; or
(xv) agree to do any of the foregoing.
4.03. No Solicitation. NCSB shall not, and NCSB shall not authorize
or permit any of its directors, officers or employees or any investment
banker, financial advisor, attorney,
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accountant or other representative of NCSB to, directly or indirectly,
encourage or solicit or hold discussions or negotiations with, or provide any
information to, any person, entity or group (other than Bancorp and the Bank)
concerning any merger, sale of substantial assets or liabilities not in the
ordinary course of business, sale of shares of capital stock or similar
transactions involving NCSB (an "Acquisition Transaction"); provided, however,
that NCSB may provide information in connection with an unsolicited possible
Acquisition Transaction if the Board of Directors of NCSB, after reviewing the
written legal advice of its counsel, determines in good faith that the failure
to furnish information in response to such unsolicited inquiries is likely to
be deemed to constitute a breach of their fiduciary duties under applicable
Ohio law. NCSB shall promptly communicate to Bancorp the terms of any
proposal which it may receive in respect of any such Acquisition Transaction
and shall provide Bancorp with copies of (i) any written legal advice provided
to the Board of Directors of NCSB, (ii) all such written inquiries or
proposals and (iii) an accurate and complete written synopsis of all such oral
inquiries or proposals.
4.04. Current Information. During the period from the date hereof to
the Effective Time, each party will cause one or more of its designated
representatives to confer from time to time, as either party may reasonably
request, with representatives of the other party regarding its business,
operations, prospects, assets and financial condition and matters relating to
the completion of the transactions contemplated hereby. As soon as reasonably
available, but in no event more than 45 days after the end of each calendar
quarter (other than the last quarter of each calendar year) ending after the
date of this Agreement, each party will deliver to the other party its
quarterly report on Form 10-Q (or Form F-4) under the 1934 Act, and, as soon
as reasonably available, but in no event more than 90 days after the end of
each fiscal year, each party will deliver to the other party its Annual Report
on Form 10-K (or Form F-2). Within 25 days after the end of each month, each
party shall provide the other party with a consolidated statement of financial
condition and a consolidated statement of earnings, without related notes, for
such month prepared in accordance with generally accepted accounting
principles.
4.05. Access to Properties and Records; Confidentiality.
(a) NCSB shall permit Bancorp and its representatives reasonable
access to its properties and shall disclose and make available to Bancorp all
books, papers and records relating to the assets, stock ownership, properties,
operations, obligations and liabilities of NCSB, including, but not limited
to, all books of account (including the general ledger), tax records, minute
books of directors' and stockholders' meetings, organizational documents,
bylaws, material contracts and agreements, filings with any regulatory
authority, accountants' work papers, litigation files, plans affecting
employees, and any other business activities or prospects in which Bancorp may
have a reasonable interest. NCSB shall not be required to provide access to or
to disclose information where such access or disclosure would violate or
prejudice the rights of any customer or would contravene any law, rule,
regulation, order or judgment. NCSB will use its best efforts to obtain
waivers of any such restriction and in any event make appropriate substitute
disclosure arrangements under circumstances in which
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the restrictions of the preceding sentence apply. NCSB shall make its
directors, officers, employees and agents and authorized representatives
(including counsel and independent public accountants) available to confer
with Bancorp and its representatives, provided that such access shall be
reasonably related to the transactions contemplated hereby and not unduly
interfere with normal operations. Similar access shall be provided by Bancorp
to NCSB and its representatives to the extent necessary to enable NCSB to
satisfy its due diligence obligations with respect to Bancorp.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be
treated as the sole property of the party furnishing the information until
consummation of the Merger and, if such Merger shall not occur, the party
receiving the information shall, at the request of the party which furnished
such information, either return to the party which furnished such information
or destroy all documents or other materials containing, reflecting or
referring to such information; shall use its best effort to keep confidential
all such information; shall use such information only for the purpose of
consummating the transactions contemplated by this Agreement; and shall not
directly or indirectly use such information for any competitive or commercial
purposes. The obligation to keep such information confidential shall continue
for three years from the date the proposed Merger is abandoned but shall not
apply to (i) any information which (A) the party receiving the information can
establish by convincing evidence was already in its possession prior to the
disclosure thereof to it by the party furnishing the information; (B) was then
generally known to the public; (C) became known to the public through no fault
of the party receiving the information; or (D) was disclosed to the party
receiving the information by a third party not bound by an obligation of
confidentiality; or (ii) disclosures pursuant to a legal requirement or in
accordance with an order of a court of competent jurisdiction.
(c) From the date hereof until the earlier of the Effective Time or
the termination of this Agreement in accordance with the terms hereof, NCSB
shall invite one person (to be designated by Bancorp) to attend all meetings
of the Board of Directors of NCSB; provided, however, that NCSB may excuse the
representative of Bancorp from any discussion of an Acquisition Transaction or
any other matter in which NCSB and Bancorp may have conflicting interests.
4.06. Regulatory Matters.
(a) Each of NCSB, Bancorp and the Bank shall cooperate with the other
and use its best efforts to prepare and file as soon as practicable after the
date of this Agreement all necessary documentation (including without
limitation the Form S-4 and the Proxy Statement/Prospectus), to effect all
necessary filings and to obtain all necessary permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement as soon as
practicable. The parties shall each have the right to review and approve in
advance all information relating to the other, as the case may be, and any of
their respective
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subsidiaries, which appears in any filing made with, or written material
submitted to, any third party or governmental body in connection with the
transactions contemplated by this Agreement.
(b) Each of the parties will furnish each other with all
information concerning themselves, their directors, officers and stockholders
and such other matters as may be necessary or advisable in connection with any
statement or application made by or on behalf of them to any governmental body
in connection with the Merger and the other transactions, applications or
filings contemplated by this Agreement.
(c) Each of the parties will promptly furnish each other with
copies of written communications received by them from, or delivered by any of
the foregoing to, any governmental body in connection with the Merger and the
other transactions, applications or filings contemplated by this Agreement.
4.07. Approval of Stockholders. NCSB will (a) take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
stockholders as soon as reasonably practicable for the purposes of securing
the adoption of such stockholders of this Agreement and the Agreement of
Merger, (b) recommend to its stockholders the adoption of this Agreement and
the Agreement of Merger and the transactions contemplated hereby and thereby,
and use its best efforts to obtain, as promptly as practicable, such
approvals, unless the Board of Directors of NCSB determines based on the
written legal advice of its counsel that such recommendation is likely to be
deemed to constitute a breach of their fiduciary duties under applicable Ohio
law, and (c) cooperate and consult with Bancorp and the Bank with respect to
the foregoing matters.
4.08. Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its best efforts to take,
or cause to be taken, all reasonable action and to do, or cause to be done,
all things necessary, proper or advisable under applicable laws and
regulations to satisfy the conditions to closing contained herein and to
consummate and make effective the transactions contemplated by this Agreement
and the Agreement of Merger. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall take all such necessary action. Nothing in this section shall be
construed to require any party to participate in any threatened or actual
legal, administrative or other proceedings (other than proceedings, actions or
investigations to which it is a party or subject or threatened to be made a
party or subject) in connection with consummation of the transactions
contemplated by this Agreement unless such party shall consent in advance and
in writing to such participation and the other party agrees to reimburse and
indemnify such party for and against any and all costs and damages related
thereto.
4.09. Disclosure Supplements. From time to time prior to the
Effective Time, each party will promptly supplement or amend its respective
Disclosure Schedules delivered
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pursuant hereto with respect to any matter hereafter arising which, if
existing, occurring or known as of the date hereof, would have been required
to be set forth or described in such Schedules or which is necessary to
correct any information in such Schedules which has been rendered inaccurate
thereby. No supplement or amendment to such Schedules shall have any effect
for the purpose of determining satisfaction of the conditions set forth in
Article V or the compliance by NCSB with the covenants set forth in Section
4.01 hereof.
4.10. Public Announcements. The parties hereto shall approve in
advance the substance of and cooperate with each other in the development and
distribution of all news releases and other public disclosures with respect to
this Agreement or any of the transactions contemplated hereby, except as may
be otherwise required by law or regulation and as to which the parties
releasing such information have used their best efforts to discuss with the
other parties in advance.
4.11. Failure to Fulfill Conditions. In the event that either of the
parties hereto determines that a condition to its respective obligations to
consummate the transactions contemplated hereby cannot be fulfilled on or
prior to June 30, 1998 and that it will not waive that condition, it will
promptly notify the other party. Bancorp and NCSB will promptly inform the
other of any facts applicable to them, or their respective directors or
officers, that would be likely to prevent or materially delay approval of the
Merger by any governmental authority or which would otherwise prevent or
materially delay completion of the Merger.
4.12. Certain Post-Merger Agreements.
The parties hereto agree to the following arrangements following the
Effective Time:
(a) Boards of Directors of Bancorp and the Bank. Effective as of
the Effective Time, the number of directors of both Bancorp and the Bank shall
be increased by one, and Bancorp and the Bank shall appoint David G. Hendy as
a director of each of Bancorp and the Bank to serve until the next annual
meeting of stockholders of Bancorp, at which time such person will be
nominated for election as a director for a two-year term. If such director
nominee is elected by Bancorp's stockholders as a director of Bancorp for a
two-year term, then Bancorp as the sole stockholder of the Bank shall also
elect such person as a director of the Bank for a term of two years.
