<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.: 0-24694
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ENTERPRISE FEDERAL BANCORP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1396726
------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7810 TYLERSVILLE SQUARE DRIVE
WEST CHESTER, OHIO 45069
----------------------------- ----------
(Address) (Zip Code)
Registrant's telephone number, including area code: (513) 755-4600
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
/ /
As of December 31, 1998, the aggregate value of the 1,717,201 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
493,795 shares held by all directors and officers of the Registrant as a group,
was approximately $82.4 million. This figure is based on the mean of the bid and
asked prices of $48.0 per share of the Registrant's Common Stock on December 31,
1998.
Number of shares of Common Stock outstanding as of December 31, 1998: 2,210,996
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
ENTERPRISE FEDERAL BANCORP, INC.
Enterprise Federal Bancorp, Inc. (the "Company") was incorporated in
the State of Ohio in April, 1994 in connection with the conversion of Enterprise
Federal Savings and Loan Association from a mutual savings and loan association
to a stock savings bank to be known as "Enterprise Federal Savings Bank" (the
"Bank"). The Company sold 2,268,596 shares of common stock, $.01 par value per
share, in an offering to certain depositors, borrowers and members of the
general public. The offering was consummated on October 14, 1994 and, as a
result, the Company became a unitary savings and loan holding company. The
Company owns 100% of the issued and outstanding common stock of the Bank, which
is the primary asset of the Company. The Company does not presently own or
operate any subsidiaries except for the Bank.
The Company completed two acquisitions and one multi branch purchase in
calendar year 1998. On February 25, 1998, the Company consummated its
acquisition of North Cincinnati Savings Bank, a state-chartered savings bank. On
October 26, 1998, the Bank completed its acquisition of three branch offices of
Cornerstone Bank, a subsidiary of Western Ohio Financial Corp. On November 20,
1998, the Company completed its acquisition of Security Savings Holding Company,
Inc., a unitary thrift holding company.
On September 25, 1998, the Company entered into an Affiliation
Agreement with Fifth Third Bancorp, an Ohio chartered bank holding company
("Fifth Third"), which sets forth the terms and conditions under which the
Company will merge with and into Fifth Third (the "Merger"). The Affiliation
Agreement provides that each issued and outstanding share of common stock of the
Company shall, by virtue of the Merger, be converted into and represent the
right to receive .68516 shares of common stock of Fifth Third.
ENTERPRISE FEDERAL SAVINGS BANK
The Bank is a federally-chartered stock savings bank conducting
business from its executive offices located in West Chester, Ohio and six full
service offices located in Hamilton, Butler and Warren Counties, Ohio. The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF"),
which is administered by the Federal Deposit Insurance Corporation ("FDIC"), to
the maximum extent permitted by law.
Enterprise is a community oriented savings bank which has traditionally
offered a wide variety of savings products to its retail customers while
concentrating its lending activities on real estate loans secured by one-to-four
family residential properties located primarily in Hamilton, Butler and Warren
Counties, Ohio. Such loans amounted to $177.6 million or 64.5% of the total loan
portfolio at September 30, 1998. To a significantly lesser extent, the Bank also
focuses its lending activities on commercial real estate loans, residential
construction loans and multi-family real estate loans. The Bank also invests in
securities which are issued by United States ("U.S.") government agencies or
government sponsored enterprises.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also regulated by the FDIC, the administrator
of the SAIF. The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is one
of the 12 regional banks comprising the FHLB System.
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MARKET AREA
Enterprise conducts its business through its main office and seven
branch offices located in Hamilton, Butler and Warren Counties, Ohio. At
September 30, 1998, management believed that most of the Bank's depositors and
borrowers were residents of Hamilton, Butler and Warren Counties.
The Cincinnati metropolitan area is the second largest in Ohio and has
a stable and diversified labor force and economic base. While the principal
industry historically has been manufacturing, in recent years the service and
wholesale/retail trade industries have overtaken manufacturing in terms of
employment. Cincinnati is the headquarters for a number of large companies,
including Proctor & Gamble, E.W. Scripps, Federated Department Stores and
Milacron. In addition to these companies, the largest local employers include
the federal government, General Electric Aircraft, The University of Cincinnati
and the Kroger Co.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At September 30, 1998, the Bank's total
loan portfolio before net items ("total loan portfolio"), amounted to $275.3
million or 69.4% of the Company's $396.5 million of total assets at such time.
The Bank has traditionally concentrated its lending activities on conventional
first mortgage loans secured by residential property. Conventional loans are
neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Department of Veterans Affairs ("VA"). Consistent with such
approach, at September 30, 1998, $177.6 million or 64.5% of the Bank's total
loan portfolio consisted of one-to-four family residential loans. To a lesser
extent, the Bank also originates equity lines, multi-family residential loans,
commercial real estate and land loans, construction loans and consumer loans. At
September 30, 1998, such loan categories amounted to $23.9 million, $10.2
million, $35.6 million, $24.4 million and $3.7 million, respectively, or 8.7%,
3.7%, 12.9% , 8.9% and 1.3% of the total loan portfolio, respectively. The Bank
intends to continue its emphasis on all types mortgage loans. In particular, to
the extent permitted by economic and market conditions, the Bank has increased
its emphasis on the origination of equity lines, smaller commercial real estate
and construction loans.
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The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $177,626 64.52% $130,022 61.92% $ 96,605 57.89% $ 81,603 69.86% $ 72,139 67.81%
Equity lines 23,936 8.69 19,781 9.42 12,065 7.23 2,427 2.08 -- --
Multi-family 10,162 3.69 4,693 2.24 6,525 3.91 5,270 4.51 3,546 3.33
Commercial 35,577 12.92 38,516 18.34 35,162 21.07 19,125 16.37 21,531 20.24
Construction 24,362 8.85 15,960 7.60 15,567 9.33 5,579 4.78 8,217 7.72
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate loans 271,663 98.67 208,972 99.52 165,924 99.43 114,004 97.60 105,433 99.10
Consumer loans 3,655 1.33 1,009 .48 942 .57 2,803 2.40 954 .90
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans 275,318 100.00% 209,981 100.00% 166,866 100.00% 116,807 100.00% 106,387 100.00%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
------- ------- ------- ------- -------
Less:
Loans in process 10,328 7,821 9,928 3,403 5,043
Deferred loan fees 1,127 1,017 874 675 705
Allowance for loan losses 806 575 410 323 323
Undisbursed portion of
equity lines 12,135 9,472 6,604 1,576 --
Unearned discounts -- -- -- -- 28
-------- -------- -------- -------- --------
Loans receivable, net $250,922 $191,096 $149,050 $110,830 $100,288
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
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CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Bank's loan portfolio at September 30, 1998.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Bank's loan portfolio.
<TABLE>
<CAPTION>
Real Estate Loans
--------------------------------------------------------
Single- Equity Multi- Consumer
family lines family Commercial Construction Loans Total
-------- ------- -------- ---------- ------------ -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $ 9,339 $ -- $ 170 $ 5,500 $ 9,091 $ 300 $ 24,400
After one year through two years 7,754 -- -- 1,117 -- 336 9,207
After two years through three years 6,075 -- 192 3,530 -- 373 10,170
After three years through five years 16,229 -- 401 1,238 -- 2,646 20,514
After five years through ten years 33,969 23,936 654 3,690 -- -- 62,249
After ten years through twenty years 41,615 -- 1,125 5,820 4,568 -- 53,128
Over twenty years 62,645 -- 7,620 14,682 10,703 -- 95,650
-------- ------- -------- ---------- ------------ -------- --------
Total(1) $177,626 $23,936 $10,162 $35,577 $24,362 $ 3,655 $275,318
-------- ------- -------- ---------- ------------ -------- --------
-------- ------- -------- ---------- ------------ -------- --------
Interest rate terms on amounts
due after one year:
Fixed $154,402
Adjustable 96,516
--------
$250,918
--------
--------
</TABLE>
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(1) Does not include adjustments relating to loans in process, the allowance
for loan losses, unearned discounts and deferred loan origination fees.
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<PAGE>
Scheduled contractual repayment of loans does not reflect the expected
term of the Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give Enterprise the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when current mortgage loan rates are lower than rates on
existing mortgage loans (due to refinancings of adjustable-rate and fixed-rate
loans at lower rates). Under the latter circumstance, the weighted-average yield
on loans decreases as higher-yielding loans are repaid or refinanced at lower
rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Bank are subject to the written, non-discriminatory underwriting standards and
loan origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained primarily through existing customers,
walk-in customers, branch managers and real estate brokers. Property valuations
are always performed by independent outside appraisers approved by the Bank's
Board of Directors. Title and hazard insurance are required on all security
property. Substantially all of the Bank's loans are secured by property located
in its market area.
Any two officers are permitted to approve loans up to $350,000, while
loans over $350,000 require the approval of the Board of Directors or the
Executive Committee of the Board. All loans are ratified by the Board, including
those loans approved by the Executive Committee.
Historically, the Bank has not been an active purchaser or seller of
loans.
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<PAGE>
The following table shows origination activity of the Bank with respect
to its loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1998 1997 1996
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Real estate loan originations:
Single-family $ 97,856 $29,818 $18,636
Equity lines 14,046 4,848 4,610
Multi-family 6,508 1,565 2,969
Commercial 12,939 12,889 17,803
Construction 24,362 15,960 15,567
--------- -------- -------
Total real estate loan
originations 155,711 65,080 59,585
Consumer loan originations 3,150 505 1,793
--------- -------- --------
Total loan originations 158,861 65,585 61,378
--------- -------- --------
Less:
Principal loan repayments 139,368 22,494 23,208
Transferred to real estate owned -- -- 21
Other, net (40,333)(1) 1,045 (71)
--------- -------- --------
Net increase $ 59,826 $42,046 $38,220
--------- -------- --------
--------- -------- --------
</TABLE>
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(1) Primarily represents loans acquired in the acquisition of North Cincinnati
Savings Bank.
Although the Bank emphasizes the origination of single-family
residential ARMs, originations of such loans has decreased due to the preference
of the Bank's customers for fixed-rate residential mortgage loans in the low
interest rate environment which has recently prevailed. As a result, in recent
years, fixed-rate single-family residential mortgage loans with terms of 15 or
30 years have constituted a significant majority of total single-family loan
originations. Originations of fixed-rate single-family residential mortgage
loans (including fixed-rate permanent construction loans) amounted to $88.1
million, $23.9 million and $14.9 million during fiscal 1998, 1997, and 1996,
respectively. In order to enhance the Bank's ability to manage interest rate
risk, the Bank is approved by the Federal Home Loan Mortgage Corporation
("FHLMC") to become a qualified loan seller/servicer for such agency. However,
fixed rate loans are typically originated for portfolio, frequently under terms
and conditions which generally do not permit the bulk sale of such loans to the
FHLMC or the Federal National Mortgage Association ("FNMA"). See "--
Single-Family Residential Real Estate Loans."
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At September 30, 1998,
$177.6 million or 64.5% of the Bank's total loan portfolio consisted of
single-family residential real estate loans. The Bank originated $97.9 million,
$29.8 million and $18.6 million of single-family residential loans in fiscal
1998, 1997, and 1996, respectively, and intends to continue to emphasize the
origination of permanent loans secured by first mortgage liens on single-family
residential properties in the future. Of the $177.6 million of such loans at
September 30, 1998, $31.0 million or 17.5% had adjustable-rates of interest and
$146.6 million or 82.5% had fixed-rates of interest.
The Bank currently originates for its portfolio single-family
residential mortgage loans which typically provide for an interest rate which
adjusts every year in accordance with a designated index (One Year Constant
Maturity Treasury) plus a margin. Prior to October, 1995, the Bank utilized the
National Median Cost of Funds Index. The Bank also offers such loans with
interest rates which adjust every three years. Such loans are typically based on
a
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<PAGE>
30-year amortization schedule. The amount of any increase or decrease in the
interest rate is presently limited to 2% per year, with a limit of 6% over the
life of the loan. The Bank's adjustable-rate loans currently being originated
are not assumable and do not contain prepayment penalties. In October 1995, the
Bank began to offer below market initial interest rates. The Bank does not
engage in the practice of using a cap on the payments that could allow the loan
balance to increase rather than decrease, resulting in negative amortization.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding a significant position of fixed-rate loans in an
increasing interest rate environment.
Due to competitive market pressures and historically low interest
rates, the Bank has continued to originate fixed-rate mortgage loans with terms
of between 10 and 30 years although substantially all of the Bank's fixed-rate
loans in its portfolio have terms of 15 or 30 years. While the Bank has
historically retained all of its fixed-rate loans in its portfolio, the Bank has
developed a secondary mortgage market capacity and could sell a portion of its
fixed-rate loans in the secondary market.
The Bank is permitted to lend up to 100% of the appraised value of the
real property securing a residential loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations to obtain private mortgage insurance
on the portion of the principal amount that exceeds 80% of the appraised value
of the security property. Pursuant to underwriting guidelines adopted by the
Board of Directors, the Bank will lend up to 95% of the appraised value of the
property securing a single-family residential loan, and generally requires
borrowers to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the security
property. Notwithstanding the foregoing, the Bank is permitted to originate
loans in an amount up to 5% of assets which do not otherwise conform to the
above-referenced regulatory requirements. In certain circumstances, the Bank has
originated loans in an amount up to 95% of the property's appraised value
without requiring the borrower to obtain private mortgage insurance. As of
September 30, 1998, the Bank had $1.5 million or .4% of its assets invested in
such loans. In addition, the Bank has also allocated $2.0 million for the
origination of low-income, single-family housing loans. The Bank intends to
originate such loans in amounts up to 95% of the appraised value of the property
securing such loans without requiring the borrower to obtain private mortgage
insurance and will provide 5% of the amount of the loan to its allowance for
loan losses.
Certain of the Bank's single-family residential loans do not conform to
particular requirements which must be satisfied to sell such loans in the
secondary market to institutions such as the FHLMC. However, a majority of such
loans have a loan-to-value ratio of less than 80% and the retention of such
loans in the Bank's portfolio has not had a material adverse affect on the
Bank's financial condition or results of operations.
EQUITY LINES. Equity lines increased from $19.8 million or 9.4% of the
total loan portfolio at September 30, 1997 to $23.9 million or 8.7% of the total
loan portfolio at September 30, 1998. Such increase was primarily due to an
increase in line of credit loans primarily secured by individual residences.
