UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24694
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
7810 Tylersville Square Drive
West Chester, Ohio 45069
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(Address or principal executive office) (Zip Code)
(513) 755-4600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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 report), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 1, 1997, there
were issued and outstanding 2,010,828 shares of the Registrant's Common Stock,
par value $.01 per share.
ENTERPRISE FEDERAL BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition 1
(As of March 31, 1997 (unaudited) and September 30, 1996)
Consolidated Statements of Earnings for the six months 2
ended March 31, 1997 (unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows for the six months 3
ended March 31, 1997 (unaudited) and 1996 (unaudited)
Notes to unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Securities Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
i
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, 1997 September 30, 1996
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(unaudited)
ASSETS:
Cash and due from banks $ 526 $ 736
Federal Funds sold 7,000 7,225
Interest-bearing deposits in other financial institutions 4,143 4,977
----- -----
Cash and cash equivalents 11,669 12,938
Mortgage-backed securities available for sale at market 65,407 65,482
Loans receivable - net 169,931 149,050
Office premises and equipment-at depreciated cost 3,558 3,603
Federal Home Loan Bank stock - at cost 4,500 3,000
Accrued interest receivable on loans 644 360
Accrued interest receivable on mortgage-backed securities 411 371
Accrued interest receivable on interest-bearing deposits 62 44
Goodwill and other intangible assets 35 50
Prepaid expenses and other assets 487 256
Deferred federal income tax asset --- 37
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Total assets $256,704 $235,191
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $143,019 $139,447
Advances from Federal Home Loan Bank 80,000 60,000
Escrow deposits 197 208
Accrued interest payable 574 488
Other liabilities 832 1,703
Accrued federal income taxes 288 289
Deferred federal income taxes 148 ---
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Total liabilities $225,058 $202,135
Commitments --- ---
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares
authorized, none issued and outstanding --- ---
Common stock, $.01 par value, 4,000,000 shares authorized,
2,268,596 issued 23 23
Additional paid-in capital 22,772 22,713
Less 257,768 and 194,268 shares of treasury stock - at cost (3,932) (3,058)
Less shares acquired by employee stock benefit plans (2,215) (2,593)
Retained earnings - restricted 14,998 15,736
Unrealized gain on securities designated as available
for sale, net of related tax effects --- 235
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Total stockholders' equity 31,646 33,056
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Total liabilities and stockholders' equity $256,704 $235,191
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The accompanying narrative is an integral part of these statements.
1
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except share data)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
1997 1996 1997 1996
---------- --------- --------- ------
Interest income:
Loans $3,424 $2,592 $6,699 $4,933
Mortgage-backed securities 1,078 994 2,076 2,179
Interest-bearing deposits and other 157 181 346 389
---------- --------- --------- ------
Total interest income 4,659 3,767 9,121 7,501
Interest expense:
Deposits 1,796 1,699 3,567 3,393
Borrowings 1,042 596 1,921 1,185
---------- --------- --------- ------
Total interest expense 2,838 2,295 5,488 4,578
Net interest income 1,821 1,472 3,633 2,923
Provision for losses on loans 45 30 75 30
---------- --------- --------- ------
Net interest income after provision for losses on loans 1,776 1,442 3,558 2,893
Other operating income:
Gain on sale of securities 136 205 435 831
Other operating income 30 24 58 55
---------- --------- --------- ------
Total other income 166 229 493 886
Operating expenses:
Employee compensation and benefits 607 583 1,264 1,242
Occupancy and equipment 97 92 193 160
Federal deposit insurance premiums 5 73 76 142
Franchise taxes 111 115 224 233
Data processing 49 35 71 68
Amortization of intangible assets 8 8 15 15
Other 137 53 242 212
---------- --------- --------- ------
Total operating expenses 1,014 959 2,085 2,072
Earnings before income taxes 928 712 1,966 1,707
Federal income taxes 331 243 679 613
---------- --------- --------- ------
Net earnings $ 597 $ 469 $1,287 $1,094
---------- --------- --------- ------
---------- --------- --------- ------
Earnings per share $.31 $.24 $.66 $.55
---- ---- ---- ----
---- ---- ---- ----
The accompanying narrative is an integral part of these statements.