(b) Advisory Board of Directors. The remaining non-employee
directors of NCSB as of the Effective Time shall be requested by Bancorp to
serve as an Advisory Board for a term of three years following the Effective
Time, and each of such persons shall be paid an Advisory Board fee of $3,105
per quarterly meeting.
(c) Officers and Employees of NCSB. Bancorp and the Bank agree to
honor the terms of NCSB's Employment Agreement with Michael W. Kelley as set
forth in NCSB Disclosure Schedule 2.13(a). In addition, the Bank anticipates
retaining all full-time persons
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who are officers and employees of NCSB as of both the date of this Agreement
and the Effective Time for a period of not less than six (6) months subsequent
to the Effective Time, except in the event of termination for cause. Any
full-time employee who is terminated within six months from the Effective
Time, except for those individuals terminated for cause, shall be entitled to
severance pay equal to one week of salary for each full year employed by NCSB
with a minimum of four weeks severance pay and a maximum of 26 weeks of
severance pay.
(d) Employee Benefit Plans. Subject to the provisions of this
Section 4.12, all employees of NCSB immediately prior to the Effective Time
who are employed by Bancorp or the Bank (the "Employers") immediately
following the Effective Time ("Transferred Employees") will be covered by the
Employers' employee benefit plans on substantially the same basis as any
employee of the Employers in a comparable position. Notwithstanding the
foregoing, Bancorp and the Bank may determine to continue any of the NCSB
benefit plans for Transferred Employees in lieu of offering participation in
the Employers' benefit plans providing similar benefits (e.g., medical and
hospitalization benefits), to terminate any of NCSB's benefit plans, or to
merge any such benefit plans with the Employers' benefit plans, provided the
result is the provision of benefits to Transferred Employees that are
substantially similar to the benefits provided to the Employers' employees
generally. Service to NCSB by a Transferred Employee prior to the Effective
Time shall be recognized as service to the Employers for purposes of
eligibility to participate under the Employers' sick leave policies, paid
vacation policies, and medical, long-term disability and life insurance plans.
In addition, for purposes of determining eligibility to participate in and the
vesting of benefits (but not for purposes of benefit accrual) under Bancorp's
Employee Stock Ownership Plan and defined benefit plan, Bancorp shall
recognize years of service with NCSB. Bancorp and the Bank agree that any
pre-existing condition, limitation or exclusion in its medical, long-term
disability and life insurance plans shall not apply to Transferred Employees
or their covered dependents who are covered under a medical or hospitalization
indemnity plan maintained by NCSB on the Effective Time and who then change
coverage to the Employers' medical or hospitalization indemnity health plan at
the time such Transferred Employees are first given the option to enroll.
If the Effective Time occurs after November 30, 1997, NCSB may, prior to
the Effective Time (i) conduct employee reviews in December 1997 and implement
salary increases effective January 1, 1998 in an amount not to exceed on a
percentage basis the increase in the Consumer Price Index for the then most
recently available 12-month period, and (ii) make a contribution to the NCSB
defined contribution plan in an amount not to exceed 4% of total compensation.
(e) Indemnification. From and after the Effective Time through the
third anniversary of the Effective Time, Bancorp shall indemnify and hold
harmless each present and former director, officer and employee of NCSB
determined as of the Effective Time (the "Indemnified Parties") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal,
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administrative or investigative, arising out of matters existing or occurring
at or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent to which such Indemnified
Parties were entitled under the Amended Articles of Incorporation, Code of
Regulations or other governing instrument and Bylaws of NCSB as in effect on
the date hereof.
Any Indemnified Party wishing to claim indemnification under this Section
4.12(e), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Bancorp, but the failure to so notify
shall not relieve Bancorp of any liability it may have to such Indemnified
Party if such failure does not materially prejudice Bancorp. In the event of
any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) Bancorp shall have the right to
assume the defense thereof and Bancorp shall not be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the
defense thereof, except that if Bancorp elects not to assume such defense or
counsel for the Indemnified Parties advises that there are issues which raise
conflicts of interest between Bancorp and the Indemnified Parties, the
Indemnified Parties may retain counsel which is reasonably satisfactory to
Bancorp, and Bancorp shall pay, promptly as statements therefor are received,
the reasonable fees and expenses of such counsel for the Indemnified Parties
(which may not exceed one firm in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel with a
conflict of interest), (ii) the Indemnified Parties will cooperate in the
defense of any such matter, and (iii) Bancorp shall not be liable for any
settlement effected without its prior written consent.
In the event that Bancorp or any of its respective successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
person, then, and in each such case, the successors and assigns of such entity
shall assume the obligations set forth in this Section 4.12(e), which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each of the Indemnified Parties.
(f) Insurance. Bancorp and the Bank shall maintain a directors'
and officers' liability insurance policy covering the Indemnified Parties for
a period of three (3) years after the Effective Time on terms generally no
less favorable than the NCSB policy in effect on the date of this Agreement.
4.13 Other Acquisition Transactions. Bancorp agrees that from the
date hereof to the Effective Time, except as otherwise approved by NCSB in
writing, Bancorp will not, nor will Bancorp permit the Bank to, participate in
any merger, consolidation or other transaction in which Bancorp is not the
surviving entity or sell, transfer or otherwise dispose of all or
substantially all of its or the Bank's assets or deposit liabilities or the
capital stock of the Bank.
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ARTICLE V
CLOSING CONDITIONS
5.01. Conditions to the Parties' Obligations Under This Agreement.
The respective obligations of the parties under this Agreement shall be
subject to the fulfillment at or prior to the Effective Time of the
following conditions:
(a) All necessary regulatory or governmental approvals and consents
(including without limitation the requisite approval of the OTS required to
consummate the transactions contemplated hereby) shall have been obtained
without any term or condition which would materially impair the value of NCSB
to Bancorp and the Bank; all conditions required to be satisfied prior to the
Effective Time by the terms of such approvals and consents shall have been
satisfied; and all waiting periods in respect thereof shall have expired.
(b) All corporate action necessary to authorize the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby and by the Agreement of Merger shall have been duly and validly taken
by Bancorp, the Bank and NCSB, including adoption by the requisite vote of
the stockholders of NCSB of this Agreement and the Agreement of Merger.
(c) No order, judgment or decree shall be outstanding against a party
hereto or a third party that would have the effect of preventing completion
of the Merger; no suit, action or other proceeding shall be pending or
threatened by any governmental body in which it is sought to restrain or
prohibit the Merger; and no suit, action or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit the Merger or obtain other substantial monetary or other relief
against one or more of the parties hereto in connection with this Agreement
and which Bancorp, the Bank or NCSB determines in good faith, based upon the
advice of their respective counsel, makes it inadvisable to proceed with the
Merger because any such suit, action or proceeding has a significant
potential to be resolved in such a way as to deprive the party electing not
to proceed of any of the material benefits to it of the Merger.
(d) The Form S-4 shall have become effective under the 1933 Act, and
Bancorp shall have received all state securities laws or "blue sky" permits
and other authorizations or there shall be exemptions from registration
requirements necessary to issue the Bancorp Common Stock in connection with
the Merger, and neither the Form S-4 nor any such permit, authorization or
exemption shall be subject to a stop order or threatened stop order by the
Commission or any state securities authority.
(e) The parties shall have received, in form and substance reasonably
satisfactory to them, an opinion of Elias, Matz, Tiernan & Herrick L.L.P. to
the effect that, for federal income tax purposes, the Merger will qualify as
a "reorganization" under Section 368(a) of the Code; no taxable gain will be
recognized by Bancorp, the Bank or NCSB (i) upon the
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transfer of NCSB's assets to the Bank in exchange for Bancorp Common Stock,
cash and the assumption of NCSB's liabilities or (ii) upon the distribution
of such Bancorp Common Stock and cash to NCSB stockholders.
5.02. Conditions to the Obligations of Bancorp and the Bank Under
This Agreement. The obligations of Bancorp and the Bank under this Agreement
shall be further subject to the satisfaction, at or prior to the Effective
Time, of the following conditions, any one or more of which may be waived by
Bancorp and the Bank:
(a) Each of the obligations of NCSB required to be performed by it at or
prior to the Closing pursuant to the terms of this Agreement shall have been
duly performed and complied with in all material respects and the
representations and warranties of NCSB contained in this Agreement shall have
been true and correct as of the date hereof and as of the Effective Time as
though made at and as of the Effective Time, except (i) as to any
representation or warranty which specifically relates to an earlier date,
(ii) where the facts which caused the failure of any representation or
warranty to be so true and correct would not, either individually or in the
aggregate, constitute a material adverse change in the business, operations,
assets or financial condition of NCSB, and Bancorp and the Bank shall have
received a certificate to that effect signed by the President and Chief
Executive Officer of NCSB, or (iii) with respect to changes in the financial
condition of NCSB attributable to actual or unrealized losses on securities
held for sale as of the date of this Agreement.
(b) All permits, consents, waivers, clearances, approvals and
authorizations of all regulatory or governmental authorities or third parties
which are necessary in connection with the consummation of the Merger shall
have been obtained, and none of such permits, consents, waivers, clearances,
approvals and authorizations shall contain any term or condition which would
materially impair the value of NCSB to Bancorp and the Bank.
