SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No.: 0-24694
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Enterprise Federal Bancorp, Inc.
--------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1396726
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7810 Tylersville Square Drive
West Chester, Ohio 45069
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(Address) (Zip Code)
Registrant's telephone number, including area code: (513) 755-4600
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
/X/
As of October 23, 1997, the aggregate value of the 1,554,098 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
431,730 shares held by all directors and officers of the Registrant as a
group, was approximately $41.5 million. This figure is based on the mean of
the bid and asked prices of $26.69 per share of the Registrant's Common Stock
on October 23, 1997.
Number of shares of Common Stock outstanding as of October 23, 1997: 1,985,828
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended
September 30, 1997 are incorporated into Part II, Items 5 through 8 of this
Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of September 30, 1997 are
incorporated into Part III, Items 9 through 13 of this Form 10-K.
PART I
ITEM 1. BUSINESS
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GENERAL
ENTERPRISE FEDERAL BANCORP, INC.
Enterprise Federal Bancorp, Inc. (the "Company") was incorporated in the
State of Ohio in April, 1994 in connection with the conversion of Enterprise
Federal Savings and Loan Association from a mutual savings and loan association
to a stock savings bank to be known as "Enterprise Federal Savings Bank" (the
"Bank"). The Company sold 2,268,596 shares of common stock, $.01 par value per
share, in an offering to certain depositors, borrowers and members of the
general public. The offering was consummated on October 14, 1994 and, as a
result, the Company became a unitary savings and loan holding company. The
Company owns 100% of the issued and outstanding common stock of the Bank, which
is the primary asset of the Company. The Company does not presently own or
operate any subsidiaries except for the Bank.
ENTERPRISE FEDERAL SAVINGS BANK
The Bank is a federally-chartered stock savings bank conducting business
from its executive offices located in West Chester, Ohio and four full service
offices located in Hamilton, Butler and Warren Counties, Ohio. The Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF"), which
is administered by the Federal Deposit Insurance Corporation ("FDIC"), to the
maximum extent permitted by law.
Enterprise is a community oriented savings bank which has traditionally
offered a wide variety of savings products to its retail customers while
concentrating its lending activities on real estate loans secured by one-to-four
family residential properties located primarily in Hamilton, Butler and Warren
Counties, Ohio. Such loans amounted to $130.0 million or 61.9% of the total loan
portfolio at September 30, 1997. To a significantly lesser extent, the Bank also
focuses its lending activities on commercial real estate loans, residential
construction loans and multi-family real estate loans. The Bank also invests in
securities which are issued by United States ("U.S.") government agencies or
government sponsored enterprises.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also regulated by the FDIC, the administrator
of the SAIF. The Bank is also subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which is one
of the 12 regional banks comprising the FHLB System.
MARKET AREA
Enterprise conducts its business through its main office and four branch
offices located in Hamilton, Butler and Warren Counties, Ohio. At September 30,
1997, management believed that most of the Bank's depositors and borrowers were
residents of Hamilton, Butler and Warren Counties.
The Cincinnati metropolitan area is the second largest in Ohio and has a
stable and diversified labor force and economic base. While the principal
industry historically has been manufacturing, in recent years the service and
wholesale/retail trade industries have overtaken manufacturing in terms of
employment. Cincinnati is the headquarters for a number of large companies,
including Proctor & Gamble, E.W. Scripps, Federated Department Stores and
Cincinnati Milacron. In addition to these companies, the largest local employers
include the federal government, General Electric Aircraft, The University of
Cincinnati and the Kroger Co.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. At September 30, 1997, the Bank's total loan
portfolio before net items ("total loan portfolio"), amounted to $210.0
million or 76.4% of the Company's $274.9 million of total assets at such
time. The Bank has traditionally concentrated its lending activities on
conventional first mortgage loans secured by residential property.
Conventional loans are neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Department of Veterans Affairs
("VA"). Consistent with such approach, at September 30, 1997, $130.0 million
or 61.9% of the Bank's total loan portfolio consisted of one-to-four family
residential loans. To a lesser extent, the Bank also originates equity lines,
multi-family residential loans, commercial real estate and land loans,
construction loans and consumer loans. At September 30, 1997, such loan
categories amounted to $19.8 million, $4.7 million, $38.5 million, $16.0
million and $1.0 million, respectively, or 9.4%, 2.2%, 18.3% 7.6% and .5% of
the total loan portfolio, respectively. The Bank intends to continue its
emphasis on all types mortgage loans. In particular, to the extent permitted
by economic and market conditions, the Bank has increased its emphasis on the
origination of equity lines, smaller commercial real estate and construction
loans.
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995 1994
---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family................ $130,022 61.92% $ 96,605 57.89% $ 81,603 69.86% $ 72,139 67.81%
Equity lines................. 19,781 9.42 12,065 7.23 2,427 2.08 -- --
Multi-family................. 4,693 2.24 6,525 3.91 5,270 4.51 3,546 3.33
Commercial................... 38,516 18.34 35,162 21.07 19,125 16.37 21,531 20.24
Construction................. 15,960 7.60 15,567 9.33 5,579 4.78 8,217 7.72
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans..... 208,972 99.52 165,924 99.43 114,004 97.60 105,433 99.10
Consumer loans................ 1,009 .48 942 .57 2,803 2.40 954 .90
-------- ------ -------- ------ -------- ------ -------- ------
Total loans.................. 209,981 100.00% 166,866 100.00% 116,807 100.00% 106,387 100.00%
-------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------
Less:
Loans in process............. 7,821 9,928 3,403 5,043
Deferred loan fees........... 1,017 874 675 705
Allowance for loan losses.... 575 410 323 323
Undisbursed portion of
equity lines................ 9,472 6,604 1,576
Unearned discounts........... -- -- -- 28
-------- -------- -------- --------
Loans receivable, net....... $191,096 $149,050 $110,830 $100,288
-------- -------- -------- --------
-------- -------- -------- --------
---------------
1993
---------------
AMOUNT %
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Real estate loans:
Single-family................ $69,723 74.48%
Equity lines................. -- --
Multi-family................. 1,535 1.64
Commercial................... 16,603 17.73
Construction................. 4,857 5.19
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Total real estate loans..... 92,718 99.04
Consumer loans................ 900 .96
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Total loans.................. 93,618 100.00%
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Less:
Loans in process............. 2,612
Deferred loan fees........... 603
Allowance for loan losses.... 310
Undisbursed portion of
equity lines................