2
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
(unaudited)
Six Months Ended March 31,
------------------------------
1997 1996
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Cash flows from operating activities:
Net earnings for the period $ 1,287 $ 1,094
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 11 (43)
Amortization of deferred loan origination fees (86) (113)
Depreciation and amortization 53 58
Provision for losses on loans 45 30
Federal Home Loan Bank Stock dividends (116) (64)
Gains on sales of securities (435) (831)
Amortization of expense related to stock benefit plans 507 482
Increase (decrease) in cash due to change in:
Accrued interest receivable (342) (29)
Prepaid expenses and other assets (231) (273)
Accrued interest payable 86 (34)
Other liabilities (871) 382
Federal income taxes
Current (1) 255
Deferred 148 (100)
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Net cash provided by operating activities 55 814
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Cash flows provided by (used in) investing activities:
Purchase of mortgage-backed securities (37,393) (36,535)
Sale of mortgage-backed securities 35,191 45,116
Principal repayments of mortgage-backed securities 2,466 2,150
Loan principal repayments 8,567 8,856
Loan disbursements (29,407) (28,277)
Purchase of office premises and equipment (26) (1,242)
Purchase of FHLB Stock (1,384) (423)
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Net cash used in investing activities (21,986) (10,355)
----------- ----------
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 3,572 12,021
Borrowed money 20,000 ---
Escrow deposits (11) (12)
Distribution to stockholders (2,025) (6,535)
Purchase of Treasury shares (874) (1,485)
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Net cash provided by (used in) financing activities 20,662 3,989
----------- ----------
Net decrease in cash and cash equivalents (1,269) (5,552)
Cash and cash equivalents at beginning of period 12,938 10,670
----------- ----------
Cash and equivalents at end of period $ 11,669 $ 5,118
----------- ----------
----------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 700 $ 245
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Interest on deposits and borrowings $ 5,402 $ 4,664
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The accompanying narrative is an integral part of these statements.
3
ENTERPRISE FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Note 1 - BASIS OF PRESENTATION
Enterprise Federal Bancorp, Inc. (the "Corporation") was incorporated under
Ohio law in April 1994 by Enterprise Federal Savings and Loan Association (the
"Association") in connection with the conversion of the Association from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank, to be known as Enterprise Federal Savings Bank (the "Savings
Bank"), the issuance of the Association's stock to the Corporation and the offer
and sale of the Corporation's common stock by the Corporation (the
"Conversion"). Upon consummation of the Conversion on October 14, 1994, the
Corporation became the unitary holding company for the Savings Bank.
The accompanying unaudited consolidated financial statements of the Corporation
have been prepared in accordance with instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the six months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the year ending
September 30, 1997. The unaudited consolidated financial statements and notes
hereto should be read in conjunction with the audited financial statements and
notes thereto for the year ending September 30, 1996, contained in the
Corporation's 1996 Annual Report.
Note 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Corporation and the Savings Bank. All significant intercompany items have
been eliminated.
Note 3 - EARNINGS PER SHARE
Earnings per share for the three and six months ended March 31, 1997 were
calculated assuming 1,927,584 and 1,942,209 shares were issued and outstanding
during the periods. Earnings per share for the three and six months ended
March 31, 1996 were calculated assuming 1,954,167 and 1,989,091 shares were
issued and outstanding during the periods.
4
Note 4 - EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 1991, the Financial Accounting Standards Board ("FASB") adopted
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," which became effective for fiscal years
ending after December 15, 1992, for institutions with assets of more than $150
million. For institutions with less than $150 million in assets, SFAS No. 107
became effective for fiscal years ending after December 15, 1995. SFAS No. 107
requires disclosure of the fair value of financial instruments, both assets and
liabilities, recognized and not recognized in the statement of financial
condition, for which it is practical to estimate fair value. SFAS No. 107 only
requires disclosure of fair values and has no impact on the Company's
consolidated net earnings or financial condition.
In May 1993, FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," SFAS No. 114, which is effective for fiscal years
beginning after December 15, 1994, requires that impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as an alternative, at the loan's observable
market price or fair value of the collateral. The Bank's loans which might be
affected by SFAS No. 114 are generally collateral dependent, and the Bank's
current procedures for evaluating impaired loans result in carrying such loans
at the lower of cost or fair value. The Company adopted SFAS No. 114 on October
1, 1995, as required, without material effect on consolidated financial
condition or results of operations.