(c) Holders of NCSB Common Stock who dissent from the Merger pursuant to
Sections 1161.02 and 1701.84 of the ORC by meeting the requirements set forth
in Section 1701.85 of the ORC shall not hold more than 10% of the NCSB Common
Stock immediately prior to the Effective Time.
(d) Each stockholder of NCSB who is a NCSB Affiliate shall have executed
and delivered a commitment and undertaking to the effect that (i) such
stockholder will dispose of the shares of Bancorp Common Stock received by
him in connection with the Merger only in accordance with the provisions of
paragraph (d) of Rule 145 under the 1933 Act; (ii) such stockholder will not
dispose of any of such shares until Bancorp has received an opinion of
counsel acceptable to it that such proposed disposition is in compliance with
the provisions of paragraph (d) of Rule 145 under the 1933 Act; and (iii) the
certificates representing said shares may bear a legend referring to the
foregoing restrictions.
(e) NCSB shall have furnished Bancorp and the Bank with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Section 5.02 as Bancorp and
the Bank may reasonably request.
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<PAGE>
(f) Bancorp and the Bank shall have received the written opinion of
Vorys, Sater, Seymour and Pease, dated the date of the Closing, that
addresses the matters set forth in Appendix C hereto.
5.03. Conditions to the Obligations of NCSB Under this Agreement. The
obligations of NCSB under this Agreement shall be further subject to the
satisfaction, at or prior to the Effective Time, of the following
conditions, any one or more of which may be waived by NCSB:
(a) Each of the obligations of Bancorp and the Bank required to be
performed by them at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the representations and warranties of Bancorp and the Bank
contained in this Agreement shall have been true and correct as of the date
hereof and as of the Effective Time as though made at and as of the Effective
Time, except (i) as to any representation or warranty which specifically
relates to an earlier date or (ii) where the facts which caused the failure
of any representation or warranty to be so true and correct would not, either
individually or in the aggregate, constitute a material adverse change in the
business, operations, assets or financial condition of Bancorp and the Bank
taken as a whole, and NCSB shall have received a certificate to that effect
signed by the President and Chief Executive Officer of Bancorp and the Bank.
(b) Bancorp and the Bank shall have furnished NCSB with such
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Section 5.03 as NCSB may
reasonably request.
(c) NCSB shall have received the written opinion of Elias, Matz,
Tiernan and Herrick L.L.P., dated the date of the Closing, that addresses the
matters set forth in Appendix D hereto.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER, ETC.
6.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this
Agreement and the Agreement of Merger by the stockholders of NCSB:
(a) by mutual written consent of the parties hereto;
(b) by Bancorp, the Bank or NCSB (i) if the Effective Time shall
not have occurred on or prior to June 30, 1998 or (ii) if a vote of the
stockholders of NCSB is taken and such stockholders fail to approve this
Agreement and the Agreement of Merger at the meeting of stockholders (or any
adjournment thereof) of NCSB contemplated by Section 4.07 hereof; unless the
failure of such occurrence shall be due to the failure of the party
36
<PAGE>
seeking to terminate this Agreement to perform or observe its agreements set
forth herein to be performed or observed by such party at or before the
Effective Time;
(c) by Bancorp or NCSB upon written notice to the other 30 or more
days after the date upon which any application for a regulatory or
governmental approval necessary to consummate the Merger and the other
transactions contemplated hereby shall have been denied or withdrawn at the
request or recommendation of the applicable regulatory agency or governmental
authority, unless within such 30-day period a petition for rehearing or an
amended application is filed or noticed, or 30 or more days after any
petition for rehearing or amended application is denied;
(d) by Bancorp in writing if NCSB has, or by NCSB in writing if
Bancorp has, breached (i) any covenant or undertaking contained herein or in
the Agreement of Merger, or (ii) any representation or warranty contained
herein, which breach would have a material adverse effect on the business,
operations, assets or financial condition of NCSB and the NCSB Subsidiaries
or Bancorp and the Bancorp Subsidiaries, as applicable, taken as a whole, or
upon the consummation of the transactions contemplated hereby, in any case if
such breach has not been cured by the earlier of 30 days after the date on
which written notice of such breach is given to the party committing such
breach or the Effective Time; provided that it is understood and agreed that
either party may terminate this Agreement on the basis of any such material
breach of any representation or warranty contained herein, notwithstanding
any qualification therein relating to the knowledge of the other party;
(e) by Bancorp or NCSB in writing, if any of the applications for
prior approval referred to in Section 4.06 hereof are denied or are approved
contingent upon the satisfaction of any condition or requirement which, in
the reasonable opinion of the Board of Directors of Bancorp, would materially
impair the value of NCSB and the NCSB Subsidiaries to Bancorp, and the time
period for appeals and requests for reconsideration has run.
6.02. Effect of Termination. In the event of termination of this
Agreement by Bancorp, the Bank or NCSB as provided above, this Agreement
shall forthwith become void (other than Sections 4.05(b) and 7.01 hereof,
which shall remain in full force and effect) and there shall be no further
liability on the part of the parties or their respective officers or
directors except for the liability of the parties under Sections 4.05(b) and
7.01 hereof and except for liability for any breach of this Agreement.
6.03. Amendment, Extension and Waiver. Subject to applicable law, at
any time prior to the consummation of the Merger, whether before or after
approval thereof by the stockholders of NCSB, the parties may (a) amend this
Agreement and the Agreement of Merger, (b) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or (d) waive
compliance with any of the agreements or conditions contained herein;
provided, however, that after any approval of the Merger by the stockholders
of NCSB, there may not be, without further
37
<PAGE>
approval of such stockholders, any amendment or waiver of this Agreement or
the Agreement of Merger which modifies either the amount or the form of the
Merger Consideration to be delivered to stockholders of NCSB. This Agreement
and the Agreement of Merger may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto. Any agreement on the
part of a party hereto to any extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party, but such
waiver or failure to insist on strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure.
ARTICLE VII
MISCELLANEOUS
7.01. Expenses.
(a) Whether or not the transactions provided for herein are
consummated, each party to this Agreement will pay its respective expenses
incurred in connection with the preparation and performance of its
obligations under this Agreement, including legal, accounting and investment
banking fees and expenses, filing fees and printing expenses, except as set
forth below.
(b) Notwithstanding any provision in this Agreement to the
contrary, in the event that any of the parties shall willfully default in its
obligations hereunder, the nondefaulting party may pursue any remedy
available at law or in equity to enforce its rights and shall be paid by the
willfully defaulting party for all damages, costs and expenses, including
without limitation legal, accounting and investment banking fees and
expenses, incurred or suffered by the non-defaulting party in connection
herewith or in the enforcement of its rights hereunder if such non-defaulting
party prevails, provided however that such damages, costs and expenses shall
in no event be less than $150,000.
(c) NCSB shall pay Bancorp, and Bancorp shall be entitled to
payment of, a fee equal to $250,000 (the "Fee") upon the occurrence of a
Purchase Event (as defined herein) so long as the Purchase Event occurs prior
to a Fee Termination Event (as defined herein). Such payment shall be made
to Bancorp in immediately available funds within five business days after the
occurrence of a Purchase Event. A Fee Termination Event shall be the first
to occur of the following: (i) the Effective Time, (ii) 18 months following
the first occurrence of a Purchase Event (as defined herein), or (iii)
termination of this Agreement in accordance with the terms hereof prior to
the occurrence of a Purchase Event (other than a termination of this
Agreement by Bancorp pursuant to Section 6.01(d) hereof as a result of a
willful breach of any representation, warranty, covenant or agreement of
NCSB).
(d) The term "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
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(i) NCSB shall have entered into an agreement to engage in an
Acquisition Transaction (as defined below) with any person (the term
"person" for purposes of this Agreement having the meaning assigned
thereto in Sections 3(a)(9) and 13(d)(3) of the 1934 Act and the rules
and regulations thereunder) other than Bancorp or any affiliate of
Bancorp (the term "affiliate" for purposes of this Agreement having the
meaning assigned thereto in Rule 405 under the 1933 Act) or the Board of
Directors of NCSB shall have recommended that the shareholders of NCSB
approve or accept any Acquisition Transaction with any person other than
Bancorp or any affiliate of Bancorp. For purposes of this Agreement,
"Acquisition Transaction" shall mean (x) a merger or consolidation, or
any similar transaction, involving NCSB, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of NCSB, or (z) a
purchase or other acquisition (including by way of merger, consolidation,
share exchange or otherwise) of securities representing 25% or more of
the voting power of NCSB;
(ii) After a bona fide proposal is made by any person other
than Bancorp or any affiliate of Bancorp to NCSB or its shareholders to
engage in an Acquisition Transaction, (A) NCSB shall have breached any
covenant or obligation contained in this Agreement and such breach would
entitle Bancorp to terminate this Agreement or (B) the holders of the
NCSB Common Stock shall not have approved this Agreement at the meeting
of such shareholders held for the purpose of voting on this Agreement,
such meeting shall not have been held or shall have been cancelled prior
to termination of this Agreement or (C) the Board of Directors of NCSB
shall have withdrawn or modified in a manner adverse to Bancorp the
recommendation of the Board of Directors of NCSB with respect to this
Agreement.
If more than one of the transactions giving rise to a Purchase Event
under this Section is undertaken or effected, then all such transactions
shall give rise to only one Purchase Event.
(e) NCSB shall give written notice to Bancorp within 24 hours of
the occurrence of a Purchase Event known to NCSB; however, the giving of such
notice by NCSB shall not be a condition to the right of Bancorp to obtain the
Fee.
