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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, 1996
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.
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(Exact name of registrant as specified in its charter)
OHIO 31-1396726
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7810 TYLERSVILLE SQUARE DRIVE
WEST CHESTER, OHIO 45069
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(Address) (Zip Code)
Registrant's telephone number, including area code: (513) 755-4600
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / X /
As of December 27, 1996, the aggregate value of the 1,657,159 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
368,669 shares held by all directors and officers of the Registrant as a group,
was approximately $24.9 million. This figure is based on the mean of the bid
and asked prices of $15.00 per share of the Registrant's Common Stock on
December 27, 1996.
Number of shares of Common Stock outstanding as of December 31, 1996: 2,025,028
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended September
30, 1996 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1996 Annual Meeting of
Stockholders to be filed within 120 days of September 30, 1996 are incorporated
into Part III, Items 9 through 13 of this Form 10-K.
PART I
ITEM 1. BUSINESS
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GENERAL
ENTERPRISE FEDERAL BANCORP, INC.
Enterprise Federal Bancorp, Inc. (the "Company") was incorporated
in the State of Ohio in April, 1994 in connection with the conversion of
Enterprise Federal Savings and Loan Association from a mutual savings and
loan association to a stock savings bank to be known as "Enterprise Federal
Savings Bank" (the "Bank"). The Company sold 2,268,596 shares of common
stock, $.01 par value per share, in an offering to certain depositors,
borrowers and members of the general public. The offering was consummated on
October 14, 1994 and, as a result, the Company became a unitary savings and
loan holding company. The Company owns 100% of the issued and outstanding
common stock of the Bank, which is the primary asset of the Company. The
Company does not presently own or operate any subsidiaries except for the
Bank.
ENTERPRISE FEDERAL SAVINGS BANK
The Bank is a federally-chartered stock savings bank conducting
business from its executive offices located in West Chester, Ohio and four
full service offices located in Hamilton, Butler and Warren Counties, Ohio.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"), to the maximum extent permitted by law.
Enterprise is a community oriented savings bank which has
traditionally offered a wide variety of savings products to its retail
customers while concentrating its lending activities on real estate loans
secured by one-to-four family residential properties located primarily in
Hamilton, Butler and Warren Counties, Ohio. Such loans amounted to $96.6
million or 60.3% of the total loan portfolio at September 30, 1996. To a
significantly lesser extent, the Bank also focuses its lending activities on
commercial real estate loans, residential construction loans and multi-family
real estate loans. The Bank also invests in securities which are issued by
United States ("U.S.") government agencies or government sponsored
enterprises.
The Bank is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), which is the Bank's chartering
authority and primary regulator. The Bank is also regulated by the FDIC, the
administrator of the SAIF. The Bank is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve
System ("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati, which is one of the 12 regional banks comprising the FHLB System.
MARKET AREA
Enterprise conducts its business through its main office and four
branch offices located in Hamilton, Butler and Warren Counties, Ohio. At
September 30, 1996, 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 Departments
Stores and Cincinnati Milacron. In addition to these companies, the largest
local employers include the federal government, General Electric Aircraft,
The University of Cincinnati and the Kroger Co.
-1-
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At September 30, 1996, the Bank's
total loan portfolio before net items ("total loan portfolio"), amounted to
$160.3 million or 68.1% of the Company's $235.2 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, 1996, $96.6 million
or 60.3% of the Bank's total loan portfolio consisted of one to four family
residential loans. To a lesser extent, the Bank also originates multi-family
residential loans, commercial real estate and land loans, construction loans
and consumer loans. At September 30, 1996, such loan categories amounted to
$6.5 million, $35.2 million, $15.6 million and $6.4 million, respectively, or
4.1%, 21.9%, 9.7% and 4.0% of the total loan portfolio, respectively. The
Bank intends to continue its emphasis on all types of mortgage loans. In
particular, to the extent permitted by economic and market conditions, the
Bank has increased its emphasis on the origination of smaller commercial real
estate and construction loans. Commercial real estate loans increased from
$19.1 million or 16.6% of the total loan portfolio at September 30, 1995 to
$35.2 million or 21.9% of the total loan portfolio at September 30, 1996
while construction loans increased from $5.6 million or 4.8% of the total
loan portfolio at September 30, 1995 to $15.6 million or 9.7% of the total
loan portfolio at September 30, 1996.
-2-
The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------
(Dollars in Thousands)
Real estate loans:
Single-family $ 96,605 60.28% $ 81,603 70.82% $ 72,139 67.81% $69,723 74.48% $66,076 73.24%
Multi-family 6,525 4.07 5,270 4.57 3,546 3.33 1,535 1.64 1,134 1.26
Commercial 35,162 21.94 19,125 16.60 21,531 20.24 16,603 17.73 18,336 20.33
Construction 15,567 9.71 5,579 4.84 8,217 7.72 4,857 5.19 3,494 3.87
-------- ------ -------- ------ -------- ------ ------- ------ ------ ------
Total real estate loans 153,859 96.00 111,577 96.83 105,433 99.10 92,718 99.04 89,040 98.70
-------- ------ -------- ------ -------- -------
Consumer loans 6,403 4.00 3,654 3.17 954 .91 900 .96 1,173 1.30
Total loans 160,262 100.00% 115,231 100.00% 106,387 100.00% 93,618 100.00% 90,213 100.00%
-------- ------ -------- ------ ------- ------ ------- ------ ------ ------
Less:
Loans in process 9,928 3,403 5,043 2,612 1,943
Deferred loan fees 874 675 705 603 624
Allowance for loan losses 410 323 323 310 241
Unearned discounts -- -- 28 66 104
-------- -------- -------- ------- -------
Loans receivable, net $149,050 $110,830 $100,288 $90,027 $87,301
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
-3-
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Bank's loan portfolio at September 30, 1996.
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.