In October 1994, the FASB issued SFAS No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119
requires financial statement disclosure of certain derivative financial
instruments, defined as futures, forwards, swaps, option contracts, or other
financial instruments with similar characteristics. In the opinion of
management, SFAS No. 119 will have no material effect on the Company's
consolidated financial condition or results of operations, as the Company does
not invest in derivative financial instruments, as defined. As a result, the
applicability of SFAS No. 119 relates solely to disclosure requirements
pertaining to fixed-rate and adjustable-rate loan commitments.
In June 1994, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that the Company recognize as separate assets,
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights
and capitalized excess
5
servicing receivables be assessed for impairment. Impairment is measured based
on fair value.
SFAS No. 122 would be applied prospectively to fiscal years beginning after
December 15, 1995, (October 1, 1996, as to the Company) to transactions in which
an entity acquires mortgage servicing rights and to impairment evaluations of
all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited. The
Company's management believes that SFAS No. 122 will not have a material effect
on the Company's consolidated financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123 entitled "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings, and, if presented, earnings per share, as if SFAS No.
123 has been adopted. The accounting requirements of SFAS No. 123 are effective
for transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that the Company will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore SFAS No. 123 will have no effect on its consolidated financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements and transfers of receivables
with recourse.
6
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidated financial position or results of
operation.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Corporation's assets totaled $256.7 million at March 31, 1997 compared
to $235.2 million at September 30, 1996. This $21.5 million or 9.1% increase
was primarily due to a $20.9 million or 14.0% increase in loans receivable, net.
Total liabilities amounted to $225.1 million at March 31, 1997 compared to
$202.1 million at September 30, 1996. This increase was primarily due to a
$20.0 million or 33.3% increase in advances from the Federal Home Loan Bank
("FHLB") of Cincinnati and a $3.6 million or 2.6% increase in deposits. Total
stockholders' equity decreased $1.4 million or 4.3% to $31.7 million at March
31, 1997 compared to $33.1 million at September 30, 1996. The decrease in
stockholders' equity was primarily due to the payment of a $1.00 per share
dividend on December 26, 1996 to stockholders of record on December 14, 1996.
Such distribution amounted to $2.0 million in the aggregate and is primarily
reflected as a reduction in retained earnings. Such reduction was partially
offset by net income of $1.3 million during the six months ended March 31, 1997.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NET INCOME. The Corporation's net income amounted to $597,000 for the
three months ended March 31, 1997 compared to $469,000 for the comparable period
in 1996. The $128,000 or 27.3% increase was due primarily to an increase in net
interest income.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $349,000 or 23.7% to $1.8 million for the three months ended March 31,
1997 compared to the same period in 1996. Net interest income is determined by
the Corporation's interest rate spread (i.e., the difference between the yields
earned on its interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. The increase in net interest income was due to the
increase in interest-earning assets. The increase in interest-earning assets was
primarily due to the leveraging of the Corporation's capital and the increased
origination of loans.
INTEREST INCOME. Interest income amounted to $4.7 million for the three
months ended March 31, 1997 compared to $3.8 million for the same period in
1996. The increase of $892,000 or 23.7% was primarily due to an increase in
interest income on loans of $832,000 or 32.1% to $3.4 million for the 1997
period compared to the 1996 period. Such increase was primarily due to an
increase in the average balance of such assets due to increased loan demand.
8
INTEREST EXPENSE. Interest expense increased $543,000 or 23.7% to $2.8
million for the three months ended March 31, 1997 compared to the same period
in 1996 as a result of an increase in interest expense on both deposits and
borrowed money. Interest expense on deposits increased $97,000 or 5.7% due
to an increase in the average balance of and rates paid on deposits.
Interest expense on borrowed money increased $446,000 or 74.8% primarily due
to an increase in the average balance of such liabilities as a result of
increased funding needs.
OTHER OPERATING INCOME. Other operating income amounted to $166,000 and
$229,000 during the three months ended March 31, 1997 and 1996, respectively.
The $63,000 decrease during the 1997 period was primarily due to decreased
gains on sales of securities as a result of decreased sales activity.