7.02. Survival. The respective representations, warranties and
covenants of the parties to this Agreement shall not survive the Effective
Time but shall terminate as of the Effective Time, except for the provisions
of Section 4.12 hereof.
7.03. Notices. All notices or other communications hereunder shall
be in writing and shall be deemed given if delivered personally, sent by
overnight express or mailed by prepaid registered or certified mail (return
receipt requested) or by cable, telegram or telex addressed as follows:
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(a) If to Bancorp, to:
Enterprise Federal Bancorp, Inc.
7810 Tylersville Square Drive
West Chester, Ohio 45069
Attn: Otto L. Keeton
Copy to:
Elias, Matz, Tiernan and Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Kevin M. Houlihan, Esq.
(b) If to NCSB, to:
North Cincinnati Savings Bank
4947 Kenwood Road
Blue Ash, Ohio 45242
Attn: Michael W. Kelley
Copy to:
Vorys, Sater, Seymour and Pease
Suite 2100, Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45201
Attn: Terri Reyering Abare
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the
date so mailed.
7.04. Parties in Interest. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by
any party hereto without the prior written consent of the other party and,
except as otherwise expressly provided herein, that nothing in this Agreement
is intended to confer, expressly or by implication, upon any other person any
rights or remedies under or by reason of this Agreement.
7.05. Complete Agreement. This Agreement and the Agreement of
Merger, including the documents and other writings referred to herein or
therein or delivered pursuant hereto or thereto, contain the entire agreement
and understanding of the parties with respect to their subject matter and
shall supersede all prior agreements and understandings between the parties,
both written and oral, with respect to such subject
40
<PAGE>
matter. There are no restrictions, agreements, promises, representations,
warranties, covenants or undertakings between the parties other than those
expressly set forth herein or therein.
7.06. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
7.07. Governing Law. This Agreement shall be governed by the laws of
the State of Ohio, without giving effect to the principles of conflicts of
laws thereof.
7.08. Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
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IN WITNESS WHEREOF, Bancorp, the Bank and NCSB have caused this Agreement
to be executed by their duly authorized officers as of the day and year first
above written.
ENTERPRISE FEDERAL BANCORP, INC.
Attest:
/s/ Edith P. Mayer By: /s/ Otto L. Keeton
- ------------------------------ --------------------------------------
Edith P. Mayer Otto L. Keeton
Corporate Secretary President and Chief Executive Officer
ENTERPRISE FEDERAL SAVINGS BANK
Attest:
/s/ Edith P. Mayer By: /s/ Otto L. Keeton
- ------------------------------ --------------------------------------
Edith P. Mayer Otto L. Keeton
Corporate Secretary President and Chief Executive
Officer
NORTH CINCINNATI SAVINGS BANK
Attest:
/s/ Eileen M. Davis By: /s/ Michael W. Kelley
- ------------------------------ --------------------------------------
Eileen M. Davis Michael W. Kelley
Vice President and Secretary President
42
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Appendix A
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated as of July 18, 1997, by and among Enterprise
Federal Bancorp, Inc. (the "Acquiror"), an Ohio corporation, and certain
stockholders of North Cincinnati Savings Bank (the "Company"), an Ohio
chartered stock savings bank, named on Schedule I hereto (collectively the
"Stockholders").
WITNESSETH:
WHEREAS, the Acquiror and the Company have entered into an Agreement and
Plan of Reorganization, dated as of the date hereof (the "Agreement"), which
is being executed simultaneously with the execution of this Stockholder
Agreement and provides for, among other things, the merger of the Company with
and into Enterprise Federal Savings Bank (the "Bank"), a federally chartered
stock savings bank and a wholly owned subsidiary of the Acquiror (the
"Merger"); and
WHEREAS, in order to induce the Acquiror to enter into the Agreement,
each of the Stockholders agrees to, among other things, vote in favor of the
Agreement in his or her capacity as a stockholder of the Company.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements set forth herein and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Ownership of Acquiror Common Stock. Each Stockholder represents and
warrants that the Stockholder has or shares the right to vote and dispose of
the number of shares of common stock of the Company, $1.00 par value per share
("Company Common Stock"), set forth opposite such Stockholder's name on
Schedule I hereto.
2. Agreements of the Stockholders. Each Stockholder covenants and
agrees that:
(a) such Stockholder shall, at any meeting of the Company's
stockholders called for the purpose, vote, or cause to be voted, all shares
of Company Common Stock in which such stockholder has the right to vote
(whether owned as of the date hereof or hereafter acquired) in favor of the
Agreement and the related Agreement of Merger between the Bank and the
Company dated as of the date hereof;
(b) except as otherwise expressly permitted hereby, such
Stockholder shall not, prior to the meeting of the Company's stockholders
referred to in Section 2(a) hereof or the earlier termination of the
Agreement in accordance with its terms, sell,
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pledge, transfer or otherwise dispose of the Stockholder's shares of
Company Common Stock; and
(c) such Stockholder shall use his reasonable best efforts to take or
cause to be taken all action, and to do or cause to be done all things,
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the agreements contemplated by this
Stockholder Agreement.
Each Stockholder further agrees that the Company's transfer agent shall
be given an appropriate stop transfer order and shall not be required to
register any attempted transfer of shares of Company Common Stock, unless the
transfer has been effected in compliance with the terms of this Stockholder
Agreement.
3. Successors and Assigns. A Stockholder may sell, pledge, transfer or
otherwise dispose of his shares of Company Common Stock, provided that, with
respect to any sale, transfer or disposition which would occur on or before
the meeting of the Company's stockholders referred to in Section 2(a) hereof,
such Stockholder obtains the prior written consent of the Acquiror and that
any acquiror of such Company Common Stock expressly agrees in writing to be
bound by the terms of this Stockholder Agreement.
4. Termination. The parties agree and intend that this Stockholder
Agreement be a valid and binding agreement enforceable against the parties
hereto and that damages and other remedies at law for the breach of this
Stockholder Agreement are inadequate. This Stockholder Agreement may be
terminated at any time prior to the consummation of the Merger by mutual
written consent of the parties hereto and shall be automatically terminated in
the event that the Agreement is terminated in accordance with its terms.
5. Notices. Notices may be provided to the Company and the
Stockholders in the manner specified in Section 7.03 of the Agreement, with
all notices to the Stockholders being provided to them at the Company in the
manner specified in such section.
6. Governing Law. This Stockholder Agreement shall be governed by the
laws of the State of Ohio without giving effect to the principles of conflicts
of laws thereof.
7. Counterparts. This Stockholder Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same and each
of which shall be deemed an original.
8. Headings and Gender. The Section headings contained herein are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Stockholder Agreement. Use of the masculine gender
herein shall be considered to represent the masculine, feminine or neuter
gender whenever appropriate.
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IN WITNESS WHEREOF, the Acquiror by a duly authorized officer, and each
of the Stockholders have caused this Stockholder Agreement to be executed as
of the day and year first above written.
ENTERPRISE FEDERAL BANCORP, INC.
By: /s/ OTTO L. KEETON
----------------------------------------
Name: Otto L. Keeton
Title: President and Chief Executive Officer
COMPANY STOCKHOLDERS:
/s/ DAVID G. HENDY
------------------------------------------------
David G. Hendy
/s/ JOHN L. MASON
------------------------------------------------
John L. Mason
/s/ ROBERT J. NOVAK
------------------------------------------------
Robert J. Novak
/s/ ARTHUR J. SCHUH
------------------------------------------------
Arthur J. Schuh
/s/ ROBERT H. SENDELBECK
------------------------------------------------
Robert H. Sendelbeck
/s/ MICHAEL W. KELLEY
------------------------------------------------
Michael W. Kelley
/s/ EILEEN M. DAVIS
------------------------------------------------
Eileen M. Davis
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IN WITNESS WHEREOF, the Acquiror by a duly authorized officer, and each
of the Stockholders have caused this Stockholder Agreement to be executed as
of the day and year first above written.
ENTERPRISE FEDERAL BANCORP, INC.
By:
---------------------------------------------
Name: Otto L. Keeton
Title: President and Chief Executive Officer
COMPANY STOCKHOLDERS:
------------------------------------------------
David G. Hendy
------------------------------------------------
John L. Mason
------------------------------------------------
Robert J. Novak
------------------------------------------------
Arthur J. Schuh
------------------------------------------------
Robert H. Sendelbeck
------------------------------------------------
Michael W. Kelley
------------------------------------------------
Eileen M. Davis
4
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SCHEDULE I
Number of Shares of
Company Common Stock
Name of Stockholder Beneficially Owned
- ------------------------------------- --------------------------------
David G. Hendy 5,000
John L. Mason 10,000
Robert J. Novak 10,000
Arthur J. Schuh 9,000
Robert H. Sendelbeck 6,000
Michael W. Kelley 8,800
Eileen M. Davis 5,000
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APPENDIX B
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan"), dated this 18th day of July, 1997, is
by and among Enterprise Federal Bancorp, Inc., an Ohio corporation
("Bancorp"), Enterprise Federal Savings Bank, a federally chartered stock
savings bank and wholly-owned subsidiary of Bancorp (the "Bank") and North
Cincinnati Savings Bank, an Ohio chartered stock savings bank ("NCSB").