Real Estate Loans
-------------------------------------------------------
Single-family Multi-family Commercial Construction Consumer Loans Total
------------- ------------ ---------- ------------ -------------- ---------
(In Thousands)
Amounts due in:
One year or less $ 4,887 --- $ 565 $ 1,315 $ 146 $ 6,913
After one year through two years 1,332 -- 539 -- 156 2,027
After two years through three years 1,783 194 2,567 -- 310 4,854
After three years through five years 4,087 218 1,944 -- -- 6,249
After five years through ten years 7,941 546 2,617 2,470 5,791 19,365
After ten years through twenty years 29,572 3,335 11,897 2,946 -- 47,750
Over twenty years 47,003 2,232 15,033 8,836 -- 73,104
------- ------ ------- ------- ------ --------
Total(1) $96,605 $6,525 $35,162 $15,567 $6,403 $160,262
------- ------ ------- ------- ------ --------
------- ------ ------- ------- ------ --------
Interest rate terms on amounts
due after one year:
Fixed $ 68,788
Adjustable 84,561
------
$153,349
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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.
-4-
Scheduled contractual repayment of loans does not reflect the
expected term of the Bank's loan portfolio. The expected average life of
loans is substantially less than their contractual terms because of
prepayments and due-on-sale clauses, which give Enterprise the right to
declare a conventional loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are higher than rates on
existing mortgage loans and, conversely, decrease when current mortgage loan
rates are lower than rates on existing mortgage loans (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstance, the weighted-average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of
the Bank are subject to the written, non-discriminatory underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Loan originations are obtained primarily through
existing customers, walk-in customers, branch managers and real estate
brokers. Property valuations are always performed by independent outside
appraisers approved by the Bank's Board of Directors. Title and hazard
insurance are required on all security property. Substantially all of the
Bank's loans are secured by property located in its market area.
Any two officers are permitted to approve loans up to $350,000,
while loans over $350,000 require the approval of the Board of Directors or
the Executive Committee of the Board. All loans are ratified by the Board,
including those loans approved by the Executive Committee.
Historically, the Bank has not been an active purchaser or seller
of loans. However, the Bank may sell certain long-term fixed-rate loans in
the secondary market to reduce the percentage of such loans in its loan
portfolio and to generate liquidity to the extent necessary.
-5-
The following table shows origination, purchase and sale activity
of the Bank with respect to its loans during the periods indicated.
Year Ended September 30,
----------------------------
1996 1995 1994
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(In Thousands)
Real estate loan originations:
Single-family . . . . . . . . . . . . $18,636 $17,720 $18,790
Multi-family. . . . . . . . . . . . . 2,969 2,433 2,105
Commercial. . . . . . . . . . . . . . 17,803 1,900 5,924
Construction. . . . . . . . . . . . . 15,567 5,579 7,107
------- ------ -------
Total real estate loan
originations . . . . . . . . . . . 54,975 27,632 33,926
------- ------ -------
Single-family loan purchases. . . . . . -- -- 1,110
Consumer loan originations. . . . . . . 6,403 3,581 881
------- ------ -------
Total loan originations and
purchases . . . . . . . . . . . 61,378 31,213 35,917
------- ------ -------
Less:
Principal loan repayments . . . . . . 23,208 20,802 25,808
Sales of whole loans and
participations. . . . . . . . . . . -- -- --
Transferred to real estate owned. . . 21 -- 83
Other, net. . . . . . . . . . . . . . (71) (131) (235)
------- ------ -------
Net increase. . . . . . . . . . . . . $38,220 $10,542 $10,261
------- ------ -------
------- ------ -------
Although the Bank emphasizes the origination of single-family residential
ARMs, originations of such loans has decreased due to the preference of the
Bank's customers for fixed-rate residential mortgage loans in the low
interest rate environment which has recently prevailed. As a result, in
recent years, fixed-rate single-family residential mortgage loans with terms
of 15 or 30 years have constituted a significant portion of total loan
originations. Originations of fixed-rate single-family residential mortgage
loans (including fixed-rate permanent construction loans) amounted to $14.9
million, $17.5 million, and $19.4 million during fiscal 1996, 1995, and 1994,
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.
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,
1996, $96.6 million or 60.3% of the Bank's total loan portfolio consisted of
single-family residential real estate loans. The Bank originated $18.6
million, $17.7 million, and $18.8 million of single-family residential loans
in fiscal 1996, 1995, and 1994 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 $96.6 million
of such loans at September 30, 1996, $30.3 million or 31.4% had
adjustable-rates of interest and $66.3 million or 68.6% had fixed-rates of
interest.
-6-
The Bank currently originates for its portfolio single-family residential
mortgage loans which typically provide for an interest rate which adjusts
every year in accordance with a designated index (One Year Constant Maturity
Treasury) plus a margin. Prior to October, 1995, the Bank utilized the
National Median Cost of Funds Index. The Bank also offers such loans with
interest rates which adjust every three years. Such loans are typically
based on a 30-year amortization schedule. The amount of any increase or
decrease in the interest rate is presently limited to 2% per year, with a
limit of 6% over the life of the loan. The Bank's adjustable-rate loans
currently being originated are not assumable and do not contain prepayment
penalties. In October 1995, the Bank began to offer below market initial
interest rates. The Bank does not engage in the practice of using a cap on
the payments that could allow the loan balance to increase rather than
decrease, resulting in negative amortization.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same time,
the marketability of the underlying property may be adversely affected by
higher interest rates. The Bank believes that these risks, which have not
had a material adverse effect on the Bank to date, generally are less than
the risks associated with holding a significant position of fixed-rate loans
in an increasing interest rate environment.
Due to competitive market pressures and historically low interest rates,
the Bank has continued to originate fixed-rate mortgage loans with terms of
between 10 and 30 years although substantially all of the Bank's fixed-rate
loans in its portfolio have terms of 15 or 30 years. While the Bank has
historically retained all of its fixed-rate loans in its portfolio, the Bank
has developed a secondary mortgage market capacity and could sell a portion
of its fixed-rate loans in the secondary market.