Such loans have interest rates which adjust daily based on the prime rate in THE
WALL STREET JOURNAL. The Bank increased its emphasis on such lending in fiscal
1998 and believes that such lending will increase in the future.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Bank
originates mortgage loans for the acquisition and refinancing of existing
multi-family residential and commercial real estate properties. At September 30,
1998, $10.2 million or 3.7% of the Bank's total loan portfolio consisted of
loans secured by existing multi-family residential real estate properties and
$35.6 million or 12.9% of such loan portfolio consisted of loans secured by
existing commercial real estate properties.
The majority of the Bank's multi-family residential loans are secured
by small apartment buildings, while commercial real estate loans are secured by
office buildings, small retail establishments, gas stations, warehouses,
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hotels and restaurants. These types of properties constitute the majority of the
Bank's commercial real estate loan portfolio. All of the Bank's multi-family and
commercial real estate loans are secured by property located in the Bank's
market area.
Multi-family and commercial real estate loans are made on terms up to
25 years. Although the Bank will originate these loans with fixed interest
rates, the majority of these loans have interest rates which adjust in
accordance with a designated index. Loan to value ratios on the Bank's
multi-family and commercial real estate loans are limited to 75%. As part of the
criteria for underwriting multi-family and commercial real estate loans, the
Bank generally imposes a debt coverage ratio (the ratio of net cash from
operations before payment of debt service to debt service) of not less than 1.1.
It is also the Bank's policy to obtain corporate or personal guarantees, as
applicable, on its multi-family residential and commercial real estate loans
from the principals of the borrower.
Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Such loans typically involve large loan balances to single borrowers or groups
of related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The success of
such projects is sensitive to changes in supply and demand conditions in the
market for multi-family and commercial real estate as well as economic
conditions generally. At September 30, 1998, the Bank did not have any
non-performing multi-family or commercial real estate loans.
CONSTRUCTION LENDING. The Bank presently originates residential
construction loans to individuals to construct their own homes through a
pre-approved builder and to a much lesser extent, to selected local builders.
Although the Bank originates land acquisition and development loans, the Bank
does not anticipate that this type of lending will represent a significant
portion of its construction loan portfolio in the future. The Bank's
construction lending activities are limited to the Bank's primary market area.
At September 30, 1998, construction loans amounted to $24.4 million or 8.9% of
the Bank's total loan portfolio.
The Bank's construction loans are generally made in connection with the
granting of the permanent financing on the property. Residential construction
loans convert to a fixed or adjustable rate loan at the end of the one-year
construction term, while commercial and multi-family construction loans
generally convert to adjustable rate loans. Advances are generally made to the
borrower on a percentage of completion basis.
Upon application, credit review and analysis of personal and corporate
financial statements, the Bank will grant construction loans to local builders
for the purpose of construction of speculative (unsold) residential properties.
All such properties are inspected by outside appraisers and the Bank may conduct
follow-up inspections. Advances are generally made on a percentage of completion
basis. At September 30, 1998, the Bank did not have any of such loans in its
construction loan portfolio.
The Bank's construction loans generally have construction terms of 12
months, with payments being made monthly on an interest-only basis. Residential
construction loans are made with a maximum loan to value ratio of 80.0% of the
projected market value of the completed project, while commercial and
multi-family construction loans are made with maximum loan to value ratios of
75% of the projected market value of the completed project.
Construction lending is generally considered to involve a higher level
of risk as compared to single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder on properties which are
not necessarily pre-sold pose a greater potential risk to the Bank than
construction loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and adopting
underwriting guidelines which impose stringent loan-to-value, debt service and
other requirements for loans which are believed to involve higher elements of
credit risk, by limiting the
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<PAGE>
geographic area in which the Bank will do business and by working with builders
with whom it has established relationships.
CONSUMER LOANS. To a limited extent, the Bank also offers consumer
loans. Such loans generally have shorter terms and higher interest rates than
mortgage loans. The consumer loans offered by the Bank include automobile, boat,
recreational vehicle and deposit account secured loans. Consumer loans amounted
to $3.7 million or 1.3% of the total loan portfolio at September 30, 1998.
LOAN FEE INCOME. In addition to interest earned on loans, the Bank
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services related
to its loans. Income from these activities varies from period to period with the
volume and type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees and all
incremental direct loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. In accordance with SFAS No. 91, the Bank amortized $287,000, $189,000
and $170,000 of deferred loan fees into income during fiscal 1998, 1997 and
1996, respectively, in connection with loan refinancings, payoffs and ongoing
repayments of outstanding loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or personal
contacts are made. In most cases, deficiencies are cured promptly. While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank institutes foreclosure or
other proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Bank does not accrue interest on real estate loans past due 90 days or more
unless, in the opinion of management, the value of the property securing the
loan exceeds the outstanding balance of the loan (principal, interest and
escrows) and collection is probable. Loans may be reinstated to accrual status
when all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected. The Bank did not
have any accruing loans 90 or more days delinquent at September 30, 1998, 1997,
or 1996.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold. When
property is acquired, at the date of acquisition it is recorded at the lower of
carrying value or estimated fair value less selling expenses and any writedown
resulting therefrom is charged to the allowance for possible loan losses.
Between the date a loan becomes delinquent and the date it is acquired by the
Bank, all costs incurred in maintaining the Bank's interest in the property are
capitalized in an amount which may not exceed the estimated fair value. After
the date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such property
are capitalized in an amount which may not exceed the estimated fair value less
the estimated disposition costs.
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DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------------------------------------- -------------------------------------------------------
30-59 Days 60-89 Days 90 or more Days 30-59 Days 60-89 Days 90 or more Days
----------------- ----------------- ---------------- ----------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of Percent of
Loan Loan Loan Loan Loan Loan
Amount Category Amount Category Amount Category Amount Category Amount Category Amount Category
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family $32 .02% -- -- $38 .02% $155 .12% $ 1 --% $193 .15%
Equity lines -- -- -- -- -- -- -- -- 4 .02 -- --
Multi-family -- -- -- -- -- -- -- -- -- -- -- --
Commercial -- -- -- -- -- -- -- -- -- -- -- --
Construction -- -- -- -- -- -- -- -- -- -- -- --
Consumer loans -- -- -- -- -- -- -- -- -- -- -- --
--- ---- --- --- --- ---- ---- ---- --- ---- ---- ----
Total $32 -- $38 $155 $5 $193
--- --- --- ---- --- ----
--- --- --- ---- --- ----
</TABLE>
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<PAGE>
The following table sets forth the amounts and categories of the Bank's
non-performing assets and troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential $ 38 $193 $203 $ 45 $114
Equity lines -- -- -- -- --
Multi-family residential -- -- -- -- --
Construction -- -- -- -- --
Commercial real estate -- -- -- -- --
Consumer -- -- -- 4 --
---- ---- ---- ---- ----
Total non-performing loans 38 193 203 49 114
Real estate owned -- -- -- -- 83
---- ---- ---- ---- ----
Total non-performing assets 38 193 203 49 197
Troubled debt restructurings -- -- -- -- 417
---- ---- ---- ---- ----
Total $ 38 $193 $203 $ 49 $614
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total non-performing loans
and troubled debt
restructurings as a percentage
of total loans .01% .09% .12% .04% .50%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total non-performing assets
and troubled debt
restructurings as a percentage
of total assets .01% .07% .09% .02% .37%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Interest income which would have been recognized if the above loans had
been performing pursuant to their contractual terms totaled $3,000 for fiscal
1998.
The $38,000 of non-accruing single-family residential loans at
September 30, 1998 consisted of one loan secured by single-family residential
property located in the Bank's market area.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectable and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At September 30, 1998, the Bank had $38,000 of
classified assets, all of which were classified special mention
-11-
<PAGE>
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained
at a level that management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan portfolio.
Management's periodic evaluation is based upon examination of the portfolio,
past loan loss experience, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. The allowance is increased by a provision for loan losses
which is charged against income.
Although management uses the best information available to make
determinations with respect to the provision for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the OTS
and the FDIC, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the Bank
to recognize additions to such allowance based on their judgments about
information available to them at the time of their examination.
The following table summarizes changes in the allowance for possible
loan losses and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ending September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average loans, net $ 221,009 $171,519 $130,399 $102,065 $95,658
--------- -------- -------- -------- -------
--------- -------- -------- -------- -------
Allowance for loan losses,
beginning of period $ 575 $ 410 $ 323 $ 323 $ 310
Charged-off loans:
Consumer -- -- (3) -- --
Commercial -- -- -- -- (2)
--------- -------- -------- -------- -------
Total charged-off loans -- -- (3) -- (2)
Recoveries on loans previously
charged-off -- -- -- -- --
--------- -------- -------- -------- -------
Net loans charged-off -- -- (3) -- (2)
Provision for loan losses 180 165 90 -- 15
Increase due to Acquisition 51(1) -- -- -- --
--------- -------- -------- -------- -------
Allowance for loan losses,
end of period $ 806 $ 575 $ 410 $ 323 $ 323
--------- -------- -------- -------- -------
Net loans charged-off to average
loans, net --% --% --% --% --%
Allowance for loan losses
to total loans .32% .30% .28% .29% .32%
Allowance for loan losses
to non-performing loans 2,121.05% 297.93% 201.97% 659.18% 283.33%
Net loans charged-off to allowance
for loan losses --% --% .73% --% .62%
</TABLE>
- ----------
(1) Represents the allowance for loan losses acquired in the acquisition of
North Cincinnati Savings Bank.
-12-
<PAGE>
The following table presents the allocation of the allowance for loan
losses to the total amount of loans in each category listed at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
% of Loans % of Loans % of Loans
in Each Category in Each Category in Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ ---------------- ------ ---------------- ------ ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential 227 64.52% $130 61.92% $140 57.89%
Equity lines 139 8.69 190 9.42 55 7.23
Multi-family residential 25 3.69 12 2.24 14 3.91
Commercial real estate 256 12.92 193 18.34 180 21.07
Construction 122 8.85 40 7.60 12 9.33
Consumer 37 1.33 10 .48 9 .57
Unallocated -- -- -- -- -- --
---- ------- ---- ------- ---- -------
Total $806 100.00% $575 100.00% $410 100.00%
---- ------- ---- ------- ---- -------
---- ------- ---- ------- ---- -------
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1995 1994
------------------------ ------------------------
% of Loans % of Loans
in Each Category in Each Category
Amount to Total Loans Amount to Total Loans
------ ---------------- ------ ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential $ 91 69.86% $ 91 67.81%
Equity lines 24 2.08 -- --
Multi-family residential 9 4.51 9 3.33
Commercial real estate 109 16.37 109 20.24
Construction 10 4.78 10 7.72
Consumer 28 2.40 9 .90
Unallocated 52 -- 95 --
------- ------ ------- ------
Total $ 323 100.00% $ 323 100.00%
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
-13-
<PAGE>
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the FHLMC, FNMA and the Government National Mortgage Association ("GNMA"). The
Bank has also purchased mortgage-backed securities issued by the Small Business
Administration ("SBA").
The FHLMC is a public corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal. The FNMA is a private corporation chartered by the
U.S. Congress with a mandate to establish a secondary market for conventional
mortgage loans. The FNMA guarantees the timely payment of principal and interest
on FNMA securities. FHLMC and FNMA securities are not backed by the full faith
and credit of the United States, but because the FHLMC and the FNMA are U.S.
Government sponsored enterprises, these securities are considered to be among
the highest quality investments with minimal credit risks. The GNMA is a
government agency within the Department of Housing and Urban Development which
is intended to help finance government assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. To accommodate larger-sized loans, and loans that,
for other reasons, do not conform to the agency programs, a number of private
institutions have established their own home-loan origination and securitization
programs. The SBA is an agency of the U.S. Government. The SBA issues
participation certificates backed principally by commercial real estate and/or
other business collateral. The SBA was established by the U.S. Congress with a
mandate to increase the ability of small businesses to borrow money thereby
expanding and increasing employment. The timely payment of principal and
interest on SBA securities are guaranteed by the SBA and are backed by the full
faith and credit of the U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages.
The Bank's mortgage-backed securities include collateralized mortgage
obligations ("CMOs"). CMOs have been developed in response to investor concerns
regarding the uncertainty of cash flows associated with the prepayment option of
the underlying mortgagor and are typically issued by governmental agencies,
governmental sponsored enterprises and special purpose entities, such as trusts,
corporations or partnerships, established by financial institutions or other
similar institutions. A CMO can be collateralized by loans or securities which
are insured or guaranteed by the FNMA, the FHLMC or the GNMA. In contrast to
pass-through mortgage-backed securities, in which cash flow is received pro rata
by all security holders, the cash flow from the mortgages underlying a CMO is
segmented and paid in accordance with a predetermined priority to investors
holding various CMO classes. By allocating the principal and interest cash flows
from the underlying collateral among the separate CMO classes, different classes
of bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics. At September 30, 1998, $42.5 million
or 35.7% of the Bank's mortgage-backed securities consisted of CMO's. All of the
Bank's CMO's at September 30, 1998 are collateralized by loans which are insured
or guaranteed by the FNMA, the FHLMC or the GNMA.
-14-
<PAGE>
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the accounting for
investments in all debt and equity securities, which are to be classified in one
of three categories for fiscal years beginning after December 15, 1993.
Securities that an institution has the positive intent and ability to hold to
maturity are to be reported at amortized cost. Securities that are bought and
held principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Other securities are to be classified as
securities available for sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. The Company adopted SFAS No. 115 in fiscal 1995. At
September 30, 1998, the Company had $119.2 million of mortgage-backed securities
classified as available for sale. At such time, stockholders' equity included
$565,000 of unrealized gains on mortgage-backed securities designated as
available for sale, net of related tax effects.
The following table sets forth the purchases, sales and principle
repayments of the Bank's mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities purchased $138,211 $ 55,302 $ 51,493
Principal repayments (26,558) (6,728) (4,178)
Other, net (53,950)(1) (52,599)(1) (53,855)(1)
--------- --------- ---------
Net increase (decrease) $ 57,703 $ (4,025) $ (6,540)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ----------
(1) Includes $54,837, $52,714 and $54,552 in net proceeds from the sale of
mortgage-backed securities for 1998, 1997 and 1996, respectively.
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank.
