Exhibit 13.0
1997 Annual Report
to
Shareholders
To Our Stockholders:
The record financial results achieved during fiscal 1997 reflect our
continued emphasis on expanding our lending and retail operations to enhance
earnings, efficiently leverage our capital and, above all, enhance shareholder
value. We are proud to report record earnings of $2.4 million and an increase
in assets to $274.9 million. During the last five years, we have more than
doubled our size reflecting significant growth in the loan portfolio with the
expansion of our loan products. In addition, our strong capital position
enabled us to pay $1.50 per share in cash dividends during fiscal 1997. Since
our conversion to a public company on October 14, 1997, we have paid dividends
aggregating $4.50 per share, including a $3.00 return of capital paid in fiscal
1996. Our significant capital base also permitted us to commence a third 5%
repurchase program in October 1997.
While we are pleased with our progress to date, we intend to continue our
efforts to expand our asset base by further leveraging our capital. In addition
to the growth in our loan portfolio and the expansion of our loan products, we
have continually sought other opportunities to expand. This is evidenced by the
announcement in July 1997 of the proposed acquisition by Enterprise Federal of
North Cincinnati Savings Bank for a combination of common stock and cash. With
offices in the communities of Blue Ash and North College Hill, this acquisition
solidifies and expands our core market area.
We look forward to building on our success to date and believe that fiscal
1998 will be another promising year. We would like to thank our directors and
employees for their dedication to Enterprise along with our stockholders for
their continued support.
SINCERELY,
/s/ Otto L. Keeton
------------------
Otto L. Keeton
President and Chairman of the Board
CORPORATE PROFILE
Enterprise Federal Bancorp, Inc. (the "Company") was incorporated in
April 1994 under Ohio law for the purpose of acquiring all of the capital
stock issued by Enterprise Federal Savings and Loan Association in connection
with its conversion from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank (the "Conversion").
The Conversion was consummated on October 14, 1994 and, as a result, the
Company became a unitary savings and loan holding company for its wholly
owned subsidiary, Enterprise Federal Savings Bank ("Enterprise" or the
"Bank"). The Company has no significant assets other than the shares of the
Bank's common stock acquired in the Conversion, the loan to the Employee
Stock Ownership Plan ("ESOP") and a minority interest in North Cincinnati
Savings Bank and has no significant liabilities other than dividends payable.
The Bank is a federally chartered, SAIF-insured stock savings bank
conducting business from its executive offices located in West Chester, Ohio
and four full-service offices located in Hamilton, Butler and Warren
Counties, Ohio. Enterprise is a community oriented savings bank which has
traditionally offered a wide variety of savings products to its retail
customers while concentrating its lending activities on real estate loans
secured by one-to-four family residential properties located primarily in
Hamilton, Butler and Warren Counties, Ohio. To a lesser extent, the Bank also
focuses its lending activities on non-residential real estate loans,
residential construction loans and multi-family real estate loans. The Bank
also invests in securities which are issued by United States government
agencies or government sponsored enterprises.
At September 30, 1997, the Company had consolidated total assets of
$274.9 million, total deposits of $146.3 million and stockholders' equity of
$31.4 million. The Company's and the Bank's principal executive offices are
located at 7810 Tylersville Square Drive, West Chester, Ohio 45069, and their
telephone number is (513)755-4600.
2
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Selected Financial Data:
Total assets......................................... $ 274,888 $ 235,191 $ 197,938 $ 167,294 $ 131,681
Loans receivable, net................................ 191,096 149,050 110,830 100,288 90,027
Mortgage-backed securities........................... 61,457 65,482 72,022 25,681 26,518
Cash and cash equivalents............................ 11,141 12,938 10,670 36,465 10,510
Deposit accounts..................................... 146,297 139,447 127,687 153,709 119,672
FHLB advances........................................ 95,000 60,000 30,000 -- --
Stockholders' equity(1).............................. 31,424 33,056 38,474 12,458 11,176
Selected Operations Data:
Net interest income.................................. $ 7,130 $ 6,268 $ 5,719 $ 4,259 $ 3,966
Other operating income............................... 726 994 464 76 79
General, administrative and other expense............ 4,066 4,973 3,410 2,356 2,091
Net earnings......................................... 2,369 1,441 1,837 1,282 1,121
Selected Operating Ratios(2):
Average interest rate spread(3)...................... 2.21% 2.13% 2.28% 2.85% 2.76%
Net interest margin(3)............................... 2.84 2.98 3.38 3.16 3.12
Ratio of interest-earning assets to
interest-bearing liabilities....................... 113.44 119.03 128.46 107.81 107.88
General, administrative and other expense as a
percent of average assets.......................... 1.59 2.31 1.99 1.71 1.59
Return on average assets............................. .93 .67 1.07 .93 .85
Return on average equity............................. 7.35 4.03 4.82 10.85 10.56
Ratio of average equity to average assets............ 12.64 16.61 22.27 8.59 8.10
Full-service offices at end of period................ 5 5 5 5 5
Asset Quality Ratios(2):
Non-performing assets as a percent of total assets(4) .07% .09% .23% .37% .55%
Allowance for loan losses as a percent of
non-performing loans and troubled debt
restructurings..................................... 297.93 201.97 659.18 60.83 52.19
Capital Ratios(5):
Tangible capital ratio............................... 10.46 11.68 14.30 7.38 8.39
Core capital ratio................................... 10.46 11.68 14.30 7.38 8.49
Risk-based capital ratio............................. 19.04 22.29 31.00 15.42 16.50
- ------------------------
(1) Consists of retained earnings as of September 30, 1993 and September 30,
1994.