W I T N E S S E T H:
WHEREAS, Bancorp, the Bank and NCSB have entered into an Agreement and
Plan of Reorganization (the "Agreement") dated July 18, 1997, pursuant to
which NCSB will merge with and into the Bank (the "Merger"); and
WHEREAS, NCSB and the Bank desire to merge on the terms and conditions
herein provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto, intending to be legally
bound hereby, agree as follows:
Section 1. The Merger
Subject to the terms and conditions of the Plan, at the Effective Time
(as defined in Section 2 below), NCSB shall merge with and into the Bank in
accordance with the applicable provisions of the Ohio Revised Code Annotated
("ORC") and 12 C.F.R. Section 563.22. The Bank shall be the surviving
corporation (the "Surviving Corporation") and shall operate under the name
"Enterprise Federal Savings Bank." Upon consummation of the Merger, the
separate corporate existence of NCSB shall cease.
Section 2. Effective Time
The Merger shall become effective upon the occurrence of the filing of a
certificate of merger (the "Certificate of Merger") with the Secretary of
State of the State of Ohio and Articles of Combination ("Articles of
Combination") with the Office of Thrift Supervision, unless a later date and
time is specified as the effective time in such Certificate of Combination
and Articles of Combination (the "Effective Time").
<PAGE>
Section 3. Charter and Bylaws
The Charter and Bylaws of the Bank in effect immediately prior to the
Effective Time shall be the Charter and Bylaws of the Surviving Corporation.
Section 4. Effects of the Merger
From and after the Effective Time, the Merger shall have the effects set
forth in Chapter 17, Section 1701.82 of the ORC and Section 12 C.F.R. Section
563.22.
Section 5. Directors and Executive Officers
Upon consummation of the Merger:
(i) The directors of the Surviving Corporation shall consist of six (6)
persons, the names of which are set forth as Appendix A to this
Plan and incorporated by reference herein;
(ii) The executive officers of the Surviving Corporation shall be as set
forth in Appendix B to this Plan and incorporated herein by
reference.
Section 6. Effect on Shares of NCSB Common Stock
At the Effective Time:
(i) Each share of common stock of NCSB, par value, $1.00 per share,
issued and outstanding will be converted to a right to receive the
Merger Consideration as defined and pursuant to the terms and
conditions set forth in Section 1.04 of the Agreement; and
(ii) Each share of Bank capital stock issued and outstanding shall
remain issued and outstanding.
Section 7. Additional Actions
If at any time after the Effective Time, the Surviving Corporation shall
consider that any further assignments or assurances in law or any other acts
are necessary or desirable to:
(i) Vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its rights, title or interest in, to or under any of
the rights, properties or assets of NCSB acquired, or to be
acquired by the Surviving Corporation as a result of, or in
connection with, the Merger, or
(ii) otherwise carry out the purposes of the Agreement and the Plan of
Merger,
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NCSB and its proper director and officers shall be deemed to have
granted to Surviving Corporation an irrevocable power of attorney
to execute and deliver all such proper deeds, assignments and
assurances in law and to do all acts necessary or proper to vest,
perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to
carry out the purposes of the Agreement and the Plan of Merger; and
the proper directors and officers of the Surviving Corporation are
fully authorized in the name of NCSB or otherwise to take any and
all such action.
Section 8. Counterpart
This Plan may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall constitute
an agreement.
Section 9. Governing Law
(i) This Plan shall be governed in all respects, including but not
limited to, validity, interpretation, effect and performance, by
the laws of the State of Ohio.
(ii) Section headings are not to be considered part of this Plan, are
solely for convenience of reference, and shall not affect the
meaning or interpretation of this Plan or any of its provisions.
Section 10. Amendment
Subject to applicable law and Section 6.03 of the Agreement, this Plan
may be amended, modified or supplemented only by written agreement of
Bancorp, the Bank and NCSB at any time prior to the Effective Time.
Section 11. Waiver
Subject to Section 6.03 of the Agreement, any of the terms of conditions
of this Plan may be waived at any time by whichever of the parties hereto is
entitled to the benefit thereof by action taken by the Board of Directors of
such waiving party.
Section 12. Assignment; Termination
This Plan may not be assigned by any party hereto without the prior
written consent of the other party. This Plan shall terminate upon the
termination of the Agreement in accordance with its terms.
3
<PAGE>
Section 13. Acknowledgment
Each party to this Plan acknowledges and affirms that its Board of
Directors has:
(i) Approved the Agreement, this Plan and the Merger; and
(ii) Authorized the execution of the Agreement and the Plan; and
(iii) Empowered its signatories to execute the Agreement and this Plan.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Plan as of
the day and year first above written:
Attest: ENTERPRISE FEDERAL SAVINGS BANK
/s/ Edith P. Mayer By: /s/ Otto L. Keeton
- -------------------------------- ----------------------------------
Edith P. Mayer Otto L. Keeton, President and
Secretary Chief Executive Officer
ENTERPRISE FEDERAL BANCORP, INC.
/s/ Edith P. Mayer By: /s/ Otto L. Keeton
- -------------------------------- -----------------------------------
Edith P. Mayer Otto L. Keeton, President and
Secretary Chief Executive Officer
NORTH CINCINNATI SAVINGS BANK
/s/ Eileen M. Davis By: /s/ Michael W. Kelley
- -------------------------------- -----------------------------------
Eileen M. Davis Michael W. Kelley President
Secretary
5
<PAGE>
Appendix B
_____________, 1997
Board of Directors
North Cincinnati Savings Bank
9477 Kenwood Road
Blue Ash, OH 45242
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of common stock,
par value $1.00 per share ("NCSB Common Stock"), of North Cincinnati Savings
Bank ("NCSB") of the financial consideration as set forth in Section 1.03 (c) of
the Agreement and Plan of Reorganization dated July 18, 1997, by and between
Enterprise Federal Bancorp, Inc. ("Enterprise"), Enterprise Federal Savings Bank
(the "Bank") and NCSB.
The Agreement and Plan of Reorganization dated July 18, 1997 (the
"Agreement") provides for the merger (the "Merger") of NCSB with and into the
Bank, pursuant to which, among other things, at the Effective Time (as defined
in the Agreement), outstanding shares of NCSB Common Stock will be exchanged for
$18.50 in cash or common stock, par value $0.01 per share, ("Enterprise Common
Stock") of Enterprise, subject to adjustment, as set forth in Section 1.03 (c)
of the Agreement. The terms and conditions of the Merger are more fully set
forth in the Agreement.
McDonald & Company Securities, Inc., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
We have acted as NCSB's financial advisor in connection with, and have
participated in certain negotiations leading to, the execution of the Agreement.
In connection with rendering our opinion set forth herein, we have among other
things:
(i) Reviewed NCSB's Annual Report to Shareholders and Annual Report on
Form F-2 for the year ended December 31, 1996, including the audited
<PAGE>
Board of Directors
__________________, 1997
Page 2
financial statements contained therein; NCSB's Consolidated Report of
Income and Consolidated Report of Condition for Insured Commercial and
State-Chartered Savings Banks for each of the years ended December 31,
1995 and December 31, 1994; and NCSB's Quarterly Report on Form F-4
for the three month periods ended September 30, 1997, June 30, 1997,
and March 31, 1997;
(ii) Reviewed Enterprise's Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the years ended September 30, 1997,
September 30, 1996 and September 30, 1995, including the audited
financial statements contained therein;
(iii) Reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective businesses,
earnings, assets and prospects of NCSB and Enterprise provided to us
or publicly available;
(iv) Participated in meetings and telephone conferences with members of
senior management of NCSB and Enterprise concerning the financial
condition, business, assets, financial forecasts and prospects of the
respective companies, as well as other matters we believed relevant to
our inquiry;
(v) Reviewed certain stock market information for NCSB Common Stock and
Enterprise Common Stock, and compared it with similar information for
certain companies, the securities of which are publicly traded;
(vi) Compared the results of operations and financial condition of NCSB and
Enterprise with that of certain companies which we deemed to be
relevant for purposes of this opinion;
(vii) Reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions which we deemed to be
relevant for purposes of this opinion;
(viii) Reviewed the Agreement and its schedules and exhibits and certain
related documents; and
(ix) Performed such other reviews and analyses as we have deemed
appropriate.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information reviewed by us and have relied upon the accuracy and completeness of
the representations, warranties
<PAGE>
Board of Directors
__________________, 1997
Page 3
and covenants of NCSB and Enterprise contained in the Agreement. We have not
been engaged to undertake, and have not assumed any responsibility for, nor have
we conducted, an independent investigation or verification of such matters. We
have not been engaged to and we have not conducted a physical inspection of any
of the assets, properties or facilities of either NCSB or Enterprise nor have
we made or obtained or been furnished with any independent valuation or
appraisal of any of such assets, properties or facilities or any of the
liabilities of either NCSB or Enterprise. With respect to financial forecasts
used in our analysis, we have assumed that such forecasts have been reasonably
prepared by management of NCSB and Enterprise, as the case may be, on a basis
reflecting the best currently available estimates and judgments of the
management of NCSB and Enterprise, as to the future performance of NCSB,
Enterprise and NCSB and Enterprise combined, as the case may be. We have not
been engaged to assess the reasonableness or achievability of such financial
forecasts or the assumptions on which they are based, and we express no view as
to such financial forecasts or assumptions. We have also assumed that all of
the conditions to the consummation of the Merger as set forth in the Agreement,
including the tax-free nature of the reorganization for federal income tax
purposes, would be satisfied and that the Merger would be consummated on a
timely basis in the manner contemplated by the Agreement.