The Bank is permitted to lend up to 100% of the appraised value of the
real property securing a residential loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank will lend up to 95% of
the appraised value of the property securing a single-family residential
loan, and generally requires borrowers to obtain private mortgage insurance
on the portion of the principal amount of the loan that exceeds 80% of the
appraised value of the security property. Notwithstanding the foregoing, the
Bank is permitted to originate loans in an amount up to 5% of assets which do
not otherwise conform to the above-referenced regulatory requirements. In
certain circumstances, the Bank has originated loans in an amount up to 95%
of the property's appraised value without requiring the borrower to obtain
private mortgage insurance. As of September 30, 1996, the Bank had $582,000
or .25% 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.
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, 1996, $6.5 million or 4.1% of the Bank's total loan portfolio consisted
of loans secured by existing multi-family residential real estate properties
and $35.2 million or 21.9% of such loan portfolio consisted of loans secured
by existing commercial real estate properties.
-7-
The majority of the Bank's multi-family residential loans are secured by
small apartment buildings, while commercial real estate loans are secured by
office buildings, small retail establishments, gas stations, warehouses,
hotels and restaurants. These types of properties constitute the majority of
the Bank's commercial real estate loan portfolio. All of the Bank's
multi-family and commercial real estate loans are secured by property located
in the Bank's market area.
Multi-family and commercial real estate loans are made on terms up to 25
years. Although the Bank will originate these loans with fixed interest
rates, the majority of these loans have interest rates which adjust in
accordance with a designated index. Loan to value ratios on the Bank's
multi-family and commercial real estate loans are limited to 75%. As part of
the criteria for underwriting multi-family and commercial real estate loans,
the Bank generally imposes a debt coverage ratio (the ratio of net cash from
operations before payment of debt service to debt service) of not less than
1.1. It is also the Bank's policy to obtain corporate or personal
guarantees, as applicable, on its multi-family residential and commercial
real estate loans from the principals of the borrower.
Between September 30, 1995 and September 30, 1996, commercial real estate
loans have increased from $19.1 million or 16.6% of the total loan portfolio
to $35.2 million or 21.9% of the total loan portfolio. Originations of such
loans amounted to $17.8 million in fiscal 1996 compared to $1.9 million in
fiscal 1995 and $5.9 million in fiscal 1994. The Bank has increased its
emphasis on such lending through increased originations, as permitted by
market and economic conditions. Any loan participations purchased by the
Bank are subject to the same underwriting standards which are applied to the
Bank's origination of such loans.
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, 1996, 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, 1996, construction loans amounted to $15.6 million or
9.7% of the Bank's total loan portfolio compared to $5.6 million or 4.8% of
the loan portfolio at September 30, 1995. At September 30, 1996, the Bank's
construction loans consisted of $8.4 million of commercial construction
loans, $6.6 million of one-to-four family construction loans and $600,000 of
multi-family construction loans. The Bank's commercial construction loans
generally consist of construction loans related to gas stations, small retail
establishments and office and warehouse buildings. The Bank intends to
continue its emphasis on commercial construction lending in the future.
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, 1996, the Bank did not have
any of such loans in its construction loan portfolio.
-8-
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 by
limiting its construction lending to residential properties. In addition,
the Bank has adopted underwriting guidelines which impose stringent
loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the
geographic area in which the Bank will do business and by working with
builders with whom it has established relationships.
CONSUMER LOANS. To a limited extent, the Bank also offers consumer
loans. Such loans generally have shorter terms and higher interest rates than
mortgage loans. The consumer loans offered by the Bank include automobile,
boat, recreational vehicle and deposit account secured loans. Consumer loans
amounted to $6.4 million or 4.0% of the total loan portfolio at September 30,
1996.
Consumer loans increased from $3.7 million or 3.2% of the total loan
portfolio at September 30, 1995 to $6.4 million or 4.0% of the total loan
portfolio at September 30, 1996. Such increase was primarily due to an
increase in line of credit loans 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 1996 and believes that such lending will increase in the future.
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
$170,000, $142,000, and $152,000 of deferred loan fees into income during
fiscal 1996, 1995, and 1994, 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.
-9-
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, 1996, 1995, or 1994.
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.
Under generally accepted accounting principles, the Bank is required to
account for certain loan modifications or restructurings as "troubled debt
restructurings." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Bank, for economic or legal
reasons related to the borrower's financial difficulties, grants a concession
to the borrower that the Bank would not otherwise consider. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. The Bank did
not have any troubled debt restructurings at September 30, 1996.
-10-
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.
September 30, 1996 September 30, 1995
--------------------------------------------------- -----------------------------------------------
30-59 Days 60-89 Days 90 or more days 30-59 Days 60-89 Days 90 or more days
---------- ---------- -------------- ---------- ---------- ---------------
Percent Percent Percent Percent Percent Percent
of of of of of of
Loan Loan Loan Loan Loan Loan
Amount Category Amount Category Amount Category Amount Category Amount Category Amount Category
---- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars In Thousands)
Real estate loans:
Residential:.
Single-family . . . $332 .34% $558 .58% $203 .21% $465 .57% $21 .03% $45 .06%
Multi-family. . . . -- -- -- -- -- -- -- -- -- -- -- --
Commercial. . . . . -- -- -- -- -- -- -- -- -- -- -- --
Construction. . . . -- -- -- -- -- -- -- -- -- -- -- --
Consumer loans. . . . . -- -- 16 .25% -- -- -- -- 4 .11% -- --
---- ---- ---- ---- --- ---
Total . . . . . . . $332 $574 $203 $465 $25 $45
---- ---- ---- ---- --- ---
---- ---- ---- ---- --- ---
-11-
The following table sets forth the amounts and categories of the Bank's
non-performing assets and troubled debt restructurings at the dates indicated.