The following table sets forth certain information relating to the
Bank's mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA securities $ 41,568 $ 41,378 $ -- $ -- $ -- $ --
FNMA securities 35,233 35,242 33,906 33,832 23,497 23,364
CMO securities 41,503 42,540 12,530 12,704 36,988 37,602
FHLMC
securities -- -- 14,943 14,921 3,559 3,398
SBA securities -- -- -- -- 1,082 1,118
-------- -------- -------- -------- -------- --------
Total $118,304 $119,160 $ 61,379 $ 61,457 $ 65,126 $ 65,482
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
-15-
<PAGE>
At September 30, 1998, the $118.3 million mortgage-backed securities
portfolio had a weighted average yield of 5.51%. Of such amount, $2.7 million
with a weighted average yield of 4.83% had contractual maturities within ten
years and $115.6 million with a weighted average yield of 5.53% had contractual
maturities over ten years. However, the actual maturity of a mortgage-backed
security may be less than its stated maturity due to prepayments of the
underlying mortgages. Prepayments that are faster than anticipated may shorten
the life of the security and adversely affect its yield to maturity. The yield
is based upon the interest income and the amortization of any premium or
discount related to the mortgage-backed security. In accordance with generally
accepted accounting principles, premiums and discounts are amortized over the
estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because
to the extent that the Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
For additional information relating to the Bank's mortgage-backed
securities, see Notes A-2 and B to the Consolidated Financial Statements.
INVESTMENT SECURITIES. The investment policy of the Bank is designed
primarily to provide and maintain liquidity and to generate a favorable return
on investments without incurring undue interest rate risk, credit risk, and
investment portfolio asset concentrations. Historically, the Bank has invested
excess funds in mortgage-backed securities rather than investment securities due
to the higher yield on mortgage-backed securities. As a result, investment
securities have not comprised a significant portion of the Bank's assets.
The Bank is authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations, certain
time deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt securities
and other specified equity investments.
The following table sets forth certain information relating to the
Bank's investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1998 1997 1996
---- ---- ----
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Marketable equity
securities $2,266 $1,984 $698 $698 $-- $--
</TABLE>
At September 30, 1998, the Bank's investment securities consisted
entirely of the common stock of other local financial institutions. Sources of
Funds
-16-
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from principal repayments and prepayments on loans and mortgage-backed
securities. Repayments on loans and mortgage-backed securities are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources. They may also be used on a longer term basis for
general business purposes.
DEPOSITS. The Bank's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts and term certificate accounts. Deposit account terms vary, with
the principal differences being the minimum balance required, the time periods
the funds must remain on deposit and the interest rate.
The Bank considers its primary market area to be Hamilton, Warren and
Butler Counties, Ohio. The Bank attracts deposit accounts by offering a wide
variety of accounts, competitive interest rates, and convenient office locations
and service hours. In addition, the Bank maintains automated teller machines at
its Lebanon, Pisgah and Wyoming offices. The Bank does not advertise for
deposits outside of its primary market area or utilize the services of deposit
brokers. Management believes that an insignificant number of deposit accounts
were held by non-residents of Ohio at September 30, 1998.
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. Beginning in the second
half of fiscal 1995, the Bank began to experience an inflow of deposits as a
result of the Bank's pricing strategies, increased marketing efforts and new
deposit products. Although market demand generally dictates which deposit
maturities and rates will be accepted by the public, the Bank intends to
continue to promote longer term deposits to the extent possible, consistent with
its asset and liability management goals. The following table shows the increase
in net deposits and interest credited on deposits.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Increase before interest credited $ 3,051 $ 1,727 $ 7,721
Interest credited 7,410 5,123 4,039
------- ------- -------
Net deposit increase $10,461 $ 6,850 $11,760
------- ------- -------
------- ------- -------
</TABLE>
-17-
<PAGE>
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at September 30, 1998 by time remaining to maturity.
<TABLE>
<CAPTION>
Amounts in
Thousands
----------
<S> <C>
Three months or less $ 832
Over three months through six months 2,498
Over six months through 12 months 9,989
Over 12 months 12,599
--------
Total $25,918
--------
--------
</TABLE>
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type of deposit as of the dates
indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
1998 1997 1996
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts $ 18,606 9.04% $ 15,949 10.90% $ 17,192 12.33%
Money market accounts 29,447 14.31 21,694 14.83 18,446 13.23
Certificates of deposit 145,606 70.74 99,446 67.98 95,431 68.43
NOW accounts 10,504 5.10 8,308 5.68 6,538 4.69
Noninterest-bearing deposits 1,666 0.81 900 0.61 1,840 1.32
-------- ------- -------- ------- -------- -------
Total deposits at end of
period $205,829 100.00% $146,297 100.00% $139,447 100.00%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1998 and 1997, and the
amounts at September 30, 1998 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1998
September 30, Maturing Within
Certificates of ------------------ --------------------------------------------
Deposit 1998 1997 One Year Two Years Three Years Thereafter
-------- -------- ------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
4.0% or less $ -- $ 88 $ -- $ -- $ -- $ --
4.01% to 6.0% 89,441 61,721 61,259 15,401 6,405 16,226
6.01% to 8.0% 56,165 37,637 14,636 17,936 7,082 6,661
-------- ------- ------- ------- ------- -------
Total certificate
accounts $145,606 $99,446 $75,895 $33,337 $13,487 $22,887
-------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- -------
</TABLE>
-18-
<PAGE>
The following table presents the average balance of each deposit type
and the average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 17,277 2.50% $ 16,570 3.00% $ 17,590 3.00%
Money market accounts 25,571 4.39 20,079 4.35 15,399 4.06
Certificates of deposit 122,526 5.95 97,439 5.95 95,839 5.82
NOW accounts 9,406 1.42 8,223 1.54 6,531 1.73
Noninterest-bearing deposits 1,283 -- 1,370 -- 1,531 --
-------- ---- -------- ---- -------- ----
Total deposits $176,063 5.10% $143,681 5.08% $136,890 5.00%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
BORROWINGS. While the Bank has not historically utilized borrowings as
a source of funds, during fiscal 1994, the Bank began borrowing funds from the
FHLB of Cincinnati in order to leverage its capital. At September 30, 1998, the
Bank had $150 million in FHLB advances, all of which were long-term in nature.
The following table sets forth certain information relating to the
Bank's borrowings at the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
-------------------------------------
1998 1997 1996
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $130,000 $77,692 $40,000
Maximum amount outstanding at any
month-end during the period $165,000 $95,000 $60,000
Weighted average rate:
During the period 6.08% 5.95% 6.39%
At end of period 5.76% 5.98% 5.98%
</TABLE>
COMPETITION
The Bank faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks and
other savings institutions located in its market area. The Bank faces additional
significant competition for investors' funds from other financial
intermediaries. The Bank competes for deposits principally by offering
depositors a variety of deposit programs, convenient branch locations, hours and
other services. The Bank does not rely upon any individual group or entity for a
material portion of its deposits.
-19-
<PAGE>
The Bank's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Bank competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers and the variety of its products. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
EMPLOYEES
The Bank had 44 full-time employees and six part-time employees at
September 30, 1998. None of these employees is represented by a collective
bargaining agreement, and the Bank believes that it enjoys good relations with
its personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
REGULATION OF THE COMPANY
GENERAL. The Company, as a savings and loan holding company within the
meaning of the Home Owners' Loan Act ("HOLA"), has registered with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank is
subject to certain restrictions in its dealings with the Company and affiliates
thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "-- The Bank --
Qualified Thrift Lender Test."
-20-
<PAGE>
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. No multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings association; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings association; (iv) holding or managing properties used
or occupied by a subsidiary savings association; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may only be engaged in after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
FEDERAL LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions
between savings associations and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of either, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At September 30, 1998, the Bank was in compliance with
the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
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<PAGE>
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act, or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
The Bank Holding Company Act of 1956 ("BHCA") has been amended to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company to acquire control of a savings association. In addition, a
bank holding company that controls a savings association is permitted to merge
or consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
Bank Insurance Fund ("BIF") with the approval of the appropriate federal banking
agency and the Federal Reserve Board. As a result of these provisions, there
have been a number of acquisitions of savings associations by bank holding
companies in recent years.
REGULATION OF THE BANK
GENERAL. The OTS has extensive regulatory authority over the operations
of savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured up to
$100,000 per insured member (as defined by law and regulation) by the SAIF
administered by the FDIC and are backed by the full faith and credit of the U.
S. Government. As insurer, the FDIC is authorized to conduct examinations of,
and to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action.
The deposits of the Bank are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the BIF, the federal
deposit insurance fund that covers commercial bank deposits, are required by law
to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits.
The BIF had achieved a fully funded status in contrast to the SAIF and,
therefore, the Federal Deposit Insurance Corporation ("FDIC") substantially
reduced the average deposit insurance premium paid by commercial banks to a
level approximately 75% below the average premium paid by savings institutions.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity. On September 30, 1996, The Omnibus
Appropriations Act was signed into law. The legislation authorized a one-time
charge on SAIF insured deposits at a rate of $.657 per $100.00 of March 31, 1995
deposits. As a result, the Bank's assessment amounted to $770,000 ($508,000 net
of tax). Additional provisions of the Act include new BIF and SAIF premiums and
the merger of BIF and SAIF. The new BIF and SAIF premiums will include a premium
for repayment of the Financing Corporation ("FICO") bonds plus any regular
insurance assessment, currently nothing for the lowest risk category
institutions. Until
-22-
<PAGE>
full pro-rata FICO sharing is in effect, the FICO premiums for BIF and SAIF will
be 1.3 and 6.4 basis points, respectively, beginning January 1, 1997. Full
pro-rata FICO sharing is to begin no later than January 1, 2000.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Current OTS capital standards require
savings associations to satisfy three different capital requirements. Under
these standards, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to 3% of adjusted total
assets and "total" capital (a combination of core and "supplementary" capital)
equal to 8% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets.
Both core and tangible capital are further reduced by an amount equal
to a savings association's debt and equity investments in subsidiaries engaged
in activities not permissible to national banks (other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies).
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirement, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighting system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
The following is a reconciliation of the Bank's equity determined in
accordance with GAAP to regulatory tangible, core, and risk-based capital at
September 30, 1998.
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------
Tangible Core Risk- based
Capital Capital Capital
-------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
GAAP equity $28,078 $28,078 $28,078
Unrealized gain on securities (661) (661) (661)
Goodwill (759) (759) (759)
General valuation allowances -- -- 806
-------- -------- --------
Total regulatory capital 26,658 26,658 27,464
Minimum capital requirements 18,136 15,720 5,880
-------- -------- --------
Excess regulatory capital $ 8,522 $10,938 $21,584
-------- -------- --------
-------- -------- --------
</TABLE>
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<PAGE>
LIQUIDITY REQUIREMENTS. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 5%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at September 30, 1998, had a liquidity ratio of
12.7%.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At September 30, 1998, under the
expanded QTL test, approximately 87% of the Bank's portfolio assets were
qualified thrift investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval. See "- Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 associations must submit written notice to the OTS 30 days prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association as a result of such a
determination. The Bank currently is a Tier 1 institution for purposes of the
regulation dealing with capital distributions.
-24-
<PAGE>
OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
POLICY STATEMENT ON NATIONWIDE BRANCHING. Effective May 11, 1992, the
OTS amended and codified its policy statement on branching by
federally-chartered savings associations to delete then-existing regulatory
restrictions on the branching authority of such associations and to permit
nationwide branching to the extent allowed by federal statute. (Prior OTS policy
generally permitted interstate branching for federally-chartered savings
associations only to the extent allowed state-chartered savings associations in
the states where the association's home office was located and where the branch
was sought or if the branching resulted from OTS approval of a supervisory
interstate acquisition of a troubled institution.) Current OTS policy generally
permits a federally-chartered savings association to establish branch offices
outside of its home state if the association meets the domestic building and
loan test in Section 7701(a)(19) of the Code or the asset composition test of
subparagraph (c) of that section, and if, with respect to each state outside of
its home state where the association has established branches, the branches,
taken alone, also satisfy one of the two tax tests. An association seeking to
take advantage of this authority would have to have a branching application
approved by the OTS, which would consider the regulatory capital of the
association and its record under the Community Reinvestment Act of 1977, as
amended, among other things.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Cincinnati,
whichever is greater. At September 30, 1998, the Bank had $8.9 million in FHLB
stock, which was in compliance with this requirement.
TAXATION
TAXATION
FEDERAL TAXATION. The Company and the Bank are both subject to the
federal tax laws and regulations which apply to corporations generally. Prior to
the enactment of the Small Business Jobs Protection Act (the "Act"), which was
signed into law on August 21, 1996, certain thrift institutions, such as the
Bank, were allowed deductions for bad debts under methods more favorable than
those granted to other taxpayers. Qualified thrift institutions could compute
deductions for bad debts using either the specific charge off method of Section
166 of the Code or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method applicable
only to thrift institutions, or (ii) the "experience" method that also was
available to small banks. Under the "percentage of taxable income" method, a
thrift institution generally was allowed a deduction for an addition to its bad
debt reserve equal to 8% of its taxable income (determined without regard to
this deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
-25-
<PAGE>
method of the percentage of taxable income method. For tax years 1995 and 1994,
the Bank used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like the Bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or, (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by the Bank to the Company is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced
and the Bank's gross income for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of September 30, 1998, the Bank's pre-1988 reserves for
tax purposes totaled approximately $3.1 million. The Bank believes it had
approximately $12.3 million of accumulated earnings and profits for tax purposes
as of September 30, 1998, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
No representation can be made as to whether the Bank will have current or
accumulated earnings and profits in subsequent years.
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<PAGE>
In addition to the regular income tax, the Company and the Bank are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1996, the Company and the Bank are also subject to environmental tax
equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
The tax returns of the Bank have been audited or closed without audit
through fiscal year 1994. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
OHIO TAXATION. The Company is subject to the Ohio corporation franchise
tax, which, as applied to the Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, The Company may
exclude 100% of its investment in the capital stock of the Bank after the
Conversion, as reflected on the balance sheet of the Company, in computing its
taxable net worth as long as it owns at least 25% of the issued and outstanding
capital stock of the Bank. The calculation of the exclusion from net worth is
based on the ratio of the excludable investment (net of any appreciation or
goodwill included in such investment) to total assets multiplied by the net
value of the stock. As a holding company, the Bank may be entitled to various
other deductions in computing taxable net worth that are not generally available
to operating companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of the computed Ohio taxable income in excess of $50,000. If the franchise
tax is paid on the net worth basis, the litter tax is equal to .014% times
taxable net worth.
The Bank is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which was imposed in 1998 at a rate of 1.5% of the Bank's book
net worth determined in accordance with generally accepted accounting
principles. As a "financial institution," the Bank is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.
ITEM 2. PROPERTIES.
OFFICES AND PROPERTIES
At September 30, 1998, the Bank conducted its business from its
executive offices in West Chester, Ohio and six full service offices, all of
which are located in southwestern Ohio.