OPERATING EXPENSES. Operating expenses increased $55,000 or 5.7% to $1.0
million for the three months ended March 31, 1997 compared to $959,000 for the
three months ended March 31, 1996. Such increase was primarily due to an
$84,000 or 158.5% increase in other operating expenses which was partially
offset by a $68,000 or 93.2% decrease in federal deposit insurance premiums.
FEDERAL INCOME TAXES. Federal income taxes amounted to $331,000 and
$243,000 for the three months ended March 31, 1997 and 1996, respectively,
resulting in effective tax rates of 32.6% and 34.1%, respectively.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
NET INCOME. The Corporation's net income amounted to $1.3 million for
the six months ended March 31, 1997 compared to $1.1 million for the
comparable period in fiscal 1996. The $193,000 or 17.6% increase was due
primarily to an increase in net interest income, partially offset by a
decline in total other operating income.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $710,000 or 24.3% for the six months ended March 31, 1997 compared to
the same period in fiscal 1996. The increase in net interest income was due to
an increase in interest-earning assets. The increase in interest-earning assets
was primarily due to the leveraging of the Corporation's capital and the
increased origination of loans.
INTEREST INCOME. Interest income amounted to $9.1 million for the six
months ended March 31, 1997 compared to $7.5 million for the same period in
fiscal 1996. The increase of $1.6 million or 21.6% was primarily due to an
increase in interest income on loans of $1.8 million or 36.0% to $6.7 million
for the fiscal 1997 period compared to the fiscal 1996 period. Such increase
was primarily due to an increase in the average balance of such assets due to
increased loan demand.
INTEREST EXPENSE. Interest expense increased $910,000 or 19.9% to $5.5
million for the six months ended March 31, 1997 compared to the same period in
fiscal 1996 as a result of an increase in interest expense on both deposits and
borrowed money. Interest
9
expense on deposits increased $174,000 or 5.1% due to an increase in the
average balance of and rates paid on deposits. Interest expense on borrowed
money increased $736,000 or 62.1% primarily due to an increase in the average
balance of such liabilities as a result of increased funding needs.
OTHER OPERATING INCOME. Other operating income amounted to $493,000 and
$886,000 during the six months ended March 31, 1997 and 1996, respectively.
The $393,000 decrease during the fiscal 1997 period was primarily due to
decreased gains on sales of securities as a result of decreased sales
activity.
OPERATING EXPENSES. Operating expenses increased $13,000 or .6% to $2.1
million for the six months ended March 31, 1997 compared to $2.7 million for the
six months ended March 31, 1996. Such increase was primarily due to modest
increases in most categories of operating expenses which were offset primarily
by a $66,000 or 46.5% decrease in federal deposit insurance premiums.
FEDERAL INCOME TAXES. Federal income taxes amounted to $679,000 and
$613,000 for the six months ended March 31, 1997 and 1996, respectively,
resulting in effective tax rates of 34.5% and 35.9%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans and mortgage-backed securities
and funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by the movement of interest rates in
general, economic conditions and competition. The Corporation manages the
pricing of its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Corporation invests excess funds in FHLB overnight
deposits and other short-term interest-earning assets which provide liquidity to
meet lending requirements. As an additional source of funds, the Corporation
has borrowed funds from the FHLB of Cincinnati and has access to the Federal
Reserve Bank discount window. At March 31, 1997, the Corporation had $80.0
million of FHLB advances outstanding.
Liquidity management is both a daily and long term function. Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits. On a longer-term basis, the Corporation
maintains a strategy of investing in various mortgage-backed securities and
lending products. During the six month periods ended March 31, 1997 and 1996,
the Corporation used its sources of funds primarily to meet its ongoing
commitments to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain its portfolio of mortgage-backed securities. At
March 31, 1997, the total approved loan commitments outstanding amounted to
$770,000. At the same time, the Corporation had $8.7 million of commitments
under unused lines and letters of credit and the unadvanced portion of
construction loans approximated $8.9 million. Certificates of deposit scheduled
to
10
mature in one year or less at March 31, 1997 totaled $42.8 million. Management
of the Corporation believes that the Corporation has adequate resources,
including principal prepayments and repayments of loans and mortgage-backed
securities, to fund all of its commitments to the extent required. In addition,
although the Corporation has extended commitments to fund loans or lines and
letters of credit, historically, the Corporation has not been required to fund
all of its outstanding commitments. Management believes that a significant
portion of maturing deposits will remain with the Corporation.