September 30,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Single-family residential . . . . . . $203 $45 $114 $174 $282
Multi-family residential. . . . . . . -- -- -- -- 75
Construction. . . . . . . . . . . . . -- -- -- -- --
Commercial real estate. . . . . . . . -- -- -- -- 113
Consumer and other. . . . . . . . . . -- 4 -- -- --
. . . . . . . . . . . . . . . . . . --- -- --- --- ----
Total non-performing loans. . . . . 203 49 114 174 470
. . . . . . . . . . . . . . . . . . --- -- --- ---
Real estate owned . . . . . . . . . . . -- -- 83 125 --
. . . . . . . . . . . . . . . . . . --- -- --- --- ---
Total non-performing assets . . . . 203 49 197 299 470
. . . . . . . . . . . . . . . . . . --- -- --- ---
Troubled debt restructurings. . . . . . -- -- 417 420 423
. . . . . . . . . . . . . . . . . . --- -- --- --- ---
Total. . . . . . . . . . . . . . . . $203 $49 $614 $719 $893
. . . . . . . . . . . . . . . . . . --- -- --- --- ----
Total non-performing loans
and troubled debt
restructurings as a percentage
of total loans. . . . . . . . . . . . .14% .04% .50% .63% .99%
--- -- --- --- ----
Total non-performing assets
and troubled debt
restructurings as a percentage
of total assets . . . . . . . . . . . .09% .02% 37% 55% .69%
--- -- --- --- ----
Interest income which would have been recognized if the above loans had
been performing pursuant to their contractual terms totaled $12,000 for
fiscal 1996.
The $203,000 of non-accruing single-family residential loans at
September 30, 1996 consisted of five loans secured by single-family
residential property located in the Bank's market area. The largest of such
loans at such date amounted to approximately $130,000 and the average loan
balance was $41,000. Two such loans totaling $26,000 were to one borrower.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. 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
-12-
of loss. An asset classified loss is considered uncollectible and of such
little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification
as substandard, doubtful or loss. At September 30, 1996, the Bank had
$160,000 of classified assets, none of which were classified substandard and
$160,000 of which were classified special mention.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained
at a level that management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan portfolio.
Management's periodic evaluation is based upon examination of the portfolio,
past loan loss experience, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. The allowance is increased by a provision for
loan losses which is charged against income.
Although management uses the best information available to make
determinations with respect to the provision for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the
OTS and the FDIC, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to such allowance based on their
judgments about information available to them at the time of their
examination.
-13-
The following table summarizes changes in the allowance for possible
loan losses and other selected statistics for the periods presented.
Year Ending September 30,
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Average loans, net. . . . . . . . . $130,399 $102,065 $95,658 $88,664 $84,939
Allowance for loan losses,
beginning of period . . . . . . . $323 $323 $310 $241 $227
Charged-off loans:
Consumer. . . . . . . . . . . . . (3) -- -- -- --
Commercial. . . . . . . . . . . . -- -- (2) -- (82)
-------- -------- ------- ------- -------
Total charged-off loans . . . . (3) -- (2) -- (82)
-------- -------- ------- ------- -------
Recoveries on loans previously
charged-off . . . . . . . . . . . --- -- -- -- --
-------- -------- ------- ------- -------
Net loans charged-off . . . . . . . (3) -- (2) -- (82)
Provision for loan losses . . . . . 90 -- 15 69 96
-------- -------- ------- ------- -------
Allowance for loan losses,
end of period . . . . . . . . . . $410 $323 $323 $310 $241
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Net loans charged-off to average
loans, net. . . . . . . . . . . . --% --% --% --% .10%
Allowance for loan losses
to total loans. . . . . . . . . . .28% .29% .32% .33% .27%
Allowance for loan losses
to non-performing loans . . . . . 201.97% 659.18% 83.33% 178.17% 51.28%
Net loans charged-off to allowance
for loan losses . . . . . . . . . .73% --% .62% --% 34.02%
-14-
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.
September 30,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- ----------------------
% of Loans in % of Loans in % of Loans in
Each Category to Each Category to Each Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ---------------- ------ ---------------- ----- -----------------
(Dollars in Thousands)
Single-family residential $140 60.28% $ 91 70.82% $ 91 67.80%
Multi-family residential 14 4.07 9 4.57 9 3.33
Commercial real estate 180 21.94 109 16.60 109 20.24
Construction 12 9.71 10 4.84 10 7.72
Consumer 64 4.00 9 3.17 9 .91
Unallocated -- -- 95 -- 95 --
---- ------ ---- ------ ---- -------
Total $410 100.00% $323 100.00% $323 100.00%
---- ------ ---- ------ ---- -------
September 30,
-----------------------------------------------
1993 1992
----------------------- -----------------------
% of Loans in % of Loans in
Each Category to Each Category to
Amount Total Loans Amount Total Loans
------ ---------------- ------ -----------------
(Dollars in Thousands)
Single-family residential $ 81 74.48% $ 77 73.24%
Multi-family residential 4 1.64 3 1.26
Commercial real estate 86 17.73 95 20.33
Construction 6 5.19 4 3.87
Consumer 9 .96 12 1.30
Unallocated 124 -- 50 --
---- ------ ---- ------
Total $310 100.00% $241 100.00%
---- ------ ---- ------
-15-
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the Government National
Mortgage Association ("GNMA"). The Bank has also purchased mortgage-backed
securities issued by the Small Business Administration ("SBA").
The FHLMC is a public corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal. The FNMA is a private corporation chartered by
the U.S. Congress with a mandate to establish a secondary market for
conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the
FHLMC and the FNMA are U.S. Government sponsored enterprises, these
securities are considered to be among the highest quality investments with
minimal credit risks. The GNMA is a government agency within the Department
of Housing and Urban Development which is intended to help finance government
assisted housing programs. GNMA securities are backed by FHA-insured and
VA-guaranteed loans, and the timely payment of principal and interest on GNMA
securities are guaranteed by the GNMA and backed by the full faith and credit
of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are
limits to the maximum size of loans that qualify for these programs. For
example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $214,600. To accommodate
larger-sized loans, and loans that, for other reasons, do not conform to the
agency programs, a number of private institutions have established their own
home-loan origination and securitization programs. The SBA is an agency of
the U.S. Government. The SBA issues participation certificates backed
principally by commercial real estate and/or other business collateral. The
SBA was established by the U.S. Congress with a mandate to increase the
ability of small businesses to borrow money thereby expanding and increasing
employment. The timely payment of principal and interest on SBA securities
are guaranteed by the SBA and are backed by the full faith and credit of the
U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly,
the life of a mortgage-backed pass-through security approximates the life of
the underlying mortgages.