We will receive a fee for our services as financial advisor to NCSB, a
substantial portion of which is contingent upon closing of the Merger. We will
also receive a fee for our services in rendering this opinion.
In the ordinary course of business, we may actively trade securities of
NCSB or Enterprise for our own account and for the accounts of customers and,
accordingly, we may at any time hold a long or short position in such
securities.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness, as
of the date hereof, from a financial point of view, of the financial
consideration to the holders of NCSB Common Stock, and does not address the
underlying business decision by NCSB's Board of Directors to effect the Merger,
does not compare or discuss the relative merits of any competing proposal or any
other terms of the Merger, and does not constitute a recommendation to any NCSB
shareholder as to how such shareholder should vote with respect to the Merger.
This opinion does not represent an opinion as to what the value of NCSB Common
Stock or Enterprise Common Stock may be at the Effective Time of the Merger or
as to the prospects of NCSB's business or Enterprise's business.
This opinion is directed to and has been prepared solely for the
confidential use of the Board of Directors of NCSB. We do not believe that we
are acting as agents of the
<PAGE>
Board of Directors
__________________, 1997
Page 4
NCSB Board of Directors nor the holders of the NCSB Common Stock, and we do not
believe that any person other than the NCSB Board of Directors has any legal
right under state law to rely on this opinion. This opinion shall not be
reproduced, summarized, described or referred to or given to any other person
without our prior written consent. Notwithstanding the foregoing, this opinion
may be included in the proxy statement to be mailed to the holders of NCSB
Common Stock in connection with the Merger, provided that this opinion will be
reproduced in such proxy statement in full, and any description of or reference
to us or our actions, or any summary of the opinion in such proxy statement,
will be in a form acceptable to us and our counsel.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the financial consideration is fair to the holders of NCSB Common
Stock from a financial point of view.
Very truly yours,
McDONALD & COMPANY SECURITIES, INC.
<PAGE>
Appendix C
1701.85 Qualifications of and Procedures for Dissenting Shareholders
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with
this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of
the shares of the corporation as to which he seeks relief as of the date
fixed for the determination of shareholders entitled to notice of a meeting
of the shareholders at which the proposal is to be submitted, and such shares
shall not have been voted in favor of the proposal. Not later than ten days
after the date on which the vote on the proposal was taken at the meeting of
the shareholders, the dissenting shareholder shall deliver to the corporation
a written demand for payment to him of the fair cash value of the shares as
to which he seeks relief, which demand shall state his address, the number
and class of such shares, and the amount claimed by him as the fair cash
value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled to
relief under division (E) of section 1701.84 of the Revised Code in the case
of a merger pursuant to section 1701.801 of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as
of the date on which the agreement of merger was adopted by the directors of
that corporation. Within twenty days after he has been sent the notice
provided in section 1701.80 or 1701.801 of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment
with the same information as that provided for in division (A)(2) of this
section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the
new entity, whether the demand is served before, on, or after the effective
date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing
the shares as to which he seeks relief, the dissenting shareholder, within
fifteen days from the date of the sending of such request, shall deliver to
the corporation the certificates requested so that the corporation may
forthwith endorse on them a legend to the effect that demand for the fair
cash value of such shares has been made. The corporation promptly shall
return such endorsed certificates to the dissenting shareholder. A dissenting
shareholder's failure to deliver such certificates terminates his rights as a
dissenting shareholder, at the option of the corporation, exercised by
written notice sent to the dissenting shareholder within twenty days after
the lapse of the fifteen-day period, unless a court for good cause shown
otherwise directs. If shares represented by a certificate on which such a
legend has been endorsed are transferred, each
<PAGE>
new certificate issued for them shall bear a similar legend, together with
the name of the original dissenting holder of such shares. Upon receiving a
demand for payment from a dissenting shareholder who is the record holder of
uncertificated securities, the corporation shall make an appropriate notation
of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has
been made, acquires only such rights in the corporation as the original
dissenting holder of such shares had immediately after the service of a
demand for payment of the fair cash value of the shares. A request under this
paragraph by the corporation is not an admission by the corporation that the
shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving
or new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of
the county in which the principal office of the corporation that issued the
shares is located or was located when the proposal was adopted by the
shareholders of the corporation, or, if the proposal was not required to be
submitted to the shareholders, was approved by the directors. Other
DISSENTING SHAREHOLDERS, within that three-month period, may join as
plaintiffs or may be joined as defendants in any such proceeding, and any two
or more such proceedings may be consolidated. The complaint shall contain a
brief statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such a complaint
is required. Upon the filing of such a complaint, the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the complaint
and requiring that a copy of the complaint and a notice of the filing and of
the date for hearing be given to the respondent or defendant in the manner in
which summons is required to be served or substituted service is required to
be made in other cases. On the day fixed for the hearing on the complaint or
any adjournment of it, the court shall determine from the complaint and from
such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value ofany shares and, if
so, the number and class of such shares. If the court finds that the
dissenting shareholder is so entitled, the court may appoint one or more
persons as appraisers to receive evidence and to recommend a decision on the
amount of the fair cash value. The appraisers have such power and authority
as is specified in the order of their appointment. The court thereupon shall
make a finding as to the fair cash value of a share and shall render judgment
against the corporation for the payment of it, with interest at such rate and
from such date as the court considers equitable. The costs of the proceeding,
including reasonable compensation to the appraisers to be fixed by the court,
shall be assessed or apportioned as the court considers equitable. The
proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or
otherwise to
<PAGE>
prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision
in division (D) of this section is applicable, the fair cash value of the
shares that is agreed upon by the parties or fixed under this section shall
be paid within thirty days after the date of final determination of such
value under this division, the effective date of the amendment to the
articles, or the consummation of the other action involved, whichever occurs
last. Upon the occurrence of the last such event, payment shall be made
immediately to a holder of uncertificated securities entitled to such
payment. In the case of holders of shares represented by certificates,
payment shall be made only upon and simultaneously with the surrender to the
corporation of the certificates representing the shares for which the payment
is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined
as of the day prior to the day on which the vote by the shareholders was
taken and, in the case of a merger pursuant to section 1701.80 or 1701.801 of
the Revised Code, fair cash value as to shareholders of a constituent
subsidiary corporation shall be determined as of the day before the adoption
of the agreement of merger by the directors of the particular subsidiary
corporation. The fair cash value of a share for the purposes of this section
is the amount that a willing seller who is under no compulsion to sell would
be willing to accept and that a willing buyer who is under no compulsion to
purchase would be willing to pay, but in no event shall the fair cash value
of a share exceed the amount specified in the demand of the particular
shareholder. In computing such fair cash value, any appreciation or
depreciation in market value resulting from the proposal submitted to the
directors or to the shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to
pay the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
<PAGE>
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or
the comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in
substitution for such shares, an amount equal to the dividend, distribution,
or interest which, except for the suspension, would have been payable upon
such shares or securities, shall be paid to the holder of record as a credit
upon the fair cash value of the shares. If the right to receive fair cash
value is terminated other than by the purchase of the shares by the
corporation, all rights of the holder shall be restored and all distributions
which, except for the suspension, would have been made shall be made to the
holder of record of the shares at the time of termination.
<PAGE>
Appendix D
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.
45
<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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ARTICLE VII of the Amended Articles of Incorporation of the Registrant
governs the indemnification of directors, officers, employees and agents of
the Registrant. ARTICLE VII provides:
By resolution adopted by the directors in the manner set forth in
division (E) of Section 1701.13 of the Revised Code of Ohio or its successor,
the Corporation shall indemnify or agree to indemnify:
"1. Any person who was or is a party or is threatened to be made a party,
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, other than an action by or
in the right of the Corporation, by reason of the fact that he is or was a
director, officer, employee, or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, trustee, officer, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit,
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit, or proceeding by judgment, order, settlement, or conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful; and
2. Any person who was or is a party or is threatened to be made a party,
to any threatened, pending, or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee, or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, trustee,
officer, employee, or agent of another corporation, domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust or other
enterprise against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect of any of the
following:
a. Any claim, issue or matter as to which such person is adjudged to
be liable for negligence or misconduct in the performance of his duty to the
Corporation unless, and only to the extent that the court of common pleas or
the court in which such action or suit was brought determines upon
application that, despite the adjudication of liability, but
II-1
<PAGE>
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court of common
pleas or such other court shall deem proper;
b. Any action or suit in which the only liability asserted against a
director is pursuant to Section 1701.95 of the Revised Code of Ohio.
3. To the extent that a director, trustee, officer, employee, or agent
has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in subsections (1) and (2) of this Article
VII, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the action, suit or proceeding.
4. Any indemnification under subsections (1) and (2) of this Article VII,
unless ordered by a court, shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (1) and (2) of this Article VII. Such determination shall be
made by the directors of the Corporation in the manner set forth in division
(E) of Section 1701.13 of the Revised Code of Ohio."