Unearned discounts........... 66
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Loans receivable, net....... $90,027
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CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Bank's loan portfolio at September 30, 1997.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Bank's loan portfolio.
REAL ESTATE LOANS
-----------------------------------------------------------
SINGLE- EQUITY MULTI- CONSUMER
FAMILY LINES FAMILY COMMERCIAL CONSTRUCTION LOANS TOTAL
---------- --------- --------- ----------- ------------ ---------- ----------
(IN THOUSANDS)
Amounts due in:
One year or less..................... $ 1,813 $ -- $ -- $ 3,894 $ 5,267 $ 122 $ 11,096
After one year through two years..... 480 -- 182 1,508 -- 174 2,344
After two years through three
years.............................. 721 -- -- 3,536 -- 179 4,436
After three years through five
years.............................. 1,794 -- 204 972 -- 473 3,443
After five years through ten years... 12,119 19,781 456 3,738 -- 61 36,155
After ten years through twenty
years.............................. 54,658 -- 2,747 9,998 3,529 -- 70,932
Over twenty years.................... 58,437 -- 1,104 14,870 7,164 -- 81,575
---------- --------- --------- ----------- ------------ ---------- ----------
Total(1)......................... $ 130,022 $ 19,781 $ 4,693 $ 38,516 $ 15,960 $ 1,009 $ 209,981
---------- --------- --------- ----------- ------------ ---------- ----------
---------- --------- --------- ----------- ------------ ---------- ----------
Interest rate terms on amounts due
after one year:
Fixed................................ $ 104,791
Adjustable........................... 94,094
----------
$ 198,885
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----------
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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.
Scheduled contractual repayment of loans does not reflect the expected
term of the Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give Enterprise the right to declare a
conventional loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage and
the loan is not repaid. The average life of mortgage loans tends to increase
when current mortgage loan rates are higher than rates on existing mortgage
loans and, conversely, decrease when current mortgage loan rates are lower
than rates on existing mortgage loans (due to refinancings of adjustable-rate
and fixed-rate loans at lower rates). Under the latter circumstance, the
weighted-average yield on loans decreases as higher-yielding loans are repaid
or refinanced at lower rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Bank are subject to the written, non-discriminatory underwriting standards
and loan origination procedures established by the Bank's Board of Directors
and management. Loan originations are obtained primarily through existing
customers, walk-in customers, branch managers and real estate brokers.
Property valuations are always performed by independent outside appraisers
approved by the Bank's Board of Directors. Title and hazard insurance are
required on all security property. Substantially all of the Bank's loans are
secured by property located in its market area.
Any two officers are permitted to approve loans up to $350,000, while loans
over $350,000 require the approval of the Board of Directors or the Executive
Committee of the Board. All loans are ratified by the Board, including those
loans approved by the Executive Committee.
Historically, the Bank has not been an active purchaser or seller of loans.
However, as discussed below, the Bank anticipates that it may begin to sell
certain long-term fixed-rate loans in the secondary market to reduce the
percentage of such loans in its loan portfolio.
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,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Real estate loan originations:
Single-family.................................................................. $ 29,818 $ 18,636 $ 17,720
Equity lines................................................................... 4,848 4,610 851
Multi-family................................................................... 1,565 2,969 2,433
Commercial..................................................................... 12,889 17,803 1,900
Construction................................................................... 15,960 15,567 5,579
--------- --------- ---------
Total real estate loan originations.......................................... 65,080 59,585 28,483
Consumer loan originations....................................................... 505 1,793 2,730
--------- --------- ---------
Total loan originations and purchases........................................ 65,585 61,378 31,213
--------- --------- ---------
Less:
Principal loan repayments...................................................... 23,362 23,208 20,802
Transferred to real estate owned............................................... -- 21 --
Other, net..................................................................... (177) (71) (131)
--------- --------- ---------
Net increase................................................................... $ 42,046 $ 38,220 $ 10,542
--------- --------- ---------
--------- --------- ---------
Although the Bank emphasizes the origination of single-family residential
ARMs, originations of such loans has decreased due to the preference of the
Bank's customers for fixed-rate residential mortgage loans in the low interest
rate environment which has recently prevailed. As a result, in recent years,
fixed-rate single-family residential mortgage loans with terms of 15 or 30 years
have constituted a significant portion of total loan originations. Originations
of fixed-rate single-family residential mortgage loans (including fixed-rate
permanent construction loans) amounted to $23.9 million, $14.9 million and $17.5
million during fiscal 1997, 1996, and 1995, respectively. In order to enhance
the Bank's ability to manage interest rate risk, the Bank is approved by the
Federal Home Loan Mortgage Corporation ("FHLMC") to become a qualified loan
seller/servicer for such agency. However, fixed rate loans are typically
originated for portfolio, frequently under terms and conditions which generally
do not permit the bulk sale of such loans to the FHLMC or the Federal National
Mortgage Association ("FNMA"). See "--Single-Family Residential Real Estate
Loans."
Single-Family Residential Real Estate Loans. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At September 30, 1997,
$130.0 million or 62.0% of the Bank's total loan portfolio consisted of
single-family residential real estate loans. The Bank originated $29.8 million,
$18.6 million and $17.7 million of single-family residential loans in fiscal
1997, 1996, and 1995, respectively, and intends to continue to emphasize the
origination of permanent loans secured by first mortgage liens on single-family
residential properties in the future. Of the $130.0 million of such loans at
September 30, 1997, $38.0 million or 29.2% had adjustable-rates of interest and
$92.0 million or 70.8% had fixed-rates of interest.
The Bank currently originates for its portfolio single-family residential
mortgage loans which typically provide for an interest rate which adjusts every
year in accordance with a designated index (One Year Constant Maturity Treasury)
plus a margin. Prior to October, 1995, the Bank utilized the National Median
Cost of Funds Index. The Bank also offers such loans with interest rates which
adjust every three years. Such loans are typically based on a 30-year
amortization schedule. The amount of any increase or decrease in the interest
rate is presently limited to 2% per year, with a limit of 6% over the life of
the loan. The Bank's adjustable-rate loans currently being originated are not
assumable and do not contain prepayment penalties. In October 1995, the Bank
began to offer below market initial interest rates. The Bank does not engage in
the practice of using a cap on the payments that could allow the loan balance to
increase rather than decrease, resulting in negative amortization.
Adjustable-rate loans decrease the risks associated with changes in interest
rates but involve other risks, primarily because as interest rates rise, the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Bank believes that these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding a significant position of fixed-rate loans in an
increasing interest rate environment.