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<PAGE>
The following table sets forth certain information with respect to the
Bank's office properties at September 30, 1998.
<TABLE>
<CAPTION>
Net Book
Leased/ Value of Amount of
Description/Address Owned Property Deposits
------------------- ------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Blue Ash - 9477 Kenwood Road Leased $ 260 $ 21,748
Lockland - 117 Mill Street Owned 123 50,464
Lebanon - 718 E. Main Street Owned 434 24,671
Kingsgate - 7810-7820 Tylersville Square Drive Owned 1,907 29,522
North College Hill - 1500 Goodman Avenue Owned 195 24,931
Pisgah - 9235 Cincinnati - Columbus Road Owned 316 33,440
Wyoming - 401 Wyoming Avenue Owned 319 21,053
------ --------
$3,554 $205,829
------ --------
------ --------
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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, 1998, the Company had 2,210,996 shares of common stock outstanding
and had 880 stockholders of record. Such holdings do not reflect the number of
beneficial owners of common stock.
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<PAGE>
The following table sets forth, on a quarterly basis, 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 11,
1998, payable to stockholders of record as of October 15, 1998.
<TABLE>
<CAPTION>
High Low Dividends Paid*
---- --- ---------------
<S> <C> <C> <C>
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
Quarter ended
December 31, 1997 31.50 23.25 .25
Quarter ended
March 31, 1998 35.25 29.50 .25
Quarter ended
June 30, 1998 34.00 27.00 .25
Quarter ended
September 30, 1998 43.50 24.88 .25
</TABLE>
- ----------
* 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.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
As of or For the Year Ended September 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $ 396,518 $274,888 $235,191 $197,938 $167,294
Loans receivable, net 250,922 191,096 149,050 110,830 100,288
Mortgage-backed securities 119,160 61,457 65,482 72,022 25,681
Cash and cash equivalents 8,367 11,141 12,938 10,670 36,465
Deposit accounts 205,829 146,297 139,447 127,687 153,709
FHLB advances 150,000 95,000 60,000 30,000 --
Stockholders' equity(1) 37,460 31,424 33,056 38,474 12,458
SELECTED OPERATIONS DATA:
Net interest income $ 8,463 $ 7,130 $ 6,268 $ 5,719 $ 4,259
Other operating income 543 726 994 464 76
General, administrative and other
expense 5,082 4,066 4,973 3,410 2,356
Net earnings 2,406 2,369 1,441 1,837 1,282
SELECTED OPERATING RATIOS(2):
Average interest rate spread(3) 1.95% 2.21% 2.13% 2.28% 2.85%
Net interest margin(3) 2.41 2.84 2.98 3.38 3.16
Ratio of interest-earning assets to
interest-bearing liabilities 109.36 113.44 119.03 128.46 107.81
General, administrative and other
expense as a percent of average
assets 1.42 1.59 2.31 1.99 1.71
Return on average assets .67 .93 .67 1.07 .93
Return on average equity 6.79 7.35 4.03 4.82 10.85
Ratio of average equity to average
assets 9.92 12.64 16.61 22.27 8.59
Full-service offices at end of
period 7 5 5 5 5
ASSET QUALITY RATIOS(2):
Non-performing assets as a
percent of total assets(4) .01% .07% .09% .23% .37%
Allowance for loan losses as a
percent of non-performing loans
and troubled debt restructurings 2,032.69 297.93 201.97 659.18 60.83
CAPITAL RATIOS(5):
Tangible capital ratio 6.78% 10.46% 11.68% 14.30% 7.38%
Core capital ratio 6.78 10.46 11.68 14.30 7.38
Risk-based capital ratio 12.11 19.04 22.29 31.00 15.42
</TABLE>
(Footnotes on following page)
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<PAGE>
- ----------
(1) Consists solely of retained earnings as of 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 OTS.
ITEM 7. 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.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total consolidated assets increased $121.6
million or 44.2% to $396.5 million at September 30, 1998 compared to $274.9
million at September 30, 1997. Such increase was funded primarily through
increases in deposits of $59.5 million and $55.0 million in advances from the
FHLB of Cincinnati. Such increase in assets was primarily due to a $59.8 million
increase in loans receivable and a $57.7 million increase in mortgage-backed
securities. Total liabilities increased $115.6 million or 47.5% to $359.1
million at September 30, 1998 compared to September 30, 1997.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased $2.8 million
to $8.4 million at September 30, 1998 compared to September 30, 1997, as excess
liquidity was utilized to fund growth in the higher yielding loan portfolio.
LOANS RECEIVABLE, NET. Loans receivable, net increased $59.8 million or
31.3% to $250.9 million at September 30, 1998 compared to September 30, 1997, as
loan disbursements totaling $158.9 million were partially offset by principal
repayments of $139.4 million. The increase in loans receivable was primarily due
to increased
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<PAGE>
originations of all types of loans and the receipt of loans in conjunction with
the acquisition of North Cincinnati Savings Bank. Growth in the loan portfolio
was comprised of $47.6 million or 36.6% in one-to-four family loans, $1.5
million or 14.4% in equity lines, $5.5 million or 116.5% in multi-family loans,
$5.9 million or 72.4% in construction loans, and a $2.6 million or 262.2%
increase in consumer and other loans, which were partially offset by a $2.9
million or 7.6% decrease in non-residential real estate and land loans.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities increased $57.7
million to $119.2 million at September 30, 1998 compared to September 30, 1997
as a result of the redeployment of assets received in the acquisition of North
Cincinnati Savings Bank and increased leveraging utilizing FHLB advances.
FHLB ADVANCES. Advances from the FHLB of Cincinnati amounted to $150.0
million at September 30, 1998 compared to $95.0 million at September 30, 1997,
an increase of $55.0 million or 57.9%. 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 fiscal 1998 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 $59.5 million or 40.7% to $205.8 million
at September 30, 1998 compared to September 30, 1997. The increase in deposits
was comprised of a $13.4 million or 28.5% increase in demand accounts and a
$46.2 million or 46.4% increase in certificates of deposit. The increase was
primarily attributable to the receipt of deposits in conjunction with the
acquisition of North Cincinnati Savings Bank and management's continuing
marketing efforts coupled with continuing growth achieved at the new main office
facility which opened in fiscal 1996.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $6.0 million to
$37.4 million at September 30, 1998 compared to September 30, 1997, primarily as
a result of the issuance of $4.1 million in treasury shares in conjunction with
the acquisition of North Cincinnati Savings Bank and fiscal 1998 net earnings of
$2.4 million which were partially offset by net cash distributions to
stockholders of $2.2 million or $1.00 per share.
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
-32-
<PAGE>
<TABLE>
<CAPTION>
At September 30, Year Ended September 30,
---------------- ---------------------------------------------------------------------------
1998 1998 1997 1996
---------------- -------------------------- ---------------------------- -----------------
Average Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 8.15% $232,466 $18,946 8.15% $171,519 $14,067 8.20% $130,399 $ 10,853 8.32%
Mortgage-backed securities 5.51 90,309 5,522 6.11 64,100 4,147 6.47 67,316 4,164 6.19
Other interest-earning assets 5.77 27,820 1,391 5.00 15,516 835 5.38 12,834 643 5.01
-------- ------- -------- ------- -------- --------
Total interest-earning assets 7.23 350,595 25,859 7.38 251,135 19,049 7.59 210,549 15,660 7.44
Noninterest-earning assets 6,738 3,905 4,721
-------- -------- --------
Total assets $357,333 $255,040 $215,270
Interest-bearing liabilities:
Deposits 5.04 $185,985 9,494 5.10 $143,681 7,299 5.08 $136,890 6,838 5.00
Borrowings 5.76 134,617 7,902 5.87 77,692 4,620 5.95 40,000 2,554 6.39
-------- ------- -------- ------- -------- --------
Total interest-bearing
liabilities 5.34 320,602 17,396 5.43 221,373 11,919 5.38 176,890 9,392 5.31
---- ------- ---- -------- ------- ---- ------- ----
Noninterest-bearing liabilities 1,283 1,427 2,615
-------- -------- -------
Total liabilities 321,885 222,800 179,505
Stockholders' equity 35,448 32,240 35,765
-------- -------- -------
Total liabilities and
stockholders' equity $357,333 $255,040 $215,270
-------- -------- -------
-------- -------- -------
Net interest-earning assets $ 29,993 $ 29,762 $ 33,659
-------- -------- -------
-------- -------- -------
Net interest income/interest
rate spread 1.89% $ 8,463 1.95% $ 7,130 2.21% $ 6,268 2.13%
----- ------- ---- ------- ---- -------- ----
----- ------- ---- ------- ---- -------- ----
Net yield on interest-earning
assets(1) 2.41% 2.84% 2.98%
---- ---- ----
---- ---- ----
Ratio of interest-earning assets
to interest-bearing liabilities 109.36% 113.44% 119.03%
------ ------ ------
------ ------ ------
</TABLE>
- ----------
(1) Net interest income divided by total average interest-earning assets.
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<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,
--------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------------- ----------------------------------------
Increase Increase
(Decrease) Due To (Decrease) Due To
-------------------------------------- ----------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
------ ------- ------- ---------- ----- ------ ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (86) $4,998 $ (33) $4,879 $(156) $3,421 $ (51) $3,214
Mortgage-backed securities (231) 1,696 (90) 1,375 188 (199) (6) (17)
Other interest-earning assets (59) 662 (47) 556 47 134 11 192
------ ------ ------ ------ ----- ------ ------ ------
Total interest-earning assets (376) 7,356 (170) 6,810 79 3,356 (46) 3,389
------ ------ ------ ------ ----- ------ ------ ------
Interest-bearing liabilities:
Deposits 29 2,149 17 2,195 110 340 11 461
Borrowings (62) 3,387 (43) 3,282 (176) 2,409 (167) 2,066
------ ------ ------ ------ ----- ------ ------ ------
Total interest-bearing
liabilities (33) 5,536 (26) 5,477 (66) 2,749 (156) 2,527
------ ------ ------ ------ ----- ------ ------ ------
Increase (decrease) in net
interest income $(343) $1,820 $(144) $1,333 $ 145 $ 607 $ 110 $ 862
------ ------ ------ ------ ----- ------ ------ ------
------ ------ ------ ------ ----- ------ ------ ------
</TABLE>
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<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. The Company's net earnings amounted to $2.4 million for the
fiscal year ended September 30, 1998 compared to net earnings of $2.4 million
for the fiscal year ended September 30, 1997, an increase of $37,000 or 1.6%.
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 $8.5 million for the
year ended September 30, 1998, a $1.3 million or 18.7% increase over fiscal
1997. This increase in net interest income resulted from a $6.8 million or 35.7%
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
$5.5 million or 46.0% increase in total interest expense during fiscal 1998. The
Company's interest rate spread decreased from 2.21% for the year ended September
30, 1997 to 1.95% for the year ended September 30, 1998. The Company's net
interest margin decreased from 2.84% in fiscal 1997 to 2.41% in fiscal 1998. The
decline in net interest margin during fiscal 1998 was due primarily to the
funding of growth in the loan portfolio with the use of long term, fixed rate
FHLB advances as well as continuing declines experienced in long-term investment
alternatives.
INTEREST INCOME. Interest income on loans increased $4.9 million or
34.7% during the year ended September 30, 1998 compared to the same period in
1997. Such increase was due primarily to a $60.9 million or 35.5% increase in
the average balance of such assets as a result of increased loan production in
fiscal 1998 and the acquisition of North Cincinnati Savings Bank.
Interest income on the Company's mortgage-backed securities increased
$1.4 million or 33.2% during the year ended September 30, 1998 compared to the
same period in 1997. Such increase was primarily due to a $26.2 million or 40.9%
increase in the average balance of such assets, which was partially offset by a
decrease in the average yield to 6.11% for fiscal 1998 compared to 6.47% for
fiscal 1997. The increase in the average balance was primarily due to purchases
while the decrease in the average yield reflected market rates.
Interest income on investment securities and other interest-earning
assets increased by $556,000 or 66.6% primarily due to an increase in the
average balance of such assets during the year ended September 30, 1998 compared
to fiscal 1997.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $5.5 million or 46.0% during the year ended September
30, 1998 compared to fiscal 1997. Interest expense on deposits increased $2.2
million or 30.1% during fiscal 1998 as a result of a $42.3 million or 29.4%
increase in the average balance of deposits as well as an increase in the
average rate paid to 5.10% for fiscal 1998 compared to 5.08% for fiscal 1997.
The increase in deposits was primarily due to the acquisition of North
Cincinnati Savings Bank. Interest expense on borrowings increased to $7.9
million during the fiscal year ended September 30, 1998 compared to $4.6 million
during the fiscal year ended September 30, 1997 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 and the growth in the securities
portfolio.
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 1998, the Company established a
provision for loan losses totaling $180,000. For fiscal 1997, the Company
established a provision for loan losses totaling $165,000. At September 30,
1998, the Company's allowance for loan losses totaled $806,000, which
represented 2,033% of non-performing loans and .32% 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
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<PAGE>
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 $183,000 to $543,000 for the
fiscal 1998 compared to $726,000 for fiscal 1997, primarily as a result of a
$261,000 decrease in gains on sales of securities during fiscal 1998. Such
decrease was paritally offset by an increase in other operating income.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For fiscal 1998, general,
administrative and other expense increased by $1.0 million or 25.0% to $5.1
million, compared to $4.1 million for fiscal 1997. Such increase was due
primarily to a $701,000 or 27.5% increase in employee compensation and benefits,
a $209,000 or 54.3% increase in occupancy and equipment expenses and a $61,000
or 15.5% increase in other operating expenses primarily as a result of the
acquisition of North Cincinnati Savings Bank. Employee compensation and benefits
expense was also impacted by higher benefit plan costs.
INCOME TAXES. The Company incurred income tax expense of $1.3 million
during each of the fiscal years ended September 30, 1998 and 1997. The effective
tax rates were 35.7% and 34.6% during fiscal 1998 and 1997, respectively.
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
fiscal year ended September 30, 1997 compared to net earnings of $1.4 million
for the fiscal 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 charge of $770,000
related to the recapitalization of the SAIF fund, which were partially offset by
decreases in other income and increased federal income taxes.
NET INTEREST INCOME. 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 funding growth in the loan portfolio with 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
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<PAGE>
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.
PROVISION FOR LOAN LOSSES. The Company establishes a provision for loan
losses, which is charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. For 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.
OTHER INCOME. Total other income decreased $268,000 to $726,000 for the
fiscal 1997 compared to $994,000 for fiscal 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 fiscal 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 recapitalize 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.