The Bank's mortgage-backed securities include collateralized mortgage
obligations ("CMOs"). CMOs have been developed in response to investor
concerns regarding the uncertainty of cash flows associated with the
prepayment option of the underlying mortgagor and are typically issued by
governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by
financial institutions or other similar institutions. A CMO can be
collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders,
the cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the
underlying collateral among the separate CMO classes, different classes of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics. At September 30, 1996, $37.6
million or 57.4% of the Bank's mortgage-backed securities consisted of CMO's.
All of the Bank's CMO's at September 30, 1996 are collateralized by loans
which are insured or guaranteed by the FNMA, the FHLMC or the GNMA.
-16-
In May 1993, the Financial Accounting Standards Board ("FASB") adopted
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, 1996, the Company had $65.5 million of
mortgage-backed securities classified as available for sale. At such time,
stockholders' equity included $235,000 of unrealized gains on securities
designated as available for sale, net of related tax effects.
-17-
The following table sets forth the purchases and principle repayments of
the Bank's mortgage-backed securities for the periods indicated.
Year Ended September 30,
-----------------------------------
1996 1995 1994
--------- --------- --------
(In Thousands)
Mortgage-backed securities purchased $ 51,493 $ 68,464 $ 4,329
Principal repayments (4,178) (4,108) (4,996)
Other, net (53,855)(1) (18,015) (1) (170)
Net $ (6,540) $ 46,341 $ (837)
_______________________
(1) Includes $54,552 and $18,776 in net proceeds from the sale of
mortgage-backed securities for 1996 and 1995, respectively.
Mortgage-backed securities generally increase the quality of the
Bank's assets by virtue of the insurance or guarantees that back them, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Bank. At September 30, 1996, $4.2
million of the Bank's mortgage-backed securities were pledged to secure
obligations of the Bank. See Note B to the Consolidated Financial Statements.
The following table sets forth certain information relating to the
Bank's mortgage-backed securities portfolio at the dates indicated.
September 30,
-----------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
Amortized Market Amortized Market Carrying Market
Cost Value Cost Value Value Value
--------- ------- --------- ------- -------- -------
(Dollars in Thousands)
FNMA securities $23,497 $23,364 $30,299 $30,510 $ 9,170 $8,931
CMO securities 36,988 37,602 35,931 36,298 9,352 9,014
FHLMC
securities 3,559 3,398 4,084 4,084 4,609 4,448
GNMA securities -- -- -- -- 1,454 1,403
SBA securities 1,082 1,118 1,120 1,130 1,096 1,096
Total $65,126 $65,482 $71,434 $72,022 $25,681 $24,892
At September 30, 1996, the $65.1 million mortgage-backed securities
portfolio had a weighted average yield of 6.38%. Of such amount, $542,000
with a weighted average yield of 6.86% had contractual maturities within ten
years and $64.6 million with a weighted average yield of 6.38% 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
-18-
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 investments.
The following table sets forth certain information relating to the
Bank's investment securities portfolio at the dates indicated.
September 30,
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
U.S. Government and
agency securities. . $ -- $-- $ -- $-- $1,000 $1,010
At September 30, 1994, the $1.0 million of U.S. Government and
agency securities had a weighted average yield of 3.4% and contractual
maturities of between one and three years.
At September 30, 1996, investments in the debt and/or equity
securities of any one non-governmental issuer did not exceed more than 10% of
the Company's stockholders' equity.
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.
-19-
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, 1996.
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.
Due to the significant decline in interest rates paid on deposit products in
fiscal 1994, the Bank experienced disintermediation of deposits into
competing investment products during such period. 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.
Year Ended September 30,
--------------------------
1996 1995 1994(1)
------- ------ -------
(Dollars in Thousands)
Increase (decrease) before interest credited $ 7,721 $ 614 $(2,054)
Interest credited 4,039 4,827 4,628
Net deposit increase $11,760 $5,441 $ 2,574
________________
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included for fiscal
1994.
-20-
The following table sets forth maturities of the Bank's
certificates of deposit of $100,000 or more at September 30, 1996 by time
remaining to maturity.
Amounts in
Thousands
--------
Three months or less $ 2,533
Over three months through six months 1,933
Over six months through 12 months 3,190
Over 12 months 8,314
--------
Total $15,970
--------
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.
September 30,
------------------------------------------------------------
1996 1995 1994(1)
------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------ -------- ------
(Dollars in Thousands)
Passbook and statement
savings accounts $ 17,192 12.33% $ 17,987 14.09% $ 21,808 17.84%
Money market accounts 18,446 13.23 12,351 9.67 12,600 10.30
Certificates of deposit 95,431 68.43 89,603 70.17 79,897 65.36
NOW accounts 6,538 4.69 6,524 5.11 6,456 5.28
Noninterest-bearing deposits 1,840 1.32 1,222 0.96 1,485 1.22
-------- ------- -------- ------ -------- ------
Total deposits at end of
period $139,447 $100.00% $127,687 100.00% $122,246 100.0%
-------- ------- -------- ------ -------- ------
________________
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included for fiscal
1994.
-21-
The following table presents, by various interest rate categories,
the amount of certificates of deposit at September 30, 1996 and 1995, and the
amounts at September 30, 1996 which mature during the periods indicated.
Amounts at September 30, 1996
September 30, Maturing Within
--------------- --------------------------------------------
Certificates of
Deposit 1996 1995 One Year Two Years Three Years Thereafter
- ---------------------- ------- ------- -------- --------- ----------- ----------
(In Thousands)
4.0% or less $ 166 $ 163 $ 81 $ 57 $ 10 $ 18
4.01% to 6.0% 71,960 33,710 48,921 8,687 10,089 4,263
6.01% to 8.0% 23,305 55,730 3,808 6,977 --- 12,520
------- ------- -------- --------- ----------- ----------
Total certificate
accounts $95,431 $89,603 $52,810 $15,721 $10,099 $16,801
------- ------- -------- --------- ----------- ----------
------- ------- -------- --------- ----------- ----------
-22-
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type for the periods indicated.