Due to competitive market pressures and historically low interest rates, the
Bank has continued to originate fixed-rate mortgage loans with terms of between
10 and 30 years although substantially all of the Bank's fixed-rate loans in its
portfolio have terms of 15 or 30 years. While the Bank has historically retained
all of its fixed-rate loans in its portfolio, the Bank has developed a secondary
mortgage market capacity and could sell a portion of its fixed-rate loans in the
secondary market.
The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a residential loan; however, if the amount of a residential
loan originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Board of
Directors, the Bank will lend up to 95% of the appraised value of the property
securing a single-family residential loan, and generally requires borrowers to
obtain private mortgage insurance on the portion of the principal amount of the
loan that exceeds 80% of the appraised value of the security property.
Notwithstanding the foregoing, the Bank is permitted to originate loans in an
amount up to 5% of assets which do not otherwise conform to the above-referenced
regulatory requirements. In certain circumstances, the Bank has originated loans
in an amount up to 95% of the property's appraised value without requiring the
borrower to obtain private mortgage insurance. As of September 30, 1997, the
Bank had $1.1 million or .40% of its assets invested in such loans. In addition,
the Bank has also allocated $2.0 million for the origination of low-income,
single-family housing loans. The Bank intends to originate such loans in amounts
up to 95% of the appraised value of the property securing such loans without
requiring the borrower to obtain private mortgage insurance and will provide 5%
of the amount of the loan to its allowance for loan losses.
Certain of the Bank's single-family residential loans do not conform to
particular requirements which must be satisfied to sell such loans in the
secondary market to institutions such as the FHLMC. However, a majority of such
loans have a loan-to-value ratio of less than 80% and the retention of such
loans in the Bank's portfolio has not had a material adverse affect on the
Bank's financial condition or results of operations.
EQUITY LINES. Equity lines increased from $12.1 million or 7.2% of the
total loan portfolio at September 30, 1996 to $19.8 million or 9.4% of the total
loan portfolio at September 30, 1997. Such increase was primarily due to an
increase in line of credit loans primarily secured by individual residences.
Such loans have interest rates which adjust daily based on the prime rate in The
Wall Street Journal. The Bank increased its emphasis on such lending in fiscal
1997 and believes that such lending will increase in the future.
Multi-Family Residential and Commercial Real Estate Loans. The Bank
originates mortgage loans for the acquisition and refinancing of existing
multi-family residential and commercial real estate properties. At September 30,
1997, $4.7 million or 2.2% of the Bank's total loan portfolio consisted of loans
secured by existing multi-family residential real estate properties and $38.5
million or 18.3% of such loan portfolio consisted of loans secured by existing
commercial real estate properties.
The majority of the Bank's multi-family residential loans are secured by
small apartment buildings, while commercial real estate loans are secured by
office buildings, small retail establishments, gas stations, warehouses, hotels
and restaurants. These types of properties constitute the majority of the Bank's
commercial real estate loan portfolio. All of the Bank's multi-family and
commercial real estate loans are secured by property located in the Bank's
market area.
Multi-family and commercial real estate loans are made on terms up to 25
years. Although the Bank will originate these loans with fixed interest rates,
the majority of these loans have interest rates which adjust in accordance with
a designated index. Loan to value ratios on the Bank's multi-family and
commercial real estate loans are limited to 75%. As part of the criteria for
underwriting multi-family and commercial real estate loans, the Bank generally
imposes a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of not less than 1.1. It is also the
Bank's policy to obtain corporate or personal guarantees, as applicable, on its
multi-family residential and commercial real estate loans from the principals of
the borrower.
Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Such loans typically involve large loan balances to single borrowers or groups
of related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. The success of
such projects is sensitive to changes in supply and demand conditions in the
market for multi-family and commercial real estate as well as economic
conditions generally. At September 30, 1997, the Bank did not have any
non-performing multi-family or commercial real estate loans.
CONSTRUCTION LENDING. The Bank presently originates residential
construction loans to individuals to construct their own homes through a
pre-approved builder and to a much lesser extent, to selected local builders.
Although the Bank originates land acquisition and development loans, the Bank
does not anticipate that this type of lending will represent a significant
portion of its construction loan portfolio in the future. The Bank's
construction lending activities are limited to the Bank's primary market area.
At September 30, 1997, construction loans amounted to $16.0 million or 7.6% of
the Bank's total loan portfolio.
The Bank's construction loans are generally made in connection with the
granting of the permanent financing on the property. Residential construction
loans convert to a fixed or adjustable rate loan at the end of the one-year
construction term, while commercial and multi-family construction loans
generally convert to adjustable rate loans. Advances are generally made to the
borrower on a percentage of completion basis.
Upon application, credit review and analysis of personal and corporate
financial statements, the Bank will grant construction loans to local builders
for the purpose of construction of speculative (unsold) residential properties.
All such properties are inspected by outside appraisers and the Bank may conduct
follow-up inspections. Advances are generally made on a percentage of completion
basis. At September 30, 1997, the Bank did not have any of such loans in its
construction loan portfolio.
The Bank's construction loans generally have construction terms of 12
months, with payments being made monthly on an interest-only basis. Residential
construction loans are made with a maximum loan to value ratio of 80.0% of the
projected market value of the completed project, while commercial and multi-
family construction loans are made with maximum loan to value ratios of 75% of
the projected market value of the completed project.
Construction lending is generally considered to involve a higher level of
risk as compared to single-family residential lending, due to the concentration
of principal in a limited number of loans and borrowers and the effects of
general economic conditions on developers and builders. Moreover, a construction
loan can involve additional risks because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost (including interest) of the project. The nature of these loans is
such that they are generally more difficult to evaluate and monitor. In
addition, speculative construction loans to a builder on properties which are
not necessarily pre-sold pose a greater potential risk to the Bank than
construction loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending generally and adopting
underwriting guidelines which impose stringent loan-to-value, debt service and
other requirements for loans which are believed to involve higher elements of
credit risk, by limiting the geographic area in which the Bank will do business
and by working with builders with whom it has established relationships.
CONSUMER LOANS. To a limited extent, the Bank also offers consumer loans.
Such loans generally have shorter terms and higher interest rates than mortgage
loans. The consumer loans offered by the Bank include automobile, boat,
recreational vehicle and deposit account secured loans. Consumer loans amounted
to $1.0 million or .5% of the total loan portfolio at September 30, 1997.
LOAN FEE INCOME. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments, prepayments and for miscellaneous services related to its loans.