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, 1998, the Company had $150.0 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 overnight
deposits. On a longer-term basis, the Bank maintains a strategy of investing in
various mortgage-backed securities and lending products. During the fiscal year
ended September 30, 1998, 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, 1998, the total approved loan commitments
outstanding amounted to $4.5 million. At the same date, the Bank had
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<PAGE>
approximately $12.1 million of commitments under unused lines and letters of
credit and the unadvanced portion of construction loans approximated $10.3
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 within one
year at September 30, 1998 totaled $75.9 million. Management believes that a
significant portion of maturing deposits will remain with the Bank.
The Bank is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets (as defined) in amounts equal to 5%
and 1%, respectively, of net withdrawable deposits and borrowings payable in one
year or less to assure its ability to meet demand for withdrawals and repayment
of short-term borrowings. The liquidity requirements may vary from time to time
at the direction of the OTS depending upon economic conditions and deposit
flows. The Bank's average monthly liquidity ratio and short-term liquid assets
ratio were each 12.7% for September 1998.
As set forth below, as of September 30, 1998, the Bank's regulatory
capital substantially exceeded applicable requirements.
<TABLE>
<CAPTION>
September 30, 1998
---------------------------------
Tangible Core Risk-based
Capital Capital Capital
------- -------- ----------
(In Thousands)
<S> <C> <C> <C>
Stockholders' equity $27,796 $27,796 $27,796
Unrealized gain on securities (379) (379) (379)
Goodwill (759) (759) (759)
General valuation allowances -- -- 806
------- ------- --------
Total regulatory capital 26,658 26,658 27,464
Minimum capital requirements 5,880 15,720 18,136
------- ------- --------
Excess capital $20,778 $10,938 $ 9,328
------- ------- --------
------- ------- --------
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Bank's assets and liabilities are
critical to the maintenance of acceptable performance levels.
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<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements and transfers of receivables
with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management adopted SFAS No. 125 during fiscal 1998 without material
adverse effect on the Company's consolidated financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement, but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. 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. The Corporation adopted SFAS No.
130 effective October 1, 1998, as required, without material impact on the
Company'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 statements and requires that those enterprises
report selected information about reportable segments 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 accessing 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
-39-
<PAGE>
beginning after December 15, 1997. The Corporation adopted SFAS No. 131
effective October 1, 1998, as required, without material impact on the
Corporation's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling into
question their intent to hold other debt securities to maturity in the future.
SFAS No. 133 is not expected to have a material impact on the Corporation's
financial statements.
YEAR 2000 COMPLIANCE MATTERS
As with most providers of financial services, the Company's operations
are heavily dependent on information technology systems. The Company is
addressing the potential problems associated with the possibility that the
computers that control or operate the Company's information technology system
and infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year 1900
causing systems to fail to function or to generate erroneous data. The Company
is working with the companies that supply or service its information technology
systems to identify and remedy any year 2000 related problems.
The Company's primary data processing applications are handled by a
third-party service bureau, Bisys. Bisys has advised the Company that it has
migrated to a fully year 2000 compliant processing system that is presently
being tested and remediated. Management has also reviewed the Company's
ancillary equipment and is in the process of providing the appropriate remedial
measures, including requesting service providers to assure the Savings Bank that
their systems and products are fully year 2000 compliant. Management is in the
process of evaluating the need to upgrade its existing operating systems.
No assurance can be given, however, that significant expense will not
be incurred in future periods. In the unlikely event that the Bank is ultimately
required to purchase replacement computer systems, programs and equipment, or
incur substantial expense to make the Bank's current systems, programs, and
equipment year 2000 compliant, the Bank's net earnings and financial condition
could be adversely affected.
Management has developed a contingency plan which includes access to an
alternative processing site provided by Bisys. Additionally, the Bank can
process transactions manually for a period of several weeks, if necessary, upon
arrival of the year 2000.
In addition to possible expense related to its own systems, the Company
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in the Company's primary market area. Because the
Company's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and the Company's primary market area is not
significantly dependent upon one employer or industry, the Company does not
expect any significant or prolonged difficulties that will affect net earnings
or cash flow.
-40-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect.
The lending activities of savings institutions have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings institutions generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This fact, in combination with substantial investments in
long-term, fixed rate loans, has historically caused the income earned by
savings institutions on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
management has implemented and continues to monitor asset and liability
management policies to better match the maturities and repricing terms of the
Company's interest-earning assets and interest-bearing liabilities. Such
policies have consisted primarily of: (i) emphasizing investment in
adjustable-rate mortgage loans ("ARMs") and adjustable-rate mortgage-backed
securities; (ii) emphasizing 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, 1998, $100.7 million or 36.6% of the
Company's portfolio of mortgage loans consisted of ARMs. In addition, at
September 30, 1998, $119.1 million or 99.9% of the Company's mortgage-backed
securities provide the Company with an adjustable yield. As a result, as of
September 30, 1998, $219.8 million or 55.4% 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 $22.6 million or 5.7% of the Company's assets at
September 30, 1998. 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
-41-
<PAGE>
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.
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 September 30,
1998, there would have been a decrease in the Bank's NPV of approximately 10% of
the present value of its assets, assuming a 200 basis point increase in interest
rates.
The following tables present the Bank's most recently available
estimated NPV and the estimated NPV as a percentage of the present value ("PV")
of assets as of the dates indicated, as calculated by the OTS, based on
information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Net Portfolio Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 30, 1998
Change in Estimated NPV Amount Percent
Interest Rates Estimated NPV As A Percentage of Change of Change
(basis points) of PV of Assets
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 13,517 3.72% $(10,902) (45)
+300 18,265 4.88% (6,154) (25)
+200 21,956 5.73% (2,463) (10)
+100 24,247 6.19% (172) ( 1)
--- 24,419 6.13% --- ---
-100 22,521 5.59% (1,899) ( 8)
-200 20,579 5.04% (3,840) (16)
-300 19,070 4.60% (5,349) (22)
-400 17,536 4.17% (6,883) (28)
</TABLE>
-42-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years ended September 30, 1998, 1997 and 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Enterprise Federal
Bancorp, Inc. as of September 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years ended September
30, 1998, 1997, and 1996, in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Cincinnati, Ohio
November 10, 1998
-43-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 854 $ 811
Federal funds sold -- 8,000
Interest-bearing deposits in other financial institutions 7,513 2,330
--------- ---------
Cash and cash equivalents 8,367 11,141
Investment securities available for sale - at market 1,984 698
Mortgage-backed securities available for sale - at market 119,160 61,457
Loans receivable - net 250,922 191,096
Office premises and equipment-at depreciated cost 4,029 3,544
Federal Home Loan Bank stock - at cost 8,928 5,500
Accrued interest receivable on loans 1,017 608
Accrued interest receivable on mortgage-backed securities 569 409
Accrued interest receivable on interest-bearing deposits 161 96
Goodwill and other intangible assets 759 20
Prepaid expenses and other assets 278 290
Prepaid federal income taxes 344 29
--------- ---------
Total assets $396,518 $274,888
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $205,829 $146,297
Advances from the Federal Home Loan Bank 150,000 95,000
Accrued interest payable 1,006 636
Other liabilities 1,466 1,365
Accrued federal income taxes 203 --
Deferred federal income taxes 554 166
--------- ---------
Total liabilities 359,058 243,464
Commitments -- --
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 4,000,000 shares authorized,
2,268,596 issued at September 30, 1998 and 1997 23 23
Additional paid-in capital 23,593 22,912
Less 57,600 and 282,768 shares of treasury stock - at cost (333) (4,386)
Less shares acquired by stock benefit plans (1,315) (1,927)
Retained earnings - restricted 15,113 14,751
Unrealized gains on securities designated as available
for sale, net of related tax effects 379 51
--------- ---------
Total stockholders' equity 37,460 31,424
--------- ---------
Total liabilities and stockholders' equity $396,518 $274,888
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
-44-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $18,946 $14,067 $10,853
Mortgage-backed securities 5,522 4,147 4,164
Investment securities 79 3 --
Interest-bearing deposits and other 1,312 832 643
-------- -------- --------
Total interest income 25,859 19,049 15,660
Interest expense
Deposits 9,494 7,299 6,838
Borrowings 7,902 4,620 2,554
-------- -------- --------
Total interest expense 17,396 11,919 9,392
-------- -------- --------
Net interest income 8,463 7,130 6,268
Provision for losses on loans 180 165 90
-------- -------- --------
Net interest income after provision for losses on loans 8,283 6,965 6,178
Other income
Gain on sale of investment and mortgage-backed securities 336 597 885
Other operating 207 129 109
-------- -------- --------
Total other income 543 726 994
General, administrative and other expense
Employee compensation and benefits 3,249 2,548 2,479
Occupancy and equipment 594 385 307
Federal deposit insurance premiums 121 122 1,069
Franchise taxes 424 447 461
Data processing 168 140 137
Amortization of goodwill and other intangible assets 71 30 30
Other operating 455 394 490
-------- -------- --------
Total general, administrative and other expense 5,082 4,066 4,973
-------- -------- --------
Earnings before income taxes 3,744 3,625 2,199
Federal income taxes
Current 1,118 959 1,102
Deferred 220 297 (344)
-------- -------- --------
Total federal income taxes 1,338 1,256 758
-------- -------- --------
NET EARNINGS $ 2,406 $ 2,369 $ 1,441
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE:
Basic $ 1.19 $ 1.23 $ .73
-------- -------- --------
-------- -------- --------
Diluted $ 1.10 $ 1.17 $ .70
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
-45-
<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 ON SECURITIES
ADDITIONAL BY 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, 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 of $1.75 per share -- -- -- -- -- (3,354) (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 22,912 (4,386) (1,927) 51 14,571 31,424
Dividends of $1.00 per share -- 0 -- -- -- (2,044) (2,044)
Issuance of shares in connection with acquisition -- -- 4,053 -- -- -- 4,053
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- -- 328 -- 328
Principal repayment on loan to ESOP/amortization of
expense related to stock benefit plans -- 681 -- 612 -- -- 1,293
Net earnings for the year ended September 30, 1998 -- -- -- -- -- 2,406 2,406
---- -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 $23 $23,593 $ (333) $(1,315) $ 379 $15,113 $37,460
---- -------- -------- -------- -------- -------- --------
---- -------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
-46-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 2,406 $ 2,369 $ 1,441
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 217 24 (34)
Amortization of deferred loan origination fees (287) (189) (170)
Amortization of expense related to stock
benefit plans 1,293 865 925
Depreciation and amortization 282 263 121
Provision for losses on loans 180 165 90
Gain on sale of securities designated as available for sale (336) (597) (885)
Federal Home Loan Bank stock dividends (464) (297) (148)
Increase (decrease) in cash, net of acquisition of North
Cincinnati Savings Bank, due to changes in:
Accrued interest receivable (634) (338) (272)
Prepaid expenses and other assets 12 (34) (36)
Accrued interest payable 370 148 112
Other liabilities (607) (546) 878
Federal income taxes
Current 228 1,053 304
Deferred 220 297 (344)
-------- ------- --------
Net cash provided by operating activities 2,880 3,183 1,982
Cash flows provided by (used in) investing activities:
Purchase of investment securities (2,266) (968) --
Proceeds from sale of investment securities designated
as available for sale -- 356 --
Purchase of mortgage-backed securities (138,211) (55,302) (51,493)
Proceeds from sale of mortgage-backed securities
designated as available for sale 54,837 52,714 54,552
Principal repayments on mortgage-backed securities 26,558 6,728 4,178
Loan principal repayments 139,368 22,494 23,208
Loan disbursements (158,861) (65,585) (61,378)
Purchase of office premises and equipment (196) (174) (1,640)
Proceeds from sale of real estate acquired
through foreclosure -- -- 19
Purchase of Federal Home Loan Bank stock (2,456) (2,203) (1,307)
Acquisition of North Cincinnati Savings Bank
common stock - net 12,896 -- --
-------- ------- --------
Net cash used in investing activities (68,331) (41,940) (33,861)
-------- ------- --------
Net cash used in operating and investing activities
(subtotal carried forward) (65,451) (38,757) (31,879)
-------- ------- --------
</TABLE>
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<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $(65,451) $(38,757) $(31,879)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 10,461 6,850 11,760
Proceeds from Federal Home Loan Bank advances 130,000 65,000 40,000
Repayment of Federal Home Loan Bank advances (75,740) (30,000) (10,000)
Escrow deposits -- (208) 18
Purchase of treasury shares -- (1,328) (1,645)
Return of capital distribution -- -- (5,986)
Payment of dividends (2,044) (3,354) --
--------- --------- ---------
Net cash provided by financing activities 62,677 36,960 34,147
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,774) (1,797) 2,268
Cash and cash equivalents at beginning of year 11,141 12,938 10,670
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,367 $ 11,141 $ 12,938
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 700 $ 895 $ 361
--------- --------- ---------
--------- --------- ---------
Interest on deposits and borrowings $ 17,026 $ 11,771 $ 9,280
--------- --------- ---------
--------- --------- ---------
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 $ 328 $ (184) $ (153)
--------- --------- ---------
--------- --------- ---------
Treasury stock issued in connection with acquisition of
North Cincinnati Savings Bank $ 4,053 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Liabilities assumed and stock and cash paid in acquisition
of North Cincinnati Savings Bank $ 57,078 $ -- $ --
Less: Fair value of assets received 56,268 -- --
--------- --------- ---------
Amount assigned to goodwill $ 810 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
-48-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
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 Company), and the issuance of common
shares of the Company to subscribing members of the Savings Bank. The
Conversion to the stock form of ownership was completed on October 14,
1994, culminating in the Company's issuance of 2,268,596 common shares.
Condensed financial statements of the Company as of September 30, 1998 and
1997 and for the years ended September 30, 1998, 1997 and 1996 are
presented in Note L. Future references are made to either the Company or
the Savings Bank as applicable.
July 18, 1997, the Company entered into an Agreement of Merger, which was
subsequently amended December 22, 1997, with North Cincinnati Savings Bank
(North Cincinnati), pursuant to which North Cincinnati would merge with and
into the Savings Bank. The transaction was consummated on February 25,
1998, pursuant to the amended Agreement of Merger, and was accounted for
using the purchase method of accounting. The Company effected the
acquisition through cash payments totaling approximately $2.5 million and
issuance of 225,168 shares of its common stock at a fair value of $18.00
per share. The acquisition resulted in the Savings Bank recording goodwill
totaling $810,000, which will be amortized over a fifteen year term using
the straight-line method.