Division (E) of Section 1701.13 of the Ohio Revised Code governs
indemnification by an Ohio corporation and provides as follows:
"(E) (1) A corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of
the corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, member, manager,
or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust,
or other enterprise, against expenses, including attorney's fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit, or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceeding , if he had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by judgment,
order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
II-2
<PAGE>
(2) A corporation may indemnify or agree to indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending,
or completed action or suit by or in the right of the corporation to procure
a judgment in its favor, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or
for profit, a limited liability company, or a partnership, joint venture,
trust, or other enterprise, against expenses, including attorney's fees,
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
of the following:
(a) Any claim, issue, or matter as to which such person is adjudged
to be liable for negligence or misconduct in the performance of his duty to
the corporation unless, and only to the extent that, the court of common
pleas or the court in which such action or suit was brought determines, upon
application, that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses as the court of common pleas or such other
court shall deem proper;
(b) Any action or suit in which the only liability asserted against
a director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in division (E) (1) or (2) of
this section, or in defense of any claim, issue, or matter therein, he shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the action, suit, or
proceeding.
(4) Any indemnification under division (E) (1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case, upon a determination that indemnification of
the director, trustee, officer, employee, member, manager, or agent is proper
in the circumstances because he has met the applicable standard of conduct
set forth in division (E) (1) or (2) of this section. Such determination
shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with the action, suit, or proceeding referred to in division (E) (1) or (2)
of this section;
(b) If the quorum described in division (E) (4) (a) of this section
is not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel other
than an attorney, or a firm having associated
II-3
<PAGE>
with it an attorney, who has been retained by or who has performed services
for the corporation or any person to be indemnified within the past five
years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which the action,
suit, or proceeding referred to in division (E) (1) or (2) of this section
was brought.
Any determination made by the disinterested directors under division (E)
(4) (a) or by independent legal counsel under division (E) (4) (b) of this
section shall be promptly communicated to the person who threatened or
brought the action or suit by or in the right of the corporation under
division (E) (2) of this section, and, within ten days after receipt of such
notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to review
the reasonableness of such determination.
(5) (a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding to in division (E) (1) or (2) of
this section, the articles or the regulations of a corporation state, by
specific reference to this division, that the provisions of this division do
not apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in division (E) (1) or
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or
proceeding, upon receipt of an undertaking by or on behalf of the director in
which he agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure to
act involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or undertaken with reckless disregard for the best
interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director,
trustee, officer, employee, member, manager, or agent in defending any
action, suit, or proceeding referred to in division (E) (1) or (2) of this
section, may be paid by the corporation as they are incurred, in advance of
the final disposition of the action, suit, or proceeding, as authorized by
the directors in the specific case, upon receipt of an undertaking by or on
behalf of the director, trustee, officer, employee, member, manager, or agent
to repay such amount, if it ultimately is determined that he is not entitled
to be indemnified by the corporation.
II-4
<PAGE>
(6) The indemnification authorized by this section shall not be exclusive
of, and shall be in addition to, any other rights granted to those seeking
indemnification under the articles, the regulations, any agreement, a vote of
shareholders or disinterested directors or otherwise, both as to action in
their official capacities and as to action in another capacity while holding
their offices or positions, and shall continue as to a person who has ceased
to be a director, trustee, officer, employee, member, manager, or agent and
shall inure to the benefit of the heirs, executors, and administrators of such
a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including, but not limited to, trust funds, letters of credit, or
self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or
for profit, a limited liability company, or a partnership, joint venture,
trust, or other enterprise, against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section. Insurance may be purchased from or
maintained with a person in which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
division (E) (1) or (2) of this section does not limit the payment of expenses
as they are incurred, indemnification, insurance, or other protection that may
be provided pursuant to divisions (E) (5), (6), and (7) of this section.
Divisions (E) (1) and (2) of this section do not create any obligation to
repay or return payments made by the corporation pursuant to divisions (E)
(5), (6) or (7).
(9) As used in division (E) of this section, "corporation" includes all
constituent entities in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entity, or is or was
serving at the request of such constituent entity as a director, trustee,
officer, employee, member, manager, or agent of another corporation, domestic
or foreign, nonprofit or for profit, a limited liability company, or a
partnership, joint venture, trust, or other enterprise, shall stand in the
same position under this section with respect to the new or surviving
corporation as he would if he had served the new or surviving corporation in
the same capacity."
The Registrant has purchased insurance coverage under a policy which
insures directors and officers against certain liabilities which might be
incurred by them in such capacity.
II-5
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ------------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
2(a) Agreement and Plan of Merger, dated as of July 18, 1997 between Bancorp, the Bank and NCSB,
including a related Plan of Merger, attached as Exhibit B thereto (1)
2(b) Shareholders Agreement, dated as of July 18, 1997, between Bancorp and certain shareholders
of NCSB (1)
3(a) Amended Articles of Incorporation of Bancorp (2)
3(b) Code of Regulations of Bancorp (3)
3(c) Bylaws of Bancorp (3)
4 Stock Certificate of Bancorp (4)
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding legality of securities being
registered
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding certain federal income tax
consequences
10(a) Bancorp Recognition and Retention Plan (4)
10(b) Bancorp 1994 Stock Option Plan (4)
10(c) Bancorp Employee Stock Ownership Plan and Trust (3)
10(d) Employment Agreement between Bancorp and Otto L. Keeton (4)
10(e) Employment Agreement between Bancorp and Michael P. Meister (4)
10(f) Employment Agreement between Bancorp and Thomas J. Noe (4)
10(g) Employment Agreement between Bancorp and Steven M. Pomeroy (4)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ------------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
13 Bancorp's Annual Report to Shareholders for the fiscal year ended September 30, 1997 [not
deemed filed except for portions thereof which are specifically incorporated into this
Registration Statement on Form S-4] (5)
21 Subsidiaries of Bancorp (5)
23(a) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as
Exhibit 5) --
23(b) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as
Exhibit 8) --
23(c) Consent of Grant Thornton LLP
23(d) Consent of Grant Thornton LLP
23(e) Consent of McDonald & Company Securities, Inc.
24 Powers of Attorney (included in the signature page to the initial filing of this
Registration Statement) --
99(a) Form of proxy for the NCSB Special Meeting
</TABLE>
- ------------------------
(1) Exhibit is attached as Appendix A to the Proxy Statement/Prospectus included
herein.
(2) Incorporated herein by reference to Bancorp's Registration Statement on Form
8-A filed with the Commission on August 15, 1994 (File No. 0-24694).
(3) Incorporated herein by reference to Bancorp's Registration Statement on Form
S-1 filed with the Commission on April 21, 1994 (File No. 33-78012).
(4) Incorporated herein by reference to Bancorp's Form 10-K filed with the
Commission on December 29, 1994 (File No. 0-24694).
(5) Incorporated herein by reference to Bancorp's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 (File No. 0-24694).
Bancorp' management contracts or compensatory plans or arrangements consist
of Exhibit Nos. 10(a)-(g) listed above.
II-7
<PAGE>
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a) (1) (i) and (a) (1) (ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-8
<PAGE>
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b) 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of West Chester, State of
Ohio, on the 10 th day of November 1997.
---- ---------
ENTERPRISE FEDERAL BANCORP, INC.
By: /s/ Otto L. Keeton
--------------------------
Otto L. Keeton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each of the directors and/or officers
of Enterprise Federal Bancorp, Inc. whose signature appears below hereby
appoints Otto L. Keeton, as his attorney-in-fact to sign in his name and
behalf, in any and all capacities stated below and to file with the
Securities and Exchange Commission any and all amendments, including
post-effective amendments, to this Registration Statement on Form S-4, making
such changes in the Registration Statement as appropriate, and generally to
do all such things in their behalf in their capacities as directors and/or
officers to enable Enterprise Federal Bancorp, Inc. to comply with the
provisions of the Securities Act of 1933, and all requirements of the
Securities and Exchange Commission.
/s/ Otto L. Keeton Date: November 10, 1997
- ------------------------------ -----------------
Otto L. Keeton
President, Chief Executive Officer
and Chairman of the Board
(principal executive officer)
/s/ Michael R. Meister Date: November 10 , 1997
- ------------------------------ ------------------
Michael R. Meister
Vice President, Chief Operating Officer
and Director
II-10
<PAGE>
/s/ Terrell G. Marty Date: November 10, 1997
- ------------------------------ -----------------
Terrell G. Marty
Director
/s/ Edith P. Mayer Date: November 10, 1997
- ------------------------------ -----------------
Edith P. Mayer
Director
/s/ Steven A. Wilson Date: November 10, 1997
- ------------------------------ -----------------
Steven A. Wilson
Director
/s/ William H. Kreeger Date: November 10, 1997
- ------------------------------ -----------------
William H. Kreeger
Director
/s/ Thomas J. Noe Date: November 10, 1997
- ------------------------------ -----------------
Thomas J. Noe
Vice President, Chief Financial Officer
and Treasurer (principal financial officer
and principal accounting officer)
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ------------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
2(a) Agreement and Plan of Merger, dated as of July 18, 1997 between Bancorp, the Bank and NCSB,
including a related Plan of Merger, attached as Exhibit B thereto (1)
2(b) Shareholders Agreement, dated as of July 18, 1997, between Bancorp and certain shareholders
of NCSB (1)
3(a) Amended Articles of Incorporation of Bancorp (2)
3(b) Code of Regulations of Bancorp (3)
3(c) Bylaws of Bancorp (3)
4 Stock Certificate of Bancorp (4)
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding legality of securities being
registered
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding certain federal income tax
consequences
10(a) Bancorp Recognition and Retention Plan (4)
10(b) Bancorp 1994 Stock Option Plan (4)
10(c) Bancorp Employee Stock Ownership Plan and Trust (3)
10(d) Employment Agreement between Bancorp and Otto L. Keeton (4)
10(e) Employment Agreement between Bancorp and Michael P. Meister (4)
10(f) Employment Agreement between Bancorp and Thomas J. Noe (4)
10(g) Employment Agreement between Bancorp and Steven M. Pomeroy (4)
13 Bancorp's Annual Report to Shareholders for the fiscal year ended September 30, 1997 [not
deemed filed except for portions thereof which are specifically incorporated into this
Registration Statement on Form S-4] (5)
21 Subsidiaries of Bancorp (5)
23(a) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as
Exhibit 5) --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- ------------- ------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
23(b) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as
Exhibit 8) --
23(c) Consent of Grant Thornton LLP
23(d) Consent of Grant Thornton LLP
23(e) Consent of McDonald & Company Securities, Inc.