Income from these activities varies from period to period with the volume and
type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. Loan origination and commitment fees and all incremental
direct loan origination costs are deferred and recognized over the contractual
remaining lives of the related loans on a level yield basis. Discounts and
premiums on loans purchased are accreted and amortized in the same manner. In
accordance with SFAS No. 91, the Bank amortized $189,000, $170,000 and $142,000
of deferred loan fees into income during fiscal 1997, 1996 and 1995,
respectively, in connection with loan refinancings, payoffs and ongoing
repayments of outstanding loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or personal
contacts are made. In most cases, deficiencies are cured promptly. While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank institutes foreclosure or
other proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Bank does not
accrue interest on real estate loans past due 90 days or more unless, in the
opinion of management, the value of the property securing the loan exceeds the
outstanding balance of the loan (principal, interest and escrows) and collection
is probable. Loans may be reinstated to accrual status when all payments are
brought current and, in the opinion of management, collection of the remaining
balance can be reasonably expected. The Bank did not have any accruing loans 90
or more days delinquent at September 30, 1997, 1996, or 1995.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
When property is acquired, at the date of acquisition it is recorded at the
lower of carrying
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.
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, 1997 SEPTEMBER 30, 1996
---------------------------------------------------------------- ------------------------------------------
30-59 DAYS 60-89 DAYS 90 OR MORE DAYS 35-59 DAYS 60-89 DAYS 90 OR MORE DAYS
---------------- ----------------- --------------- ----------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ --------- ------ --------
Real estate
loans:
Residential:
Single-family.... $ 155 .12% $1 -- $193 .15% $332 .34% $558 .58% $203 .21%
Equity lines..... -- -- 4 .02 -- -- -- -- 16 .13 -- --
Multi-family..... -- -- -- -- -- -- -- -- -- -- --
Commercial....... -- -- -- -- -- -- -- -- -- -- -- --
Construction..... -- -- -- -- -- -- -- -- -- -- --
Consumer loans..... -- -- -- -- -- -- -- -- -- -- --
----- --- ---- ---- ----- ----
Total............ $ 155 $5 $193 $ 322 $574 $203
----- --- ---- ---- ----- ----
----- --- ---- ---- ----- ----
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,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ----- --------- ---------
(DOLLARS IN THOUSANDS)
Non-accruing loans:
Single-family residential.................................................. $ 193 $ 203 $ 45 $ 114 $ 174
Equity lines............................................................... -- -- -- -- --
Multi-family residential................................................... -- -- -- -- --
Construction............................................................... -- -- -- -- --
Commercial real estate..................................................... -- -- -- -- --
Consumer................................................................... -- -- 4 -- --
------- ------ -------- ------ ------
Total non-performing loans................................................. 193 203 49 114 174
Real estate owned.......................................................... -- -- -- 83 125
------- ------ -------- ------ ------
Total non-performing assets................................................ 193 203 49 197 299
Troubled debt restructurings............................................... -- -- -- 417 420
------- ------ -------- ------ ------
Total...................................................................... $ 193 $ 203 $ 49 $ 614 $ 719
------- ------ -------- ------ ------
------- ------ -------- ------ ------
Total non-performing loans and troubled debt restructurings as a percentage
of total loans........................................................... .10% .14% .04% .50% .63%
------- ------ -------- ------ ------
------- ------ -------- ------ ------
Total non-performing assets and troubled debt restructurings as a
percentage of total assets............................................... .07% .09% .02% .37% .55%
------- ------ -------- ------ ------
------- ------ -------- ------ ------
Interest income which would have been recognized if the above loans had been
performing pursuant to their contractual terms totaled $3,000 for fiscal 1997.
The $193,000 of non-accruing single-family residential loans at September
30, 1997 consisted of seven loans secured by single-family residential property
located in the Bank's market area. The largest of such loans at such date
amounted to approximately $45,000 and the average loan balance was $28,000. Two
such loans totaling $33,000 were to one borrower.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable,
and there is a high possibility of loss. An asset classified loss is
considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Another category designated
"special mention" also must be established and maintained for assets which do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. At September 30,
1997, the Bank had $33,000 of classified assets, none of which were
classified substandard and $33,000 of which were classified special mention.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at
a level that management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan portfolio.
Management's periodic evaluation is based upon examination of the portfolio,
past loan loss experience, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. The allowance is increased by a provision for
loan losses which is charged against income.
Although management uses the best information available to make
determinations with respect to the provision for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially. In addition, the OTS
and the FDIC, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the Bank
to recognize additions to such allowance based on their judgments about
information available to them at the time of their examination.
The following table summarizes changes in the allowance for possible loan
losses and other selected statistics for the periods presented.
YEAR ENDING SEPTEMBER 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
Average loans, net..................................... $ 171,519 $ 130,399 $ 102,065 $ 95,658 $ 88,664
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Allowance for loan losses, beginning of period......... $ 410 $ 323 $ 323 $ 310 $ 241
Charged-off loans:
Consumer............................................... -- (3) -- -- --
Commercial............................................. -- -- -- (2) --
---------- ---------- ---------- --------- ---------
Total charged-off loans................................ -- (3) -- (2) --
Recoveries on loans previously charged-off............. -- -- -- -- --
---------- ---------- ---------- --------- ---------
Net loans charged-off.................................. -- (3) -- (2) --
Provision for loan losses.............................. 165 90 -- 15 69
---------- ---------- ---------- --------- ---------
Allowance for loan losses, end of period............... $ 575 $ 410 $ 323 $ 323 $ 310
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Net loans charged-off to average loans, net............ --% --% --% --% --%
Allowance for loan losses to total loans............... .30% .28% .29% .32% .33%
Allowance for loan losses to non-performing loans...... 297.93% 201.97% 659.18% 283.33% 178.17%
Net loans charged-off to allowance for loan losses..... --% .73% --% .62% --%
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,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ------------------------ ----------------------- -----------------------
% OF LOANS IN % OF LOANS IN % OF LOANS IN % OF LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ------------- --------- ------------- -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
Single-family residential.... $ 130 61.92% $ 140 57.89% $ 91 69.86% $ 91 67.80%
Equity lines................. 190 9.42 55 7.23 24 2.08 -- --
Multi-family residential..... 12 2.23 14 3.91 9 4.51 9 3.33
Commercial real estate....... 193 18.34 180 21.07 109 16.37 109 20.24
Construction................. 40 7.60 12 9.33 10 4.78 10 7.72
Consumer..................... 10 .49 9 .57 28 2.40 9 .91
Unallocated.................. -- -- -- -- 52 -- 95 --
------- ------ ------- ------ ------- ------ ------- ------
Total........................ $ 575 100.00% $ 410 100.00% $ 323 100.00% $ 323 100.00%
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
SEPTEMBER 30,
-----------------------
1993
-----------------------
% OF LOANS IN
EACH CATEGORY
TO TOTAL
AMOUNT LOANS
-------- -------------
Single-family residential.... $ 81 74.48%
Equity lines................. -- --
Multi-family residential..... 4 1.64
Commercial real estate....... 86 17.73
Construction................. 6 5.19
Consumer..................... 9 .96
Unallocated.................. 124 --
------- ------
Total........................ $ 310 100.00%
------- ------
------- ------
INVESTMENT ACTIVITIES
Mortgage-Backed Securities. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the Government National
Mortgage Association ("GNMA"). The Bank has also purchased mortgage-backed
securities issued by the Small Business Administration ("SBA").