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition had
been consummated as of the beginning of each of the respective years ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
(In Thousands, except share data)
<S> <C> <C>
Total interest income $27,515 $23,212
Total interest expense 18,588 14,835
------ ------
Net interest income 8,927 8,377
Provision for losses on loans 180 165
Other income 517 796
General, administrative and other expense 5,492 5,389
------- -------
Earnings before income taxes 3,772 3,019
Federal income taxes 1,338 1,205
------- -------
Net earnings $ 2,434 $ 2,414
------- -------
------- -------
Earnings per share
Basic $ 1.10 $ 1.13
------- -------
------- -------
Diluted $ 1.07 $ 1.07
------- -------
------- -------
</TABLE>
-49-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
The Company 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 Company'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 Company can
be significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the 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 Company'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 Company
and its subsidiary, the Savings Bank. All significant intercompany balances
and transactions have been eliminated.
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company 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 Company 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, 1998 and 1997, the Company's stockholders' equity
reflected unrealized gains on securities designated as available for sale,
net of applicable tax effects, totaling $379,000 and $51,000, 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
-50-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. LOANS RECEIVABLE (continued)
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 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).
-51-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. ALLOWANCE FOR LOSSES ON LOANS (continued)
The Savings Bank accounts for impaired loans in accordance with 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 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.
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.
At September 30, 1998 and 1997, 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 resulting from the acquisition of North Cincinnati, totaling
$810,000, is being amortized over a fifteen year period using the
straight-line method.
Goodwill also includes 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.
-52-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
9. INCOME TAXES
The Company accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and
its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax
assets are recorded only to the extent that the amount of net deductible
temporary differences or carryforward attributes may be utilized against
current period earnings, carried back against prior years earnings, offset
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future.
The Company'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 Company 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 Company 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 Company 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 Company recognized expense related to the ESOP totaling
$786,000, $545,000 and $652,000 for the fiscal years ended September 30,
1998, 1997 and 1996, respectively.
Additionally, the Company adopted a Management Recognition Plan (MRP). The
MRP purchased 90,744 shares of the Company's common stock during fiscal
1995 at an average price per share of $14.64. All of the shares available
under the MRP 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 $589,000, $472,000 and
$234,000 was charged to expense for the MRP for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
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 pension plan maintains a fully funded status at September 30,
1998 while the provision for pension expense totaled $22,000 and $99,000
for the fiscal years ended September 30, 1997 and 1996, 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.
-53-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company in
estimating its fair value disclosures for financial instruments at
September 30, 1998 and 1997:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
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.
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,
1998 and 1997, the difference between the fair value and notional
amount of loan commitments was not material.
-54-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 8,367 $ 8,367 $ 11,141 $ 11,141
Investment securities 1,984 1,984 698 698
Mortgage-backed securities 119,160 119,160 61,457 61,457
Loans receivable 250,922 255,751 191,096 190,597
Stock in Federal Home Loan Bank 8,928 8,928 5,500 5,500
-------- -------- -------- --------
$389,361 $394,190 $269,892 $269,393
-------- -------- -------- --------
-------- -------- -------- --------
Financial liabilities
Deposits $205,829 $206,332 $146,297 $147,136
-------
Advances from Federal Home Loan Bank 150,000 150,299 95,000 94,936
------- ------- -------- ------
$355,829 $356,631 $241,297 $242,072
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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
Basic earnings per share for the years ended September 30, 1998, 1997 and
1996 is computed based upon the weighted-average shares outstanding during
the period less 63,796, 85,518 and 113,714 shares, respectively, in the
ESOP that are unallocated and not committed to be released.
Weighted-average common shares deemed outstanding totaled 2,024,637,
1,920,482 and 1,984,616 for the years ended September 30, 1998, 1997 and
1996, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Company's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
2,180,170, 2,026,254 and 2,067,765 for the fiscal years ended September 30,
1998, 1997 and 1996, respectively.
Effective during the fiscal year ended September 30, 1998, the Company
began presenting earnings per share pursuant to the provisions of SFAS No.
128, "Earnings Per Share." Accordingly, the fiscal 1997 and 1996 earnings
per share presentation has been revised to conform to SFAS No. 128.
-55-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
13. EARNINGS PER SHARE AND DIVIDENDS PER SHARE (continued)
During fiscal 1996, the Company declared a dividend of $3.00 per common
share, which was paid in October, 1995 from funds retained by the Company
in the Conversion and was deemed by management to constitute a return of
excess capital. Accordingly, the Company 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
Company'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 1998
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of investment securities at September 30, 1998 and
1997 are summarized as follows.
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
Equity securities $2,266 $12 $294 $1,984
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
Equity securities $698 $ -- $ -- $698
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
-56-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at September 30, 1998
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Federal National Mortgage Association
participation certificates $ 35,233 $ 43 $ 34 $ 35,242
Government National Mortgage Association
participation certificates 41,568 -- 190 41,378
Collateralized mortgage obligations 41,503 1,056 19 42,540
-------- -------- -------- --------
$118,304 $1,099 $243 $119,160
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<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>
The amortized cost of mortgage-backed securities at September 30, 1998, by
contractual terms 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 $ 2,742
Due after ten years 115,562
---------
$118,304
---------
---------
</TABLE>
-57-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio is as follows at September 30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $177,626 $130,022
Equity lines 23,936 19,781
Multi-family 10,162 4,693
Construction 24,362 15,960
Nonresidential real estate and land 35,577 38,516
Consumer and other 3,655 1,009
--------- ---------
275,318 209,981
Less:
Undisbursed portion of loans in process 10,328 7,821
Deferred loan origination fees 1,127 1,017
Allowance for loan losses 806 575
Undisbursed portion of equity lines 12,135 9,472
--------- ---------
$250,922 $191,096
--------- ---------
--------- ---------
</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 $205.7 million or 82% the total loan portfolio at September
30, 1998 and $141.3 million, or 74%, of the total loan portfolio at
September 30, 1997. Generally, such loans have been underwritten on the
basis of no more than an 80% loan-to-value ratio, which has historically
provided the 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. The
Savings Bank maintains participating interests in loans sold in the
secondary market retaining servicing on the loans sold. Loans sold and
serviced for others totaled approximately $3.8 million at September 30,
1998.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Balance at beginning of period $575 $410 $323
Provision for losses on loans 180 165 90
Increase due to acquisition 51 -- --
Charge-offs of loans -- -- (3)
----- ----- -----
Balance at end of period $806 $575 $410
----- ----- -----
----- ----- -----
</TABLE>
-58-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
As of September 30, 1998, 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 $38,000, $33,000 and $203,000 at September 30, 1998,
1997 and 1996, respectively. Interest income which would have been
recognized if such loans had been performing pursuant to contractual terms
totaled approximately $3,000, $3,000 and $12,000 for the years ended
September 30, 1998, 1997, and 1996, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land and improvements $ 879 $ 839
Office buildings and improvements 3,011 3,110
Leasehold improvements 300 --
Furniture, fixtures and equipment 1,465 1,009
----- -----
5,655 4,958
Less accumulated depreciation and
amortization 1,626 1,414
----- -----
$4,029 $3,544
----- -----
----- -----
</TABLE>
-59-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
1998 1997
AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE
Now accounts
1998 - 1.25% $12,170 5.91%
1997 - 1.44% $ 9,208 6.29%
Passbook
1998 - 2.50% 18,606 9.04
1997 - 3.00% 15,949 10.90
Money market deposit accounts
1998 - 4.39% 29,447 14.31
1997 - 4.35% 21,694 14.83
---------- ---------- ---------- ----------
Total demand, transaction and passbook
deposits 60,223 29.26 46,851 32.02
Certificates of deposit
Original maturities of:
12 months or less
1998 - 5.16% 47,889 23.27
1997 - 5.59% 36,902 25.23
Over 12 months to 36 months
1998 - 6.02% 53,971 26.22
1997 - 5.96% 32,655 22.32
More than 36 months
1998 - 6.36% 43,746 21.25
1997 - 6.42% 29,889 20.43
---------- ---------- ---------- ----------
Total certificates of deposit 145,606 70.74 99,446 67.98
---------- ---------- ---------- ----------
Total deposits $205,829 100.00% $146,297 100.00%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The Savings Bank had deposit accounts with balances greater than $100,000
totaling $37.0 million and $19.3 million at September 30, 1998 and 1997,
respectively.
-60-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended September 30 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook $ 475 $ 497 $ 528
NOW and money market deposit
accounts 1,261 1,000 738
Certificates of deposit 7,758 5,802 5,572
----- ----- -----
$9,494 $7,299 $6,838
----- ----- -----
----- ----- -----
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than one year $ 75,895 $52,763
One to three years 46,824 36,598
Over three years 22,887 10,085
------- -------
$145,606 $99,446
------- ------
------- ------
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1998 by certain residential mortgage loans totaling $177.6 million, certain
mortgage-backed securities totaling $85.3 million and the Savings Bank's
investment in Federal Home Loan Bank stock are summarized as follows:
<TABLE>
<CAPTION>
MATURING IN FISCAL SEPTEMBER 30,
INTEREST RATE YEAR ENDING IN 1998 1997
(In thousands)
<S> <C> <C> <C>
5.51% - 5.60% 1998 $ -- $25,000
5.60% 1999 -- 30,000
6.25% 2000 10,000 10,000
6.20% 2003 10,000 --
6.75% 2005 10,000 10,000
6.50% 2006 10,000 10,000
6.51% 2007 10,000 10,000
4.92% - 6.45% 2008 90,000 --
6.50% 2013 10,000 --
-------- --------
$150,000 $95,000
-------- --------
-------- --------
Weighted-average interest rate 5.76% 5.98%
-------- --------
-------- --------
</TABLE>
-61-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate as follows for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $1,273 $1,233 $748
Increase in taxes resulting from:
Amortization of goodwill 24 10 10
Other 41 13 ---
------- ------- -------
Federal income tax provision per consolidated
financial statements $1,338 $1,256 $758
------- ------- -------
------- ------- -------
</TABLE>
The composition of the Company's net deferred tax liability is as follows
at September 30:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY 1998 1997
DIFFERENCES AT STATUTORY RATE:
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ (604) $(346)
Difference between book and tax depreciation (209) (167)
Percentage of earnings bad debt deduction (404) (386)
Unrealized gain on securities designated as available for sale (195) (27)
-------- --------
Total deferred tax liabilities (1,412) (926)
Deferred tax assets:
General loan loss allowance 274 195
Deferred loan origination fees 383 346
Deferred compensation 176 72
Employee stock benefit plans -- 130
Other 25 17
-------- --------
Total deferred tax assets 858 760
-------- --------
Net deferred tax liability $ (554) $(166)
-------- --------
-------- --------
</TABLE>
-62-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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, 1998, includes approximately $3.1
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 $661,000 at September 30, 1998. 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, 1998, the Savings Bank had outstanding commitments of
approximately $4.5 million to originate loans, consisting of $737,000 of
fifteen year fixed rate loans at interest rates ranging from 7.00% to
8.25%, $2.1 million of thirty year fixed rate loans at interest rates
ranging from 7.50% to 8.25%, and $1.7 million in adjustable rate loans.
Additionally, the Savings Bank had commitments under unused lines of credit
totaling $12.1 million. In the opinion of management all loan commitments
equaled or exceeded prevalent market interest rates as of September 30,
1998, and will be funded from existing excess liquidity and normal cash
flow from operations.
-63-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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 equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
in present form, would increase the core capital requirement to a range of
4.0% - 5.0% of adjusted total assets for substantially all savings
institutions. Management anticipates no material change to the Savings
Bank's present excess regulatory capital position as a result of this
change to the regulatory capital requirement. The risk-based capital
requirement provides for the maintenance of core capital plus general loan
loss allowances equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, the Savings Bank multiplies the value of each asset
on its statement of financial condition by a defined risk-weighting factor,
e.g., one-to-four family residential loans carry a risk-weighted factor of
50%.
During the 1998 fiscal year, the Savings Bank was notified by 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.
-64-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
As of September 30, 1998 and 1997, management believes that the Savings
Bank met all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
1998
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ---------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-based capital $27,464 12.1% $18,136 8.0% $22,670 10.0%
Core capital $26,658 6.8% $15,720 4.0% $23,580 6.0%
Tangible capital $26,658 6.8% $ 5,880 1.5% $19,650 5.0%
</TABLE>
<TABLE>
<CAPTION>
1997
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ---------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-based capital $29,265 19.0% $12,295 8.0% $15,369 10.0%
Core capital $28,690 10.5% $ 8,224 3.0% $16,448 6.0%
Tangible capital $28,690 10.5% $ 4,112 1.5% $13,707 5.0%
</TABLE>
The Company'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.
-65-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - LEGISLATIVE MATTERS
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
Company'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 $1.2
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.
-66-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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, 1998 and
1997 and the results of its operations and its cash flows for the years
ended September 30, 1998, 1997 and 1996.
ENTERPRISE FEDERAL BANCORP, INC.
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,186 $ 1,357
Loan receivable from Employee Stock Ownership Plan 768 1,114
Investment in Enterprise Federal Savings Bank 28,078 28,761
Investment in equity securities 1,984 698
Prepaid expense and other assets 27 110
------- -------
Total assets $38,043 $32,040
------- -------
------- -------
LIABILITIES & STOCKHOLDERS' EQUITY
Other liabilities $ 583 $ 616
Common stock 23 23
Additional paid-in capital 34,908 33,503
Treasury stock, at cost (333) (4,386)
Unrealized gains on securities designated
as available for sale 379 51
Retained earnings 2,483 2,233
------- -------
Total stockholders' equity $ 7,460 $31,424
------- -------
Total liabilities and stockholders' equity $38,043 $32,040
------- -------
------- -------
</TABLE>
ENTERPRISE FEDERAL BANCORP, INC.
STATEMENTS OF EARNINGS
Years ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenue
Interest and dividend income $ 286 $ 143 $ 165
Gain on sale of investments 10 86 --
Equity in earnings of subsidiary 2,302 2,334 1,541
------ ------ ------
Total revenue 2,598 2,563 1,706
General and administrative expenses 192 194 265
------ ------ ------
NET EARNINGS $2,406 $2,369 $1,441
------ ------ ------
------ ------ ------
</TABLE>
-67-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE L - CONDENSED FINANCIAL STATEMENTS OF ENTERPRISE FEDERAL BANCORP, INC.
(continued)
ENTERPRISE FEDERAL BANCORP, INC.