24 Powers of Attorney (included in the signature page to the initial filing of this
Registration Statement) --
99(a) Form of proxy for the NCSB Special Meeting
</TABLE>
- ------------------------
(1) Exhibit is attached as Appendix A to the Proxy Statement/Prospectus included
herein.
(2) Incorporated herein by reference to Bancorp's Registration Statement on Form
8-A filed with the Commission on August 15, 1994 (File No. 0-24694).
(3) Incorporated herein by reference to Bancorp's Registration Statement on Form
S-1 filed with the Commission on April 21, 1994 (File No. 33-78012).
(4) Incorporated herein by reference to Bancorp's Form 10-K filed with the
Commission on December 29, 1994 (File No. 0-24694).
(5) Incorporated herein by reference to Bancorp's Annual Report on Form 10-K for
the fiscal year ended September 30, 1997 (File No. 0-24694).
<PAGE>
Exhibit 5
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
November 14, 1997
Board of Directors
Enterprise Federal Bancorp, Inc.
Enterprise Federal Savings Bank
7810 Tylersville Square Drive
West Chester, OH 45069
Ladies and Gentlemen:
We have acted as special counsel to Enterprise Federal Bancorp, Inc.
("Bancorp"), an Ohio chartered corporation, in connection with the
preparation and filing with the Securities and Exchange Commission pursuant
to the Securities Act of 1933, as amended, of the registration statement on
Form S-4 (the "Registration Statement") relating to the issuance of up to
330,355 shares of Bancorp's common stock, $.01 par value per share (the
"Shares"), in connection with the proposed acquisition of North Cincinnati
Savings Bank ("NCSB"), an Ohio chartered savings bank, pursuant to a merger
of NCSB with and into Enterprise Federal Savings Bank (the "Bank"), a
federally chartered savings bank and a wholly owned subsidiary of Bancorp.
As such counsel, we have made such legal and factual examinations and
inquiries as we deemed advisable for the purpose of rendering this opinion.
Based on the foregoing, it is our opinion that the Shares, when issued,
delivered and sold in the manner described in the Registration Statement,
will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to
Bancorp's Registration Statement, and we consent to the use of our name under
the heading "Legal Opinions" in the Prospectus/Proxy Statement constituting a
part thereof.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Kevin M. Houlihan
--------------------------------
Kevin M. Houlihan, a Partner
<PAGE>
Exhibit 8
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
November 14, 1997
Board of Directors
Enterprise Federal Bancorp, Inc.
Enterprise Federal Savings Bank
7810 Tylersville Square Drive
West Chester, OH 45069
Ladies and Gentlemen:
We have acted as special counsel to Enterprise Federal Bancorp, Inc.
("Bancorp"), an Ohio Chartered Corporation, in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by Bancorp with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"). The Registration Statement relates to the proposed
merger of North Cincinnati Savings Bank ("NCSB"), an Ohio chartered savings
bank, with and into Enterprise Federal Savings Bank (the "Bank"), a federally
chartered savings bank and a wholly owned subsidiary of Bancorp. This opinion
is delivered in accordance with the requirements of Item 601(b) of Regulation
S-K under the Securities Act.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Registration Statement, the Proxy Statement/Prospectus included therein (the
"Proxy Statement/Prospectus"), representation letters from Bancorp, the Bank and
NCSB, and such other documents as we have deemed necessary or appropriate.
We hereby confirm that the disclosure in the Proxy Statement/Prospectus
under the captions "SUMMARY - Certain Federal Income Tax Consequences" and "THE
MERGER -Certain Federal Income Tax Consequences" are fair and accurate summaries
of the matters addressed therein, based upon current law and the assumptions
stated or referred to therein. There can be no assurance that contrary
positions may not be taken by the Internal Revenue Service.
<PAGE>
Enterprise Federal Bancorp, Inc.
Enterprise Federal Savings Bank
November 14, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "THE MERGER
- - Certain Federal Income Tax Consequences" in the Proxy Statement/Prospectus.
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Kevin M. Houlihan
-----------------------------
Kevin M. Houlihan, a Partner
<PAGE>
Exhibit 23(c)
ACCOUNTANTS' CONSENT
We have issued our report dated October 24, 1997, accompanying the
consolidated financial statements of Enterprise Federal Bancorp, Inc. which
are included within the Corporation's Annual Report on Form 10-K for the year
ended September 30, 1997. We hereby consent to the incorporation by
reference of said report in Enterprise Federal Bancorp, Inc.'s Form S-4 to
be filed with the Securities and Exchange Commission on or about
November 11, 1997.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
November 10, 1997
<PAGE>
Exhibit 23(d)
ACCOUNTANTS' CONSENT
We have issued our report dated February 11, 1997, accompanying the
consolidated financial statements of North Cincinnati Savings Bank which are
included within the Bank's Annual Report on Form F-2 for the year ended
December 31, 1996. We hereby consent to the inclusion of said report in
Enterprise Federal Bancorp, Inc.'s Form S-4 to be filed with the Securities
and Exchange Commission on or about November 11, 1997.
/s/Grant Thornton L.L.P.
Cincinnati, Ohio
November 10, 1997
<PAGE>
Exhibit 23(e)
CONSENT OF McDONALD & COMPANY SECURITIES, INC.
We consent to the inclusion in the Proxy Statement/Prospectus of Enterprise
Federal Bancorp, Inc. and North Cincinnati Savings Bank of the use of the form
of our opinion and to the summarization of our opinion in the Proxy
Statement/Prospectus under the caption "Opinion of McDonald & Company."
Further, we consent to all references to our firm in such Proxy
Statement/Prospectus.
/s/ McDONALD & COMPANY SECURITIES, INC.
McDONALD & COMPANY SECURITIES, INC.
Cleveland, Ohio
November 13, 1997
<PAGE>
Exhibit 99(a)
REVOCABLE PROXY
NORTH CINCINNATI SAVINGS BANK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF NORTH
CINCINNATI SAVINGS BANK ("NCSB") FOR USE AT THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 1998 AND AT ANY ADJOURNMENT THEREOF.
The undersigned, being a stockholder of NCSB as of __________, 1997, hereby
authorizes the Board of Directors of the Company or any successors thereto as
proxies with full powers of substitution, to represent the undersigned at the
Special Meeting of Stockholders of NCSB to be held at ____________, Ohio _______
on ________, __________, 1998 at __:00 __.m., Eastern Time, and at any
adjournment of said meeting, and thereat to act with respect to all votes that
the undersigned would be entitled to cast, if then personally present, as
follows:
1. PROPOSAL to adopt an Agreement and Plan of Reorganization dated as of July
18, 1997 by and among Enterprise Federal Bancorp, Inc. ("Bancorp"), Enterprise
Federal Savings Bank ("Bank") and NCSB, and a related Plan of Merger (together,
the "Merger Agreement"), pursuant to which (i) NCSB will be merged with and into
the Bank which is a wholly-owned subsidiary of Bancorp (the "Merger"), with the
Bank as the surviving corporation of the Merger and (ii) each share of common
stock of NCSB, par value $1.00 per share ("NCSB Common Stock"), outstanding
immediately prior to consummation of the Merger shall be converted into and
represent the right to receive either: (i) $18.50 in cash; (ii) a number of
Bancorp common shares, par value $.01 per share (the "Bancorp Common Shares"),
as determined by applying a formula as set forth in the Merger Agreement; or
(iii) a combination of cash and Bancorp Common Shares, as described in the Proxy
Statement/Prospectus and the Merger Agreement.
/ / FOR / / AGAINST / / ABSTAIN
2. PROPOSAL to adjourn the Special Meeting to solicit additional proxies, if
necessary.
/ / FOR / / AGAINST / / ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
(Continued and to be signed on other side)
<PAGE>
SHARES OF NCSB'S COMMON STOCK WILL BE VOTED AS SPECIFIED. IF NOT OTHERWISE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ADOPTION OF THE MERGER AGREEMENT,
FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY, AND OTHERWISE AT THE
DISCRETION OF THE PROXIES. YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO THE
TIME IT IS VOTED AT THE SPECIAL MEETING.
Dated:______________________, 199_
___________________________________
___________________________________
Signature(s)
Please sign this exactly as your name(s)
appear(s) on this proxy. When signing in
a representative capacity, please give
title. When shares are held jointly, only
one holder need sign.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