The FHLMC is a public corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal. The FNMA is a private corporation chartered by
the U.S. Congress with a mandate to establish a secondary market for
conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the
FHLMC and the FNMA are U.S. Government sponsored enterprises, these
securities are considered to be among the highest quality investments with
minimal credit risks. The GNMA is a government agency within the Department
of Housing and Urban Development which is intended to help finance government
assisted housing programs. GNMA securities are backed by FHA-insured and
VA-guaranteed loans, and the timely payment of principal and interest on GNMA
securities are guaranteed by the GNMA and backed by the full faith and credit
of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are
limits to the maximum size of loans that qualify for these programs. For
example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $214,600. To accommodate
larger-sized loans, and loans that, for other reasons, do not conform to the
agency programs, a number of private institutions have established their own
home-loan origination and securitization programs. The SBA is an agency of
the U.S. Government. The SBA issues participation certificates backed
principally by commercial real estate and/or other business collateral. The
SBA was established by the U.S. Congress with a mandate to increase the
ability of small businesses to borrow money thereby expanding and increasing
employment. The timely payment of principal and interest on SBA securities
are guaranteed by the SBA and are backed by the full faith and credit of the
U.S. Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly,
the life of a mortgage-backed pass-through security approximates the life of
the underlying mortgages.
The Bank's mortgage-backed securities include collateralized mortgage
obligations ("CMOs"). CMOs have been developed in response to investor
concerns regarding the uncertainty of cash flows associated with the
prepayment option of the underlying mortgagor and are typically issued by
governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by
financial institutions or other similar institutions. A CMO can be
collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders,
the cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the
underlying collateral among the separate CMO classes, different classes of
bonds are created, each with its own stated maturity, estimated average life,
coupon rate and prepayment characteristics. At September 30, 1997, $12.7
million or 20.7% of the Bank's mortgage-backed securities consisted of CMO's.
All of the
Bank's CMO's at September 30, 1997 are collateralized by loans which are
insured or guaranteed by the FNMA, the FHLMC or the GNMA.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," affecting the accounting
for investments in all debt and equity securities, which are to be classified
in one of three categories for fiscal years beginning after December 15,
1993. Securities that an institution has the positive intent and ability to
hold to maturity are to be reported at amortized cost. Securities that are
bought and held principally for the purpose of selling them in the near term
are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Other securities are to be
classified as securities available for sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. The Company adopted SFAS No. 115 in fiscal
1995. At September 30, 1997, the Company had $61.5 million of mortgage-backed
securities classified as available for sale. At such time, stockholders'
equity included $51,000 of unrealized gains on securities designated as
available for sale, net of related tax effects.
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,
------------------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- ---------
Mortgage-backed securities purchased................. $ 55,302 $ 51,493 $ 68,464 $ 4,329
Principal repayments................................. (6,728) (4,178) (4,108) (4,996)
Other, net........................................... (52,599)(1) (53,855)(1) (18,015)(1) (170)
----------- ----------- ----------- ---------
Net................................................ $ (4,025) $ (6,540) $ 46,341 $ (837)
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
- ------------------------
(1) Includes $52,714, $54,552 and $18,776 in net proceeds from the sale of
mortgage-backed securities for 1997, 1996 and 1995, respectively.
Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of the Bank.
The following table sets forth certain information relating to the Bank's
mortgage-backed securities portfolio at the dates indicated.
SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
FNMA securities......... $ 33,906 $ 33,832 $ 23,497 $ 23,364 $ 30,299 $ 30,510
CMO securities.......... 12,530 12,704 36,988 37,602 35,931 36,298
FHLMC securities........ 14,943 14,921 3,559 3,398 4,084 4,084
SBA securities.......... -- -- 1,082 1,118 1,120 1,130
----------- --------- ----------- --------- ----------- ---------
Total................. $ 61,379 $ 61,457 $ 65,126 $ 65,482 $ 71,434 $ 72,022
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
At September 30, 1997, the $61.4 million mortgage-backed securities
portfolio had a weighted average yield of 6.30%. Of such amount, $358,000
with a weighted average yield of 6.82% had contractual maturities within ten
years and $61.0 million with a weighted average yield of 6.30% had
contractual maturities over ten years. However, the actual maturity of a
mortgage-backed security may be less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles,
premiums and discounts are amortized over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and
discounts can significantly affect the yield of the mortgage-backed security,
and these assumptions are reviewed periodically to reflect actual
prepayments. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates,
the difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because to the extent that the Bank's
mortgage-backed securities amortize or prepay faster than anticipated, the
Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate.
For additional information relating to the Bank's mortgage-backed
securities, see Notes A-2 and B to the Consolidated Financial Statements.
INVESTMENT SECURITIES. The investment policy of the Bank is designed
primarily to provide and maintain liquidity and to generate a favorable
return on investments without incurring undue interest rate risk, credit
risk, and investment portfolio asset concentrations. Historically, the Bank
has invested excess funds in mortgage-backed securities rather than
investment securities due to the higher yield on mortgage-backed securities.
As a result, investment securities have not comprised a significant portion
of the Bank's assets.
The Bank is authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations,
certain time deposits, negotiable certificates of deposit issued by
commercial banks and other insured financial institutions, investment grade
corporate debt securities and other specified equity investments.
The following table sets forth certain information relating to the Bank's
investment securities portfolio at the dates indicated.