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the period $2,406 $2,369 $1,441
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary -- (345) --
Dividend received from subsidiary in excess of earnings 2,698 -- 436
Gain on sale of investments (10) (86) --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (27) 28 (137)
Other liabilities (33) 616 --
------- ------- -------
Net cash provided by operating activities 5,034 2,582 1,740
Cash flows provided by (used in) investing activities:
Purchase of investments (2,266) (968) --
Proceeds from sale of investments 760 356 --
Proceeds from repayment of loan to ESOP 346 406 603
Repayment of loan to Enterprise Federal Savings Bank -- 3,572 3,428
------- ------- -------
Net cash provided by (used in) investing activities (1,160) 3,366 4,031
Cash flows provided by (used in) financing activities:
Acquisition of North Cincinnati Savings Bank
common stock-net 3,999 -- --
Payment of dividends and distributions on common stock (2,044) (3,354) (5,986)
Purchase of treasury stock -- (1,328) (1,645)
Sale of stock for stock benefit plans -- -- 1,329
------- ------- -------
Net cash provided by (used in) financing activities 1,955 (4,682) (6,302)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,829 1,266 (531)
------- ------- -------
Cash and cash equivalents at beginning of year 1,357 91 622
------- ------- -------
Cash and cash equivalents at end of year $ 7,186 $ 1,357 $ 91
------- ------- -------
------- ------- -------
</TABLE>
-68-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE L - CONDENSED FINANCIAL STATEMENTS OF ENTERPRISE FEDERAL BANCORP, INC.
(continued)
Regulations of the 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 $3.0 million to the
Company at September 30, 1998.
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, 1998 none of the
stock options granted had been exercised.
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation
is then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings
and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied.
The Company 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 Company'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 Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings As reported $2,406 $ 2,369 $ 1,441
-------- -------- --------
-------- -------- --------
Pro-forma $2,406 $ 2,333 $ 1,403
-------- -------- --------
-------- -------- --------
Earnings per share
Basic As reported $ 1.19 $ 1.23 $ .73
-------- -------- --------
-------- -------- --------
Pro-forma $ 1.19 $ 1.21 $ .71
-------- -------- --------
-------- -------- --------
Diluted As reported $ 1.10 $ 1.17 $ .70
-------- -------- --------
-------- -------- --------
Pro-forma $ 1.10 $ 1.15 $ .68
-------- -------- --------
-------- -------- --------
</TABLE>
-69-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - STOCK OPTION PLAN (continued)
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 1998, 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 1998 and 1997 and
6.0% in fiscal 1996, and expected lives of ten years.
A summary of the status of the Company's stock option plan as of September
30, 1998, 1997 and 1996 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 226,860 $9.45 222,324 $ 9.36 217,788 $9.25
Granted --- --- 4,536 $14.00 4,536 $14.75
Exercised --- --- --- --- --- ---
Forfeited --- --- --- --- --- ---
------- ------- ------- ------- ------- -------
Outstanding at end of year 226,860 $9.45 226,860 $ 9.45 222,324 $ 9.36
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Options exercisable at year-end 133,397 $9.45 88,015 $ 9.45 43,554 $ 9.36
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Weighted-average fair value of
options granted during the year N/A $1.77 $1.75
------- -------
------- -------
</TABLE>
The following information applies to options outstanding at September 30,
1998:
<TABLE>
<S> <C>
Number outstanding 226,860
Range of exercise prices $9.25 - $14.75
Weighted-average exercise price $9.45
Weighted-average remaining contractual life 6.3 years
</TABLE>
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.
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.
-70-
<PAGE>
ENTERPRISE FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (continued)
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 COMBINATIONS
In July 1998, the Corporation entered into a definitive agreement to
acquire all the outstanding shares of Security Savings Holding Company,
Inc. for cash consideration totaling approximately $13.0 million. The
acquisition will be accounted for using the purchase method of accounting.
Consummation of the pending combination is anticipated in November 1998
following the receipt of required regulatory and stockholder approval.
In September 1998, the Corporation also entered into a definitive agreement
to be acquired by Fifth Third Bancorp, Inc. for a consideration of common
stock totaling approximately $96.4 million. The acquisition will be
accounted for using the pooling of interest method of accounting.
Consummation of the pending combinations is anticipated in March 1999
following the receipt of required regulatory and stockholder approval.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The Amended and Restated Articles of Incorporation of the Company
provide that the Board of Directors of the Company shall be divided into two
classes if the Board consists of six, seven or eight members, or into three
classes if the Board consists of nine or more members. One class is to be
elected annually. The Board of Directors currently consists of six members.
Stockholders of the Company are not permitted to cumulate their votes for the
election of directors.
No director is related to any other director or executive officer of
the Company by blood, marriage or adoption.
-71-
<PAGE>
The following table presents information concerning the directors of the
Company.
<TABLE>
<CAPTION>
Principal Occupation During Director
Name Age(1) the Past Five Years Since
---- ------ ------------------- -----
<S> <C> <C> <C>
Otto L. Keeton 64 Chairman of the Board, President and 1970
Chief Executive Officer of the Company
and, since 1984, of the Bank; Between
1959 and 1984 served the Bank in various
capacities, including Chief Loan Officer
and Chief Operating Officer.
Terrell G. Marty 59 Director; Owner of Terry G. Marty CLC & 1983
Associates, Inc., an insurance sales and
management firm located in Cincinnati,
Ohio.
Steven A. Wilson 53 Director; President and Chief Operating 1987
Officer of The Bases Group (BBI
Marketing Services, Inc.), a
marketing firm located in
Covington, Kentucky.
Michael R. Meister 56 Director, Vice President and Chief 1993
Operating Officer of the Company and,
since 1969, of the Bank; Between 1969
and 1994 served as Treasurer of the Bank.
Edith P. Mayer 69 Director and Corporate Secretary; 1979
Presently retired.
David G. Hendy 55 Director; President and co-owner of 1998
Stern-Hendy Properties, Inc., a
real estate development and
management firm located in
Cincinnati, Ohio.
</TABLE>
- --------------------
(1) As of September 30, 1998.
-72-
<PAGE>
STOCKHOLDER NOMINATIONS
Article X.D of the Company's Amended and Restated Articles of
Incorporation governs nominations for election to the Board of Directors and
requires all such nominations, other than those made by the Board, to be made at
a meeting of stockholders called for the election of directors, and only by a
stockholder who has complied with the notice provisions in that section. In
order for a stockholder of the Company to make any such nominations, he or she
shall give notice thereof in writing, delivered or mailed by first class mail to
the Secretary of the Company not less than thirty days nor more than sixty days
prior to any such meeting; provided, however, that if less than forty days'
notice of the meeting is given to stockholders, such written notice shall be
delivered or mailed, as prescribed, to the Secretary of the Company not later
than the close of the tenth day following the day on which notice of the meeting
was mailed to stockholders. Each such notice given by a stockholder with respect
to nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee, and (iii) the
number of shares of stock of the Company which are beneficially owned by each
such nominee. In addition, the stockholder making such nomination shall promptly
provide any other information reasonably requested by the Company.
COMMITTEES AND MEETINGS OF THE BOARD OF THE BANK AND COMPANY
The Board of Directors of the Company meets on a quarterly basis and
the Board of Directors of the Bank meets on a monthly basis and may have
additional special meetings upon the request of the Chairman or a majority of
the Directors. During the fiscal year ended September 30, 1998, the Board of
Directors of the Company met six times and the Board of Directors of the Bank
met 14 times. No director attended fewer than 75% of the total number of Board
meetings or committee meetings on which he served that were held during this
period. The Board of Directors of the Company has not yet established any
committees. The Board of Directors of the Bank has established an Audit
Committee and an Executive Committee.
AUDIT COMMITTEE. The Audit Committee, which consists of the entire
Board, reviews the records and affairs of the Bank, engages the Bank's external
auditors and reviews their reports. The Audit Committee met once during fiscal
1998.
EXECUTIVE COMMITTEE. The Executive Committee is authorized to exercise
all the authority of the Board of Directors in the management of the Bank
between Board meetings except as otherwise provided in the Bank's Bylaws. The
Executive Committee, which consists of the President and any two outside
directors, met 18 times in fiscal 1998.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal
occupations during the last five years for the two executive officers of the
Company and the Bank who do not serve as directors. Executive officers of the
Company and the Bank are appointed annually by the Boards of Directors.
STEVEN M. POMEROY. Age 47. Mr. Pomeroy is Vice President of the
Company. Mr. Pomeroy as served the Bank as a Vice President and Loan Officer
since 1987.
THOMAS J. NOE. Age 38. Mr. Noe is Vice President, Chief Financial
Officer and Treasurer of the Company. Mr. Noe joined the Bank as Vice President,
Chief Financial Officer and Treasurer in January 1994. From March 1992 to
January 1994, Mr. Noe served as Vice President, Chief Financial Officer and
Treasurer for Blue Ash Building and Loan Company located in Blue Ash, Ohio. From
January 1983 to March 1992, Mr. Noe was a principal in the firm Kennedy, Kraft,
Dreyer and Noe, certified public accountants, located in Cincinnati, Ohio.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended
("1934 Act"), the Company's directors, officers and any persons holding more
than 10% of the Common Stock are required to report their
-73-
<PAGE>
ownership of the Common Stock and any changes in that ownership to the
Securities and Exchange Commission ("Commission") and the National Association
of Securities Dealers, Inc. ("NASD") by specific dates. Based on representations
of its directors and officers and copies of the reports that they have filed
with the Commission and the NASD, and other than Mr. Hendy who did not file
during fiscal 1998 a Form 3, the Company believes that all of these filing
requirements were satisfied by the Company's directors and officers in the
fiscal year ended September 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information
concerning the compensation paid by the Bank for services rendered in all
capacities during the indicated periods to the President and Chief Executive
Officer of the Bank and other executive officers of the Bank whose total
compensation during the last fiscal year exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Other All
Name and Annual Stock Number of Other
Principal Position Year Salary(1) Bonus Compensation(1) Grants Options Compensation(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Otto L. Keeton 1998 $189,800 $91,300 $-- $-- -- $ 61,175
President and 1997 177,000 60,800 -- -- -- 103,026
Chief Executive 1996 172,200 93,000 -- -- -- 88,451
Officer
Michael R. Meister 1998 147,600 74,400 -- -- -- 46,400
Vice President and 1997 134,100 44,000 -- -- -- 74,583
Chief Operating 1996 130,400 77,000 -- -- -- 88,451
Officer
Thomas J. Noe 1998 103,300 66,300 -- -- -- 38,700
Vice President, 1997 92,300 36,000 -- -- -- 61,217
Chief Financial 1996 88,100 68,000 -- -- -- 69,297
Officer and
Treasurer
Steven M. Pomeroy 1998 73,900 29,600 -- -- -- 27,700
Vice President 1997 67,000 26,200 -- -- -- 44,445
and Loan Officer 1996 64,700 25,000 -- -- -- 56,408
</TABLE>
- ---------------
(1) Does not include amounts attributable to miscellaneous benefits received by
the named executive officers. Includes directors fees where applicable. In
the opinion of management of the Bank, the costs to the Bank of providing
such benefits to the named executive officers during the fiscal year ended
September 30, 1998 did not exceed the lesser of $50,000 or 10% of the total
of annual salary and bonus reported for the individual.
(2) Consists of amounts allocated during the respective periods pursuant to the
ESOP based on the market price per share on the date of allocation.
-74-
<PAGE>
STOCK OPTIONS
No options were granted to the named executive officers during the
year ended September 30, 1998.
The following table discloses the options exercised for the year ended
September 30, 1998, and held at year-end, by the Chief Executive Officer and the
named executive officers:
<TABLE>
<CAPTION>
Shares Acquired Value Number of Options at Value of Options at
Name On Exercise Realized September 30, 1998 September 30, 1998(1)
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Otto L. Keeton --- $--- 34,028 22,686 $1,165,459 $776,996
Michael R. Meister --- --- 27,223 18,149 932,388 621,603
Thomas J. Noe --- --- 17,015 11,343 582,764 388,498
Steven M. Pomeroy --- --- 17,015 11,343 582,764 388,498
</TABLE>
- --------------
(1) Based on a per share market price of $ 47.25 at September 30, 1998.
DIRECTOR'S COMPENSATION
Directors of the Company receive no compensation. During fiscal 1998,
members of the Board of Directors of the Bank received $2,000 per month for
serving on the Board of Directors and any of its committees and the Corporate
Secretary (who is also a director) received an additional $100 per month for
performing secretarial services.
EMPLOYMENT AGREEMENTS
The Company and the Bank (collectively the "Employers") have entered
into employment agreements with each of Messrs. Keeton, Meister, Noe and
Pomeroy. The Employers have agreed to employ such individuals for a term of
three years in their current respective positions. The term of each employment
agreement shall be extended each year.
The employment agreements are terminable with or without cause by the
Employers. The officer shall have no right to compensation or other benefits
pursuant to the employment agreement for any period after voluntary termination
or termination by the Employers for cause, disability, retirement or death,
provided, however, that (i) in the event that the officer terminates his
employment because of failure of the Employers to comply with any material
provision of the employment agreement or (ii) the employment agreement is
terminated by the Employers other than for cause, disability, retirement or
death or by the officer as a result of certain adverse actions which are taken
with respect to the officer's employment following a Change in Control of the
Company, as defined, each officer will be entitled to a cash severance amount
equal to 2.99 times his base salary.
A Change in Control is generally defined in the employment agreement
to include (i) the acquisition by any person of 25% or more of the Company's
outstanding voting securities and (ii) a change in a majority of the directors
of the Company during any two-year period without the approval of at least
two-thirds of the persons who were directors of the Company at the beginning of
such period.
-75-
<PAGE>
Each employment agreement provides that in the event that any of the
payments to be made thereunder or otherwise upon termination of employment are
deemed to constitute "excess parachute payments" within the meaning of Section
280G of the Code, then such payments and benefits received thereunder shall be
reduced, in the manner determined by the employee, by the amount, if any, which
is the minimum necessary to result in no portion of the payments and benefits
being non-deductible by the Employers for federal income tax purposes. Excess
parachute payments generally are payments in excess of three times the base
amount, which is defined to mean the recipient's average annual compensation
from the employer includible in the recipient's gross income during the most
recent five taxable years ending before the date on which a change in control of
the employer occurred. Recipients of excess parachute payments are subject to a
20% excise tax on the amount by which such payments exceed the base amount, in
addition to regular income taxes, and payments in excess of the base amount are
not deductible by the employer as compensation expense for federal income tax
purposes.