Year Ended September 30,
------------------- ------------------- ------------------
1996 1995 1994(1)
------------------- ------------------- ------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in Thousands)
Passbook and statement savings accounts $ 17,590 3.00% $ 17,786 3.00% $ 20,190 3.00%
Money market accounts 15,399 4.06 12,506 3.18 12,074 3.10
Certificates of deposit 95,839 5.82 82,324 5.78 81,520 5.09
NOW accounts 6,531 1.73 6,589 1.75 6,971 1.75
Noninterest-bearing deposits 1,531 --- 1,255 -- 204 --
------- --------- ------- --------- -------- ---------
Total deposits $136,890 5.00% $120,460 4.85% $120,959 4.34%
-------- --------- ------- --------- -------- ---------
-------- --------- ------- --------- -------- ---------
________________
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included for fiscal
1994.
-23-
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, 1996, the Bank had $60.0 million in FHLB advances, of which
$30.0 million were long-term in nature.
The following table sets forth certain information relating to the
Bank's borrowings at the dates indicated.
At or For the Year Ended
September 30,
---------------------------
1996 1995 1994
------- ------- ------
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $40,000 $11,111 $ 417
Maximum amount outstanding at
any month-end during the period $60,000 $30,000 $5,000
Weighted average rate:
During the period 6.39% 6.67% 3.84%
At end of period 5.98% 6.58% -- %
SUBSIDIARIES
OTS regulations permit the Bank to invest up to 2% of its assets in
the capital stock of, and secured and unsecured loans to, subsidiary service
corporations, and an additional 1% of its assets when the additional funds
are utilized for community or inner-city purposes. In addition,
federally-chartered savings institutions which are in compliance with their
minimum regulatory capital requirements also may make conforming loans to
service corporations in which the institution owns or holds more than 10% of
the capital stock or to joint ventures of such service corporations in an
aggregate amount of up to 50% of the institutions' regulatory capital. OTS
regulations also limit the aggregate amount of direct investments, including
loans, by a SAIF-insured institution in real estate, service corporations,
operating subsidiaries and equity securities as defined therein. At
September 30, 1996, the Bank had one wholly owned subsidiary which has been
inactive since 1984.
COMPETITION
The Bank faces significant competition in attracting deposits. Its
most direct competition for deposits has historically come from commercial
banks and other savings institutions located in its market area. The Bank
faces additional significant competition for investors' funds from other
financial intermediaries. The Bank competes for deposits principally by
offering depositors a variety of deposit programs, convenient branch
locations, hours and other services. The Bank does not rely upon any
individual group or entity for a material portion of its deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Bank competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of
services it provides borrowers and the variety of its products. Factors
which affect competition include the general and local economic conditions,
current interest rate levels and volatility in the mortgage markets.
-24-
EMPLOYEES
The Bank had 35 full-time employees and four part-time employees at
September 30, 1996. 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."
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
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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, 1996, the Bank
was in compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
association or holding company thereof which is not a subsidiary. Except
with the prior approval of the Director of the OTS, no director or officer of
a savings and loan holding company or person owning or controlling by proxy
or otherwise more than 25% of such company's stock, may acquire control of
any savings association, other than a subsidiary savings association, or of
any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in
the formation of a multiple savings and loan holding company which controls
savings associations in more than one state if (i) the multiple savings and
loan holding company involved controls a savings association which operated a
home or branch office located in the state of the association to be acquired
as of March 5, 1987; (ii) the acquirer is authorized to acquire control of
the savings association pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act, or (iii) the statutes of the state in
which the association to be acquired is located specifically permit
institutions to be acquired by the state-chartered associations or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
associations).
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FIRREA amended provisions of the Bank Holding Company Act of 1956
("BHCA") to specifically authorize the Federal Reserve Board to approve an
application by a bank holding company to acquire control of a savings
association. FIRREA also authorized a bank holding company that controls a
savings association to merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any
subsidiary bank which is a member of the Bank Insurance Fund ("BIF") with the
approval of the appropriate federal 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.
FIRREA imposed limitations on the aggregate amount of loans that a
savings association could make to any one borrower, including related
entities. See "Business of the Bank - Lending Activities - Loan Origination,
Purchase and Sales Activity" for a discussion of such limitations.
The OTS' enforcement authority over all savings associations and
their holding companies was substantially enhanced by FIRREA. This
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. FIRREA
significantly increased the amount of and grounds for civil money penalties.
FIRREA requires, except under certain circumstances, public disclosure of
final enforcement actions by 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 Bank Insurance
Fund ("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF had achieved a fully funded
status in contrast to the SAIF and, therefore, the Federal Deposit Insurance
Corporation ("FDIC") substantially reduced the average deposit insurance
premium paid by commercial banks to a level approximately 75% below the
average premium paid by savings institutions.
The underfunded status of the SAIF had resulted in the introduction
of federal legislation intended to, among other things, recapitalize the SAIF
and address the resulting premium disparity. On September 30, 1996, The
Omnibus Appropriations Act was signed into law. The legislation authorized a
one-time charge on SAIF insured deposits at a rate of $.657 per $100.00 of
March 31, 1995 deposits. As a result, the Bank's assessment amounted to
$770,000 ($508,000 net of tax). Additional provisions of the Act include new
BIF and SAIF premiums and the merger of BIF and SAIF. The new BIF and SAIF
premiums will include a premium for repayment of the Financing Corporation
("FICO") bonds plus any regular insurance assessment, currently nothing for
the lowest risk category institutions. Until full pro-rata FICO
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sharing is in effect, the FICO premiums for BIF and SAIF will be 1.3 and 6.4
basis points, respectively, beginning January 1, 1997. Full pro-rata FICO
sharing is to begin no later than January 1, 2000. BIF and SAIF are to be
merged on January 1, 1999, provided the bank and savings association charters
are merged by that date. While the one-time special assessment had a
significant impact on the current year earnings, the resulting lower annual
premiums will benefit future earnings.