SEPTEMBER 30,
1997 1996 1995
------------------------ ------------------------ ---------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
Marketable equity securities..... $ 698 $ 698 $ -- $ -- $ -- $ --
At September 30, 1997, the Bank's investment securities consisted
entirely of the common stock of another local financial institution. The
market value of such common stock approximated the Bank's cost at September
30, 1997.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives
funds from principal repayments and prepayments on loans and mortgage-backed
securities. Repayments on loans and mortgage-backed securities are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
DEPOSITS. The Bank's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts, regular
savings accounts and term certificate accounts. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
The Bank considers its primary market area to be Hamilton, Warren and Butler
Counties, Ohio. The Bank attracts deposit accounts by offering a wide variety of
accounts, competitive interest rates, and convenient office locations and
service hours. In addition, the Bank maintains automated teller machines at its
Lebanon, Pisgah and Wyoming offices. The Bank does not advertise for deposits
outside of its primary market area or utilize the services of deposit brokers.
Management believes that an insignificant number of deposit accounts were held
by non-residents of Ohio at September 30, 1997.
The Bank has been competitive in the types of accounts and in interest rates
it has offered on its deposit products but does not necessarily seek to match
the highest rates paid by competing institutions. With the significant decline
in interest rates paid on deposit products, the Bank, in fiscal 1994 and 1993
experienced disintermediation of deposits into competing investment products.
Beginning in the second half of fiscal 1995, the Bank began to experience an
inflow of deposits as a result of the Bank's pricing strategies, increased
marketing efforts and new deposit products. Although market demand generally
dictates which deposit maturities and rates will be accepted by the public, the
Bank intends to continue to promote longer term deposits to the extent possible,
consistent with its asset and liability management goals. The following table
shows the increase in net deposits and interest credited on deposits.
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995(1)
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Increase before interest credited................................................... $ 1,727 $ 7,721 $ 614
Interest credited................................................................... 5,123 4,039 4,827
--------- --------- ---------
Net deposit increase................................................................ $ 6,850 $ 11,760 $ 5,441
--------- --------- ---------
--------- --------- ---------
- ------------------------
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included.
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at September 30, 1997 by time remaining to maturity.
AMOUNTS IN
THOUSANDS
-----------
Three months or less................................................................................. $ 1,876
Over three months through six months................................................................. 4,238
Over six months through 12 months.................................................................... 1,487
Over 12 months....................................................................................... 6,513
-----------
Total............................................................................................... $ 14,114
-----------
-----------
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,
-------------------------------------------------------------------
1997 1996 1995(1)
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Passbook and statement savings accounts.................. $ 15,949 10.90% $ 17,192 12.33% $ 17,987 14.09%
Money market accounts.................................... 21,694 14.83 18,446 13.23 12,351 9.67
Certificates of deposit.................................. 99,446 67.98 95,431 68.43 89,603 70.17
NOW accounts............................................. 8,308 5.68 6,538 4.69 6,524 5.11
Noninterest-bearing deposits............................. 900 0.61 1,840 1.32 1,222 0.96
---------- --------- ---------- --------- ---------- ---------
Total deposits at end of period.......................... $ 146,297 100.00% $ 139,447 100.00% $ 127,687 100.00%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
- ------------------------
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included.
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1997 and 1996, and the
amounts at September 30, 1997 which mature during the periods indicated.
SEPTEMBER 30,
--------------------
CERTIFICATES OF
DEPOSIT 1997 1996 ONE YEAR TWO YEARS THREE YEARS THEREAFTER
------------------------ --------- --------- ----------- ----------- ----------- -----------
4.0% or less........ $ 88 $ 166 $ 57 $ 10 $ 16 $ 5
4.01% to 6.0%....... 61,721 71,960 45,729 12,458 -- 3,534
6.01% to 8.0%....... 37,637 23,305 6,977 4,280 19,834 6,546
--------- --------- ----------- ----------- ----------- -----------
Total certificate accounts.......... $ 99,446 $ 95,431 $ 52,763 $ 16,748 $ 19,850 $ 10,085
--------- --------- ----------- ----------- ----------- -----------
--------- --------- ----------- ----------- ----------- -----------
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,
--------------------------------------------------------------------------------
1997 1996 1995(1)
------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
---------- ------------- ---------- ------------- ---------- --------------
Passbook accounts............................ $ 16,570 3.00% $ 17,590 3.00% $ 17,786 3.00%
Money market accounts........................ 20,079 4.35 15,399 4.06 12,506 3.18
Certificates of deposit...................... 97,439 5.95 95,839 5.82 82,324 5.78
NOW accounts................................. 8,223 1.54 6,531 1.73 6,589 1.75
Noninterest-bearing deposits................. 1,370 -- 1,531 -- 1,255 --
---------- ---- ---------- ---- ---------- ----
Total deposits............................. $ 143,681 5.08% $ 136,890 5.00% $ 120,460 4.85
---------- ---- ---------- ---- ---------- ----
---------- ---- ---------- ---- ---------- ----
- ------------------------
(1) In order to present comparability from year to year, funds received in
connection with the Bank's conversion have not been included.
Borrowings. While the Bank has not historically utilized borrowings as a
source of funds, during fiscal 1994, the Bank began borrowing funds from the
FHLB of Cincinnati in order to leverage its capital. At September 30, 1997,
the Bank had $95.0 million in FHLB advances, of which $40.0 million were
long-term in nature.
The following table sets forth certain information relating to the Bank's
borrowings at the dates indicated.
-------------------------------
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
1997 1996 1995
-------------------------------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding..................................................... $ 77,692 $ 40,000 $ 11,111
Maximum amount outstanding at any month-end during the period................... $ 95,000 $ 60,000 $ 30,000
Weighted average rate:
During the period............................................................... 5.95% 6.39% 6.67%
At end of period................................................................ 5.98% 5.98% 6.58%
COMPETITION
The Bank faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks
and other savings institutions located in its market area. The Bank faces
additional significant competition for investors' funds from other financial
intermediaries. The Bank competes for deposits principally by offering
depositors a variety of deposit programs, convenient branch locations, hours
and other services. The Bank does not rely upon any individual group or
entity for a material portion of its deposits.