Although the above-described employment agreements could increase the
cost of any acquisition of control of the Company, management of the Company
does not believe that the terms thereof would have a significant anti-takeover
effect.
REPORT OF THE COMPENSATION COMMITTEE
The goals of the Committee are to assist the Board of Directors of the
Company and the Bank in attracting and retaining qualified management,
motivating executives to achieve performance goals and ensuring that the
financial interests of management are reasonable and consistent with industry
standards, management performance and shareholders' interests.
In order to establish compensation levels for the Company's Chief
Executive Officer and other executive officers, the Compensation Committee
considered the overall financial, market and competitive performance of the
Company during the fiscal year, including net income of the Company and expense
and efficiency ratios. The Compensation Committee also considered the successful
completion of the mergers and branch purchases and the role specific officers
played in those transactions. Further, the Committee considered similar factors
with respect to fiscal 1998 compensation for the Bank's other executive
officers.
Based upon the above factors, the Committee increased Mr. Keeton's
base salary by approximately $12,800 or 7% to $189,8000 and Mr. Keeton was given
a bonus of $91,300 for his service during fiscal 1998. The Committee provided
for salary increases and bonuses for the other executive officers.
Following review and approval by the Committee, all issues pertaining
to executive compensation are submitted to the full Board of Directors for their
approval. Mr. Keeton did not participate in the review of his compensation.
Steven A. Wilson
Terrell G. Marty
Edith P. Mayer
-76-
<PAGE>
PERFORMANCE GRAPH
The following graph compares the yearly cumulative total return
relating to the Common Stock since the Company's initial public offering of the
Common Stock in October 1994 with (i) the yearly cumulative total return on the
stocks included in the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") Stock Market Index (for United States companies),
(ii) the SNL Thrift Index and (iii) the SNL $250M - $500M Thrift Index.
The graph represents $100 invested in the Company's initial public
offering of Common Stock issued on October 17, 1994 at $13.00 per share.
[Performance Graph]
<TABLE>
<CAPTION>
PERIOD ENDING
---------------------------------------------------------------------
INDEX 10/17/94 9/30/95 9/30/96 9/30/97 9/30/98
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Enterprise Federal Bancorp, Inc. 100.00 116.36 123.98 231.95 377.16
NASDAQ - Total U.S. 100.00 137.79 163.47 224.39 229.36
SNL Thrift Index 100.00 135.76 163.97 284.92 255.44
SNL $250M-$500M Thrift Index 100.00 124.22 142.54 233.62 222.57
</TABLE>
PENSION PLAN
The following table indicates the annual retirement benefit that would
be payable under the plan upon retirement at age 65 to a participant electing to
receive his retirement benefit in the standard form of benefit, assuming various
specified levels of plan compensation and various specified years of credited
service.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
PENSION PLAN TABLE
-------------------------------------------------------------------
Renumeration Years of Service
--------------- ----------- ----------- ---------- ---------- ---------- ----------
15 20 25 30 35 40
--------------- ----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 25,000 $ 7,500 $ 10,000 $ 12,500 $ 15,000 $ 17,500 $ 20,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
50,000 15,000 20,000 25,000 30,000 35,000 40,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
75,000 22,500 30,000 37,500 45,000 52,500 60,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
100,000 30,000 40,000 50,000 60,000 70,000 80,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
125,000 37,500 50,500 62,500 75,500 87,500 100,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
150,000 45,000 60,000 75,000 90,000 105,000 120,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
175,000 52,500 70,000 87,500 105,000 122,500 140,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
200,000 60,000 80,000 100,000 120,000 140,000 160,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
225,000 67,500 90,000 112,500 135,000 157,500 180,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
250,000 75,000 100,000 125,000 150,000 175,000 200,000
--------------- ----------- ----------- ---------- ---------- ---------- ----------
--------------- ----------- ----------- ---------- ---------- ---------- ----------
</TABLE>
The indicated amounts in the above table assume that participants
elect the normal retirement form of benefit.
Benefits are generally payable under the Pension Plan upon retirement
at age 65 based upon an average of an employee's five highest consecutive annual
amounts of base salary. The plan provides for an early retirement option with
reduced benefits for eligible participants who exceed 45 years of age. Employee
benefits vest 100% after 5 years of service. Benefits under the Pension Plan are
not offset by Social Security payments. Such amounts are within 10% of the
salary reported for the named individual in the Summary Compensation Table
above.
At September 30, 1998, Mr. Keeton had 38 years and one month of
credited service under the Pension Plan. Messrs. Meister, Noe, and Pomeroy had
28 years and fourth months, three years and eight months and 21 years and four
months, respectively, of credited service under the Pension Plan, respectively,
as of September 30, 1998.
-77-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table includes, as of December 18, 1998, certain
information as to the Common Stock beneficially owned by (i) those persons or
entities, including any "group" as that term is used in Section 13(d)(3) of the
1934 Act, who or which was known to the Company to be the beneficial owner of
more than 5% of the issued and outstanding Common Stock, (ii) the directors of
the Company, (iii) certain executive officers of the Company, and (iv) all
directors and executive officers of the Company and the Bank as a group.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned as of
Name of Beneficial Owner December 18, 1998(1)
- ------------------------------------------------ --------------------------------------------------
Number %
--------------------------- ---------------------
<S> <C> <C>
Enterprise Federal Bancorp, Inc. 181,487(2) 8.21%
Employee Stock Ownership Plan Trust
7810 Tylersville Square Drive
West Chester, Ohio 45069
Directors:
Otto L. Keeton 103,110(2)(3) 4.65
Michael R. Meister 95,106(4) 4.30
Terrell G. Marty 56,021(2)(5) 2.53
Edith P. Mayer 16,480(6) .75
Steven A. Wilson 54,078(2)(7) 2.45
David G. Hendy 6,676(8) .30
Executive Officers:
Thomas J. Noe 117,982(9) 5.34
Steven M. Pomeroy 44,342(10) 2.01
All directors and executive officers
of the Company and the Bank as a 493,795(1)(11) 22.33
group (8 persons)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
-78-
<PAGE>
- ----------------
(1) For purposes of this table, pursuant to rules promulgated under the 1934
Act, an individual is considered to beneficially own shares of Common
Stock if he or she directly or indirectly has or shares (1) voting power,
which includes the power to vote or to direct the voting of the shares;
or (2) investment power, which includes the power to dispose or direct
the disposition of the shares. Unless otherwise indicated, an individual
has sole voting power and sole investment power with respect to the
indicated shares. Shares which may be acquired by the exercise of stock
options which are exercisable within 60 days of December 18, 1998 are
deemed to be beneficially owned by the holder and are outstanding for the
purpose of computing the percentages of Common Stock beneficially owned
by the respective individual and group.
(2) The Enterprise Federal Bancorp, Inc. Employee Stock Ownership Plan Trust
("Trust") was established pursuant to the Enterprise Federal Bancorp,
Inc. Employee Stock Ownership Plan ("ESOP") by an agreement between the
Company and Otto Keeton, Terrell Marty and Steven Wilson, who act as
trustees of the ESOP ("Trustees"). As of December 18, 1998, 80,461 shares
held in the Trust were unallocated, and 101,026 shares held in the Trust
had been allocated to the accounts of participating employees. Under the
terms of the ESOP, the Trustees must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating
employees, and allocated shares for which employees do not give
instructions will be voted in the same ratio on any matter as to those
shares for which instructions are given. Unallocated shares held in the
ESOP will be voted by the ESOP Trustees in accordance with their
fiduciary duties as trustees. The amount of Common Stock beneficially
owned by each individual trustee or all directors and executive officers
as a group does not include the shares held by the Trust.
(3) Includes 30,860 shares held jointly with Mr. Keeton's wife, 2,496 shares
held individually by Mr. Keeton's wife, 13,001 shares held in the
individual's account in the ESOP, and 45,371 shares which may be acquired
upon the exercise of stock options exercisable within sixty (60) days of
December 18, 1998.
(4) Includes 11,538 shares held jointly with Mr. Meister's wife, 11,538
shares held individually by Mr. Meister's wife, 12,945 shares held in the
individual's account in the ESOP, and 36,297 shares which may be acquired
upon the exercise of stock options exercisable within sixty (60) days of
December 18, 1998.
(5) Includes 11,538 shares held jointly with Mr. Marty's wife, 11,538 shares
held by Mr. Marty's children, 7,895 shares held by Mr. Marty as trustee
for his retirement plan, and 8,395 shares which may be acquired upon the
exercise of stock options exercisable within sixty (60) days of December
18, 1998.
(6) Includes 1,100 shares held by Mrs. Mayer as trustee for her retirement
plan, 308 shares held jointly with Mrs. Mayer's daughter, 1,891 shares
held individually by Mrs. Mayer's husband, and 8,395 shares which may be
acquired upon the exercise of stock options exercisable within sixty (60)
days of December 18, 1998.
(7) Includes 11,670 shares held individually by Mr. Wilson's wife, 6,675
shares held by Mr. Wilson as trustee for his retirement plan and 8,395
shares which may be acquired upon the exercise of stock options
exercisable within sixty (60) days of December 18, 1998.
(8) Includes 3,338 shares held individually by Mr. Hendy's wife.
(9) Includes 71,406 shares held jointly with Mr. Noe's wife, 5,941 shares
held in Mr. Noe's individual retirement account ("IRA"), 1,895 shares
held in an IRA for Mr. Noe's wife, 280 shares held by Mr. Noe's children,
10,469 shares held in the individual's account in the ESOP, and 22,686
shares which may be acquired upon the exercise of stock options
exercisable within sixty (60) days of December 18, 1998.
(10) Includes 2,310 shares held jointly with Mr. Pomeroy's wife, 2,399 shares
held in an IRA for Mr. Pomeroy's wife, 300 shares held by Mr. Pomeroy's
children, 8,586 shares held in the individual's account in the ESOP,
-79-
<PAGE>
and 22,686 shares which may be acquired upon the exercise of stock
options exercisable within sixty (60) days of December 18, 1998.
(11) Includes 152,225 shares which may be acquired by directors and executive
officers as a group upon the exercise of stock options exercisable within
sixty (60) days of December 18, 1998 and 45,001 shares allocated to the
accounts of executive officers as a group in the ESOP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All loans or extensions of credit to executive officers and directors
must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with the
general public and must not involve more than the normal risk of repayment or
present other unfavorable features. All of the Bank's loans to its directors and
executive officers were originally made in the ordinary course of business at
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of the loans for comparable transactions with other
persons and did not involve more than the normal risk of collectability or other
unfavorable features.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference from Item 8
hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at September 30,
1998 and 1997.
Consolidated Statements of Earnings for Each of the Three Years
in the Period Ended September 30, 1998.
Consolidated Statements of Changes in Stockholders' Equity for
Each of the Three Years in the Period Ended September 30, 1998.
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period ended September 30, 1998.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements and related notes thereto.
-80-
<PAGE>
(3) The following exhibits are filed as part of this Form 10-K and this list
includes the Exhibit Index.
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
2.1 Plan of Conversion *
3.1 Amended Articles of Incorporation of Enterprise Federal Bancorp, Inc. **
3.2 Code of Regulations of Enterprise Federal Bancorp, Inc. *
3.3 Bylaws of Enterprise Federal Bancorp, Inc. *
4.0 Stock Certificate of Enterprise Federal Bancorp, Inc. ***
10.1 Enterprise Federal Bancorp, Inc. Recognition and Retention Plan ***
10.2 Enterprise Federal Bancorp, Inc. 1994 Stock Option Plan ***
10.3 Enterprise Federal Bancorp, Inc. Employee Stock Ownership
Plan and Trust *
10.4 Employment Agreement between Enterprise Federal Bancorp, Inc.
and Otto L. Keeton ***
10.5 Employment Agreement between Enterprise Federal Bancorp, Inc. and
Michael P. Meister ***
10.6 Employment Agreement between Enterprise Federal Bancorp, Inc. and
Thomas J. Noe ***
10.7 Employment Agreement between Enterprise Federal Bancorp, Inc. and
Steven M. Pomeroy ***
22.0 Subsidiaries of the Registrant - Reference is made to "Item 1
Business - Subsidiaries" for the required information
</TABLE>
(*) Incorporated herein by reference from the Corporation's Registration
Statement on Form S-1 filed with the SEC on April 21, 1994.
(**) Incorporated herein by reference from the Corporation's Registration
Statement on Form 8-A filed with the SEC on August 15, 1994.
(***) Incorporated herein by reference from the Corporation's Form 10-K filed
with the SEC on December 29, 1994.
-81-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENTERPRISE FEDERAL BANCORP, INC.
By: /S/ OTTO L. KEETON
--------------------------------------
Otto L. Keeton
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ OTTO L. KEETON December 31, 1998
------------------------------------
Otto L. Keeton
Chairman of the Board, President
and Chief Executive Officer
/S/ MICHAEL R. MEISTER December 31, 1998
------------------------------------
Michael R. Meister
Vice President, Chief Operating
Officer and Director
/S/ THOMAS J. NOE December 31, 1998
------------------------------------
Thomas J. Noe
Vice President, Treasurer and
Chief Financial Officer
/S/ DAVID G. HENDY December 31, 1998
------------------------------------
David G. Hendy
Director
-82-
<PAGE>
/S/ TERRELL G. MARTY December 31, 1998
------------------------------------
Terrell G. Marty
Director
/S/ EDITH P. MAYER December 31, 1998
------------------------------------
Edith P. Mayer
Director
/S/ STEVEN A. WILSON December 31, 1998
------------------------------------
Steven A. Wilson
Director
-83-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 854
<INT-BEARING-DEPOSITS> 7,513
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,144
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 250,922
<ALLOWANCE> 806
<TOTAL-ASSETS> 396,518
<DEPOSITS> 205,829
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,229
<LONG-TERM> 150,000
0
0
<COMMON> 23
<OTHER-SE> 37,437
<TOTAL-LIABILITIES-AND-EQUITY> 396,518
<INTEREST-LOAN> 18,946
<INTEREST-INVEST> 5,601
<INTEREST-OTHER> 1,312
<INTEREST-TOTAL> 25,859
<INTEREST-DEPOSIT> 9,494
<INTEREST-EXPENSE> 17,396
<INTEREST-INCOME-NET> 8,463
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 336
<EXPENSE-OTHER> 5,082
<INCOME-PRETAX> 3,744
<INCOME-PRE-EXTRAORDINARY> 3,744
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,406
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 7.23
<LOANS-NON> 38
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 38
<ALLOWANCE-OPEN> 575
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 806
<ALLOWANCE-DOMESTIC> 806
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