The Savings Bank is required by the Office of Thrift Supervision ("OTS") to
maintain average daily balances of liquid assets and short-term liquid assets
(as defined) in amounts equal to 5% and 1% respectively, of net withdrawal
deposits and borrowings payable in one year or less to assure its ability to
meet demand for withdrawals and repayments of short-term borrowings. The
liquidity requirements may vary from time to time at the direction of the OTS
depending upon economic conditions and deposit flows. The Savings Bank
generally maintains a liquidity ratio of between 5% and 10% of its net
withdrawable deposits and borrowings payable in one year or less. The Savings
Bank's average monthly liquidity ratio and short-term liquid assets ratio for
March 1997 was 6.01%. As of March 31, 1997, the Savings Bank's regulatory
capital substantially exceeded all regulatory capital requirements with
tangible, core and risk-based capital ratios of 11.4%, 11.4% and 21.0%,
respectively, compared to regulatory requirements of 1.5%, 3.0% and 8.0%,
respectively, as demonstrated in the table below.
Regulatory Capital
----------------------------------------------------------------------------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
-------- -------- -------- ------- ----------- -------
(Dollars in Thousands)
Capital under generally accepted
accounting principles $29,157 $29,157 $29,157
Goodwill (35) (35) (35)
General valuation allowances --- --- 485
-------- -------- - ---------
Regulatory capital computed 29,122 11.4 29,122 11.4 29,607 21.3
Minimum capital requirement 3,845 1.5 7,690 3.0 11,112 8.0
-------- ------- -------- -------- --------- -------
Regulatory capital - excess $25,277 9.9 $21,432 8.4 $18,495 13.3
-------- ------- -------- -------- --------- -------
-------- ------- -------- -------- --------- -------
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Corporation and related notes
represented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of financial institutions are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general
11
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
In the current interest rate environment, liquidity and the maturity structure
of the Corporation's assets and liabilities are critical to the maintenance of
acceptable performance levels.
RECENT LEGISLATION
The deposits of the Savings 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
insured institutions.
The underfunded status of the SAIF 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 Savings Bank's assessment amounted to $770,000
($508,000 net of tax). Additional provisions of the Act include new BIF and
SAIF premiums and the merger of BIF and SAIF. The new BIF and SAIF premiums
will include a premium for repayment of the Financing Corporation ("FICO") bonds
plus any regular insurance assessment, currently nothing for the lowest risk
category institutions. Until full pro-rata FICO sharing is in effect, the FICO
premiums for BIF and SAIF will be 1.3 and 6.4 basis points, respectively,
beginning January 1, 1997. Full pro-rata FICO sharing is to begin no later than
January 1, 2000. BIF and SAIF are to be merged on January 1, 1999, provided the
bank and savings association charters are merged by that date. While the
one-time assessment had a significant impact on fiscal year 1996 earnings, the
resulting lower annual premiums will benefit future earnings.
12
ENTERPRISE FEDERAL BANCORP, INC. AND SUBSIDIARY
PART II
Item 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Savings Bank is involved in any
pending legal proceedings other than non-material legal proceedings
occurring in the ordinary course of business.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its 1997 Annual Meeting of Stockholders
on January 29, 1997. The meeting was held to elect three directors
and ratify the appointment of Grant Thornton as the Corporation's
independent auditors for fiscal 1997. The results of the voting
are set forth below.
A. Election of Directors
Name For Withheld Not Voted
---- --- -------- ---------
1. Otto L. Keeton 1,580,733 5,553 623,042
2. Terrell G. Marty 1,580,758 5,528 623,042
3. Steven A. Nelson 1,580,758 5,528 623,042
B. Ratification of Auditors
For Against Abstain Not Voted
--- ------- ------- ---------
1,580,789 4,475 1,022 623,042
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
13
SIGNATURE
Pursuant to the requirements 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.
Date: May 7, 1997 By: /s/ Otto L. Keeton
--------------------------------
Otto L. Keeton
President & Chief Executive Officer
Date: May 7, 1997 By: /s/ Thomas J. Noe
--------------------------------
Thomas J. Noe
Vice President and Chief Financial Officer
14