The Bank's competition for real estate loans comes principally from mortgage
banking companies, other savings institutions, commercial banks and credit
unions. The Bank competes for loan originations primarily through the interest
rates and loan fees it charges, the efficiency and quality of services it
provides borrowers and the variety of its products. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
EMPLOYEES
The Bank had 36 full-time employees and four part-time employees at
September 30, 1997. None of these employees is represented by a collective
bargaining agreement, and the Bank believes that it enjoys good relations with
its personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
REGULATION OF THE COMPANY
GENERAL. The Company, as a savings and loan holding company within the
meaning of the Home Owners' Loan Act ("HOLA"), has registered with the OTS
and is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by
a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
association, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
association; (ii) transactions between the savings association and its
affiliates; and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings association subsidiary of such a holding
company fails to meet the qualified thrift lender ("QTL") test, then such
unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association requalifies as a QTL within one year
thereafter, shall register as, and become subject to the restrictions
applicable to, a bank holding company. See "--The Bank--Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL test, as set forth below, the activities of the Company and any
of its subsidiaries (other than the Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. No
multiple savings and loan holding company or subsidiary thereof which is not
a savings association shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings association; (iv)
holding or managing properties used or occupied by a subsidiary savings
association; (v) acting as trustee under deeds of trust; (vi) those
activities authorized by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and
loan holding companies, those activities authorized by the Federal Reserve
Board as permissible for bank holding companies. The activities described in
(i) through (vi) above may only be engaged in after giving the OTS prior
notice and being informed that the OTS does not object to such activities. In
addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and
loan holding company.
FEDERAL LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of either, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At September 30, 1997, the Bank was in compliance with
the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act, or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
FIRREA amended provisions of the Bank Holding Company Act of 1956 ("BHCA")
to specifically authorize the Federal Reserve Board to approve an application by
a bank holding company to acquire control of a savings association. FIRREA also
authorized a bank holding company that controls a savings association to merge
or consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
Bank Insurance Fund ("BIF") with the approval of the appropriate federal
banking agency and the Federal Reserve Board. As a result of these
provisions, there have been a number of acquisitions of savings associations
by bank holding companies in recent years.
REGULATION OF THE BANK
GENERAL. The OTS has extensive regulatory authority over the operations
of savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings associations and may also apply to
state-chartered savings associations. Such regulation and supervision is
primarily intended for the protection of depositors.
The OTS' enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. ** Recent
Legislation part--see p. 34 in the 10-k of first financial **
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured up to $100,000
per insured member (as defined by law and regulation) by the SAIF administered
by the FDIC and are backed by the full faith and credit of the U. S. Government.
As insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action.
The deposits of the Bank are currently insured by the Savings Association
Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"), the
federal deposit insurance fund that covers commercial bank deposits, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The BIF had achieved a fully funded status in contrast to the
SAIF and, therefore, the Federal Deposit Insurance Corporation ("FDIC")
substantially reduced the average deposit insurance premium paid by commercial
banks to a level approximately 75% below the average premium paid by savings
institutions.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity. On September 30, 1996, The Omnibus
Appropriations Act was signed into law. The legislation authorized a one-time
charge on SAIF insured deposits at a rate of $.657 per $100.00 of March 31, 1995
deposits. As a result, the Bank's assessment amounted to $770,000 ($508,000 net
of tax). Additional provisions of the Act include new BIF and SAIF premiums and
the merger of BIF and SAIF. The new BIF and SAIF premiums will include a premium
for repayment of the Financing Corporation ("FICO") bonds plus any regular
insurance assessment, currently nothing for the lowest risk category
institutions. Until full pro-rata FICO sharing is in effect, the FICO premiums
for BIF and SAIF will be 1.3 and 6.4 basis points, respectively, beginning
January 1, 1997. Full pro-rata FICO sharing is to begin no later than January 1,
2000. BIF and SAIF are to be merged on January 1, 1999, provided the bank and
savings association charters are merged by that date. While the one-time special
assessment had a significant impact on the current year earnings, the resulting
lower annual premiums will benefit future earnings.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. Management is aware of no existing circumstances
which would result in termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Current OTS capital standards require
savings associations to satisfy three different capital requirements. Under
these standards, savings associations must maintain "tangible" capital equal to
1.5% of adjusted total assets, "core" capital equal to 3% of adjusted total
assets and "total" capital (a combination of core and "supplementary" capital)
equal to 8% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets.
Both core and tangible capital are further reduced by an amount equal to a
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies).
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirement, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighting system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans. Off-
balance sheet items also are adjusted to take into account certain risk
characteristics.
The following is a reconciliation of the Bank's equity determined in
accordance with GAAP to regulatory tangible, core, and risk-based capital at
September 30, 1997.
September 30, 1997
---------------------------------
Tangible Core Risk- based
Capital Capital Capital
--------- --------- -----------
(Dollars in Thousands)
GAAP equity.................................................................... $ 28,761 $ 28,761 $ 28,761
Unrealized gain on securities.................................................. (51) (51) (51)
Goodwill....................................................................... (20) (20) (20)
General valuation allowances................................................... -- -- 575
--------- --------- -----------
Total regulatory capital....................................................... 28,690 28,690 29,265
Minimum capital requirements................................................... 4,112 8,224 12,295
--------- --------- -----------
Excess regulatory capital...................................................... $ 24,578 $ 20,466 $ 16,970
--------- --------- -----------
--------- --------- -----------
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 5%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at September 30, 1997, had a liquidity ratio of 6.4%.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank is a
domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and educational loans may now be made by savings associations
without regard to any percentage-of-assets limit, and commercial loans may be
made in an amount up to 10 percent of total assets, plus an additional 10
percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate, may account for
up to 20% of total assets. At September 30, 1997, under the expanded QTL test,
approximately 87.0% of the Bank's portfolio assets were qualified thrift
investments.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval. See "--Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination. The Bank
currently is a Tier 1 institution for purposes of the regulation dealing with
capital distributions.
OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
POLICY STATEMENT ON NATIONWIDE BRANCHING. Effective May 11, 1992, the OTS
amended and codified its policy statement on branching by federally-chartered
savings associations to delete then-existing regulatory restrictions on the
branching authority of such associations and to permit nationwide branching to
the extent allowed by federal statute. (Prior OTS policy generally permitted
interstate branching for federally-chartered savings associations only to the
extent allowed state-chartered savings associations in the states where the
association's home office was located and where the branch was sought or if the
branching resulted from OTS approval of a supervisory interstate acquisition of
a troubled institution.) Current OTS policy generally permits a
federally-chartered savings association to establish branch offices outside of
its home state if the association meets the domestic building and loan test in
Section 7701(a)(19) of the Code or the asset composition test of subparagraph
(c) of that section, and if, with respect to each state outside of its home
state where the association has established branches, the branches, taken alone,
also satisfy one of the two tax tests. An association seeking to take advantage
of this authority would have to have a branching application approved by the
OTS, which would consider the regulatory capital of the association and its
record under the Community Reinvestment Act of 1977, as amended, among other
things.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Cincinnati,
whichever is greater. At September 30, 1997, the Bank had $5.5 million in FHLB
stock, which was in compliance with this requirement.