The FDIC may terminate the deposit insurance of any insured
depository institution, including the Bank, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, 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. Federally insured savings
associations are required to maintain minimum levels of regulatory capital.
Pursuant to FIRREA, the OTS has established capital standards applicable to
all savings associations. These standards generally must be as stringent as
the comparable capital requirements imposed on national banks. The OTS also
is authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
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.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under
the rule, an institution with a greater than "normal" level of interest rate
risk will
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be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital requirement. As a
result, such an institution will be required to maintain additional capital
in order to comply with 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 exceeding 2% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The interest
rate risk component will be calculated, on a quarterly basis, as one-half of
the difference between an institution's measured interest rate risk and 2%,
multiplied by the market value of its assets. The rule also authorizes the
director of the OTS, or his designee, to waive or defer an institution's
interest rate risk component on a case-by-case basis. The final rule was to
be effective as of January 1, 1994, subject however to a two quarter "lag"
time between the reporting date of the data used to calculate an
institution's interest rate risk and the effective date of each quarter's
interest rate risk component. However, in October 1994 the Director of the
OTS indicated that it would waive the capital deductions for institutions
with a greater than "normal" risk until the OTS publishes an appeals process.
On August 21, 1995, the OTS released Thrift Bulletin 67 which established
(i) an appeals process to handle "requests for adjustments" to the interest
rate risk component and (ii) a process by which "well-capitalized"
institutions may obtain authorization to use their own interest rate risk
model to determine their interest rate risk component. The Director of the
OTS indicated, concurrent with the release of Thrift Bulletin 67, that the
OTS will continue to delay the implementation of the capital deduction for
interest rate risk pending the testing of the appeals process set forth in
Thrift Bulletin 67.
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, 1996.
September 30, 1996
---------------------------------
Tangible Core Risk-based
Capital Capital Capital
-------- --------- ----------
(Dollars in Thousands)
GAAP equity $27,735 $27,735 $27,735
Unrealized gain on securities (235) (235) (235)
Goodwill (50) (50) (50)
General valuation allowances -- -- 410
Total regulatory capital 27,450 27,450 27,860
Minimum capital requirements 3,526 7,052 9,997
-------- --------- ----------
Excess regulatory capital $23,924 $20,398 $17,863
-------- --------- ----------
-------- --------- ----------
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA as added
by the FDICIA, each federal banking agency is required to implement a system
of prompt corrective action for institutions which it regulates. In early
September 1992, the federal banking agencies, including the OTS, adopted
substantially similar regulations which are intended to implement Section 38
of the FDIA. These regulations became effective December 19, 1992. Under
the regulations, an institution shall be deemed to be (i) "well capitalized"
if it has total risk-based capital of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or
more and is not subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet
the definition of "well capitalized," (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier
I leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it
-29-
has a ratio of tangible equity to total assets that is equal to or less than
2.0%. At September 30, 1996, the Bank was in the "well capitalized" category.
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, 1996, had a liquidity ratio of 8.6%.
FEDERAL QUALIFIED THRIFT LENDER TEST. A savings association that
does not meet the QTL test set forth in the HOLA and implementing regulations
must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the association may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall be restricted to those of a national bank;
(iii) the association shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the association shall be subject to
the rules regarding payment of dividends by a national bank. Upon the
expiration of three years from the date the association ceases to be a QTL,
it must cease any activity and not retain any investment not permissible for
a national bank and immediately repay any outstanding FHLB advances (subject
to safety and soundness considerations).
Effective December 19, 1991, the definition of Qualified Thrift
Investments ("QTIs") was amended in its entirety and the QTL Test was amended
to require that QTIs represent 65% of portfolio assets, rather than 60% and
70% of tangible assets as previously required before and after July 1, 1991,
respectively. Portfolio assets are defined as total assets less intangibles,
property used by a savings association in its business and 20% of liquid
investments. Generally, QTIs are residential housing related assets. At
September 30, 1996, approximately 87.0% of the Bank's assets were invested in
QTIs, which was in excess of the percentage required to qualify the Bank
under the QTL test in effect at that time.
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
-30-
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.
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.
In December 1994, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal,
institutions would be permitted to only make capital distributions that would
not result in their capital being reduced below the level required to remain
"adequately capitalized." Because the Bank is a subsidiary of a holding
company, the proposal would require the Bank to provide notice to the OTS of
its intent to make a capital distribution. The Bank does not believe that
the proposal will adversely affect its ability to make capital distributions
if it is adopted substantially as proposed.
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, 1996, the Bank had
$3.0 million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to
affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income
housing projects. These contributions have adversely affected the level of
FHLB dividends paid and could continue to do so in the future. These
contributions also could have an adverse effect on the value of FHLB stock in
the future. For the years ended September 30, 1996 and 1995, respectively,
dividends paid by the FHLB of Cincinnati to the Bank totaled approximately
$148,000 and $78,000, respectively.
-31-
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction
accounts (primarily NOW and Super NOW checking accounts) and non-personal
time deposits. At September 30, 1996, the Bank was in compliance with
applicable requirements. However, because required reserves must be
maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
-32-
TAXATION
TAXATION
FEDERAL TAXATION. The Company and the Bank are both subject to the
federal tax laws and regulations which apply to corporations generally.