TAXATION
TAXATION
FEDERAL TAXATION. The Company and the Bank are both subject to the
federal tax laws and regulations which apply to corporations generally. Prior
to the enactment of the Small Business Jobs Protection Act (the "Act"), which
was signed into law on August 21, 1996, certain thrift institutions, such as
the Bank, were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method
of Section 166 of the Code or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income
(determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the
greater of (i) an amount based on its actual average experience for losses in
the current and five preceding taxable years, or (ii) an amount necessary to
restore the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad
debt reserves for qualifying loans either under the experience method of the
percentage of taxable income method. For tax years 1995 and 1994, the Bank
used the percentage of taxable income method because such method provided a
higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for
bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, like the Bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or, (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax
year, the principal amount of residential loans made by the thrift during the
year is not less than its base amount. The "base amount" generally is the
average of the principal amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case
of certain excessive distributions to shareholders. The pre-1988 reserves may
not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first,
out of the institution's post-1951 accumulated earnings and profits; second,
out of the pre-1988 reserves; and third, out of such other accounts as may be
proper. To the extent a distribution by the Bank to the Company is deemed
paid out of its pre-1988 reserves under these rules, the pre-1988 reserves
would be reduced and the Bank's gross income for tax purposes would be
increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of September 30, 1997,
The Bank's pre-1988 reserves for tax purposes totaled approximately $2.5
million. The Bank believes it had approximately $12.1 million of accumulated
earnings and profits for tax purposes as of September 30, 1997, which would
be available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made
as to whether the Bank will have current or accumulated earnings and profits
in subsequent years.
In addition to the regular income tax, the Company and the Bank are subject
to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986 and before 1996, the
Company and the Bank are also subject to environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2.0 million.
The tax returns of the Bank have been audited or closed without audit
through fiscal year 1993. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
OHIO TAXATION. The Company is subject to the Ohio corporation franchise
tax, which, as applied to the Company, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, The Company may exclude
100% of its investment in the capital stock of the Bank after the Conversion, as
reflected on the balance sheet of the Company, in computing its taxable net
worth as long as it owns at least 25% of the issued and outstanding capital
stock of the Bank. The
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. PROPERTIES.
OFFICES AND PROPERTIES
At September 30, 1997, the Bank conducted its business from its executive
offices in West Chester, Ohio and four full service offices, all of which are
located in southwestern Ohio.
The following table sets forth certain information with respect to the
Bank's office properties at September 30, 1997.
NET BOOK
LEASED/ VALUE OF AMOUNT OF
DESCRIPTION/ADDRESS OWNED PROPERTY DEPOSITS
- ----------------------------------------------------------------------------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
Lockland--117 Mill Street.................................................... Owned $ 123 $ 50,541
Lebanon--718 E. Main Street.................................................. Owned 443 25,050
Kingsgate--7810-7820 Tylersville Square Drive................................ Owned(1) 2,195 21,166
Pisgah--9235 Cincinnati--Columbus Road....................................... Owned 323 31,466
Wyoming--401 Wyoming Avenue.................................................. Owned 328 18,074
---------- -----------
$ 3,412 $ 146,297
---------- -----------
---------- -----------
- ------------------------
(1) The Bank closed its branch office at 7731 Tylersville Road and moved its
main office to 7810-7820 Tylersville Square Drive during April, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein, to the extent applicable, is
incorporated by reference from page 49 of the Corporation's 1997 Annual
Report to Stockholders ("1997 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from
page three of the 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from
pages 4 to 18 of the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages 20 to 47 of the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
the definitive proxy statement of the Corporation for the Annual Meeting of
Stockholders to be held on January 16, 1998 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
the Definitive Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Independent Auditors' Report
Consolidated Statements of Financial Condition at
September 30, 1997 and 1996.
Consolidated Statements of Earnings for Each of the Three Years
in the Period Ended September 30, 1997.
Consolidated Statements of Changes in Stockholders' Equity for
Each of the Three Years in the Period Ended September 30, 1997.
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period ended September 30, 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in
the financial statements and related notes thereto.
(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 Amended Articles of Incorporation of Enterprise Federal Bancorp, Inc........... **
3.2 Code of Regulations of Enterprise Federal Bancorp, Inc......................... *
3.3 Bylaws of Enterprise Federal Bancorp, Inc...................................... *
4.0 Stock Certificate of Enterprise Federal Bancorp, Inc........................... ***
10.1 Enterprise Federal Bancorp, Inc. Recognition and Retention Plan................ ***
10.2 Enterprise Federal Bancorp, Inc. 1994 Stock Option Plan........................ ***
10.3 Enterprise Federal Bancorp, Inc. Employee Stock Ownership Plan and Trust....... *
10.4 Employment Agreement between Enterprise Federal Bancorp, Inc. and Otto L.
Keeton....................................................................... ***
10.5 Employment Agreement between Enterprise Federal Bancorp, Inc. and Michael P.
Meister...................................................................... ***
10.6 Employment Agreement between Enterprise Federal Bancorp, Inc. and Thomas J.
Noe.......................................................................... ***
10.7 Employment Agreement between Enterprise Federal Bancorp, Inc. and Steven M.
Pomeroy...................................................................... ***
13.0 1997 Annual Report to Stockholders............................................. E-1
22.0 Subsidiaries of the Registrant--Reference is made to "Item 1
Business--Subsidiaries" for the required information
- ------------------------
(*) 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENTERPRISE FEDERAL BANCORP, INC.
By: /s/ Otto L. Keeton
-------------------------------------
Otto L. Keeton
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Otto L. Keeton
- ----------------------------------
Otto L. Keeton October 31, 1997
Chairman of the Board, President
and Chief Executive Officer
/s/ Michael R. Meister
- ----------------------------------
Michael R. Meister October 31, 1997
Vice President, Chief Operating
Officer and Director
/s/ Thomas J. Noe
- ----------------------------------
Thomas J. Noe October 31, 1997
Vice President, Treasurer and
Chief Financial Officer
/s/William H. Kreeger
- ----------------------------------
William H. Kreeger October 31, 1997
Director
/s/ Terrell G. Marty
- ----------------------------------
Terrell G. Marty October 31, 1997
Director
/s/ Edith P. Mayer
- ----------------------------------
Edith P. Mayer October 31, 1997
Director
/s/ Steven A. Wilson
- ----------------------------------
Steven A. Wilson October 31, 1997
Director