Prior to the enactment of the Small Business Jobs Protection Act (the "Act"),
which was signed into law on August 21, 1996, certain thrift institutions,
such as the Bank, were allowed deductions for bad debts under methods more
favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge off method of Section 166 of the Code or the reserve method of Section
593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was
generally allowed a deduction for an addition to its bad debt reserve equal
to the greater of (i) an amount based on its actual average experience for
losses in the current and five preceding taxable years, or (ii) an amount
necessary to restore the reserve to its balance as of the close of the base
year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the
experience method of the percentage of taxable income method. For tax years
1995 and 1994, the Bank used the percentage of taxable income method because
such method provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks
are allowed to utilize the experience method applicable to such institutions,
while thrift institutions that are treated as large banks are required to use
only the specific charge off method. The percentage of taxable income method
of accounting for bad debts is no longer available for any financial
institution.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts
to be recaptured will be determined solely with respect to the "applicable
excess reserves" of the taxpayer. The amount of the applicable excess
reserves will be taken into account ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement described below. In the case of a thrift
institution that is treated as a large bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans (generally loans secured
by improved real estate) and its reserve for losses on nonqualifying loans
(all other types of loans) as of the close of its last taxable year beginning
before January 1, 1996, over (ii) the balances of such reserves as of the
close of its last taxable year beginning before January 1, 1988 (i.e., the
"pre-1988 reserves"). In the case of a thrift institution that is treated as
a small bank, like the Bank, the amount of the institution's applicable
excess reserves generally is the excess of (i) the balances of its reserve
for losses on qualifying real property loans and its reserve for losses on
nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or, (b) what the thrift's reserves would have been at the close of
its last year beginning before January 1, 1996, had the thrift always used
the experience method.
-33-
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, 1996,
The Bank's pre-1988 reserves for tax purposes totaled approximately 2.5
million. The Bank believes it had approximately 13.2 million of accumulated
earnings and profits for tax purposes as of September 30, 1996, which would
be available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made
as to whether the Bank will have current or accumulated earnings and profits
in subsequent years.
In addition to the regular income tax, the Company and the Bank are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of
a corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its alternative minimum taxable income computed without
regard to this preference item and prior to reduction by net operating
losses, is included in alternative minimum taxable income. Net operating
losses can offset no more than 90% of alternative minimum taxable income.
The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. In
addition, for taxable years after 1986 and before 1996, the Company and the
Bank are also subject to environmental tax equal to 0.12% of the excess of
alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax)
over $2.0 million.
The tax returns of the Bank have been audited or closed without audit
through fiscal year 1992. 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.
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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 is imposed annually at a rate of 1.5% of the Bank's book
net worth determined in accordance with generally accepted accounting
principles. As a "financial institution," the Bank is not subject to any tax
based upon net income or net profits imposed by the State of Ohio. ITEM 2.
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ITEM 2. PROPERTIES.
OFFICES AND PROPERTIES
At September 30, 1996, the Bank conducted its business from its executive
offices in West Chester, Ohio and four full service offices, all of which are
located in southwestern Ohio.
The following table sets forth certain information with respect to the
Bank's office properties at September 30, 1996.
Net Book
Leased/ Value of Amount of
Description/Address Owned Property Deposits
--------------------- ------- -------- ---------
(Dollars in Thousands)
Lockland - 117 Mill Street Owned $ 126 $ 54,984
Lebanon - 718 E. Main Street Owned 452 23,451
Kingsgate - 7810-7820 Tylersville Square
Drive Owned(1) 1,938 14,578
Pisgah - 9235 Cincinnati - Columbus Road Owned 331 29,882
Wyoming - 401 Wyoming Avenue Owned 337 16,552
-------- ---------
$3,184 $139,447
-------- ---------
-------- ---------
______________
(1) The Bank closed its branch office at 7731 Tylersville Road and
moved its main office to 7810-7820 Tylersville Square Drive during
April, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other
than nonmaterial legal proceedings occurring in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required herein, to the extent applicable, is
incorporated by reference from page 48 of the Corporation's 1996 Annual
Report to Stockholders ("1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from
page three of the 1996 Annual Report.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OF OPERATIONS.
The information required herein is incorporated by reference from
pages four to 18 of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages 19 to 45 of the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
the definitive proxy statement of the Corporation for the Annual Meeting of
Stockholders to be held on January 29, 1997 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at September 30,
1996 and 1995.
Consolidated Statements of Earnings for Each of the Three Years
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in the Period Ended September 30, 1996.
Consolidated Statements of Changes in Stockholders' Equity for
Each of the Three Years in the Period Ended September 30, 1996.
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period ended September 30, 1996.
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.
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(3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.
Exhibit Index
Page
----
2.1 Plan of Conversion *
3.1 Articles of Incorporation of Enterprise Federal Bancorp, Inc. **
3.2 Code of Regulations of Enterprise Federal Bancorp, Inc. *
3.3 Bylaws of Enterprise Federal Bancorp, Inc. *
4.0 Stock Certificate of Enterprise Federal Bancorp, Inc. ***
10.1 Enterprise Federal Bancorp, Inc. Recognition and Retention
Plan ***
10.2 Enterprise Federal Bancorp, Inc. 1994 Stock Option Plan ***
10.3 Enterprise Federal Bancorp, Inc. Employee Stock Ownership
Plan and Trust *
10.4 Employment Agreement between Enterprise Federal Bancorp,
Inc. and Otto L. Keeton ***
10.5 Employment Agreement between Enterprise Federal Bancorp,
Inc. and Michael P. Meister ***
10.6 Employment Agreement between Enterprise Federal Bancorp,
Inc. and Thomas J. Noe ***
10.7 Employment Agreement between Enterprise Federal Bancorp,
Inc. and Steven M. Pomeroy ***
13.0 1996 Annual Report to Stockholders ****
16.0 Letter from Kennedy, Kraft, Dreyer and Noe
re: change in accountants *
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1 Business - Subsidiaries" for the required
information
(*) 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.
(****) Previously filed on January 3, 1997.
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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 January 7, 1996
- -----------------------
Otto L. Keeton
Chairman of the Board, President
and Chief Executive Officer
/s/ Michael R. Meister January 7, 1996
- -----------------------
Michael R. Meister
Vice President, Chief Operating
Officer and Director
/s/ Thomas J. Noe January 7, 1996
- -----------------------
Thomas J. Noe
Vice President, Treasurer and
Chief Financial Officer
(principal accounting officer)
/s/ William H. Kreeger January 7, 1996
- -----------------------
William H. Kreeger
Director
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/s/ Terrell G. Marty January 7, 1996
- -----------------------
Terrell G. Marty
Director
/s/ Edith P. Mayer January 7, 1996
- -----------------------
Edith P. Mayer
Director
/s/ Steven A. Wilson January 7, 1996
- -----------------------
Steven A. Wilson
Director
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