(2) With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(4) Non-performing assets consist of non-performing loans, troubled debt
restructurings and real estate owned ("REO"). Non-performing loans consist
of non-accrual loans, while REO consists of real estate acquired through
foreclosure and real estate acquired by acceptance of a deed-in-lieu of
foreclosure.
(5) Capital ratios reflect the Bank's capital ratios calculated under
regulations of the Office of Thrift Supervision ("OTS").
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The operating results of the Company depend primarily upon its net
interest income, which is determined by the difference between interest and
dividend income on interest-earning assets, principally loans and
mortgage-backed securities, and interest expense on interest-bearing
liabilities, which consist of deposits and borrowings. The Company's net
earnings also are affected by its provision for loan losses, as well as the
level of its other income and its general, administrative and other expenses,
such as employee compensation and benefits, occupancy and equipment expense,
federal deposit insurance premiums and miscellaneous other expenses, as well
as income taxes.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and the Company's general
market area. The forward-looking statements contained herein include, but are
not limited to, those with respect to the following matters:
1. Management's determination of the amount of and adequacy of the
allowance for loan losses;
2. The effect of changes in interest rates;
3. Management's opinion as to the effects of recent accounting
pronouncements on the Company's consolidated financial statements.
The following discussion provides an overview of the general business,
financial condition, and results of operations of the Company, and should be
read in conjunction with the Company's consolidated financial statements
presented elsewhere herein.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities, and is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result
in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter
maturities would have the opposite effect.
4
The lending activities of savings institutions have historically
emphasized long-term, fixed-rate loans secured by single-family residences,
and the primary source of funds of such institutions has been deposits. The
deposit accounts of savings institutions generally bear interest rates that
reflect market rates and largely mature or are subject to repricing within a
short period of time. This fact, in combination with substantial investments
in long-term, fixed rate loans, has historically caused the income earned by
savings institutions on their loan portfolios to adjust more slowly to
changes in interest rates than their cost of funds.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company's management has implemented and continues to monitor asset and
liability management policies to better match the maturities and repricing
terms of the Company's interest-earning assets and interest-bearing
liabilities. Such policies have consisted primarily of: (i) emphasizing
investment in adjustable-rate mortgage loans ("ARMs") and adjustable-rate
mortgage-backed securities; and (ii) emphasizing the retention of
lower-costing savings accounts and other core deposits, and (iii) utilizing
FHLB advances as long-term liabilities.
The Company emphasizes the origination of ARMs and as a consequence of
the Company's efforts, as of September 30, 1997, $72.3 million or 37.9% of
the Company's portfolio of mortgage loans consisted of ARMs. In addition, at
September 30, 1997, $61.3 million or 99.8% of the Company's mortgage-backed
securities provide the Company with an adjustable yield. As a result, as of
September 30, 1997, $133.6 million or 48.6% of the Company's assets had
adjustable rate features.
The Company prices deposit accounts based upon the availability of
prudent investment opportunities. Pursuant to this pricing policy, the
Company has generally neither engaged in sporadic increases or decreases in
interest rates paid nor offered the highest rates available in its deposit
market except upon specific occasions to control deposit flow or when market
conditions have created opportunities to attract longer-term deposits. In
addition, the Company does not pursue a growth strategy which would force the
Company to focus exclusively on competitors' rates rather than affordability.
This policy has assisted the Company in controlling its cost of funds.
The implementation of the foregoing asset and liability strategies has
resulted in the Company's interest-earning assets which were estimated to
mature or reprice within one year exceeding its interest-bearing liabilities
with the same characteristics by $5.6 million or 2.0% of the Company's assets
at September 30, 1997. Currently, the Company manages the imbalance between
its interest-earning assets and interest-bearing liabilities within shorter
maturities to ensure that such relationships are within ranges adopted by the
Company's Board of Directors given the Company's business strategies and
objectives and its analysis of market and economic conditions.
Although the action taken by management of the Company has reduced the
potential effects of changes in interest rates on the Company's results of
operations, significant increases in interest rates may adversely affect the
Company's net interest income because the Company's adjustable-rate,
interest-earning assets generally are not as responsive to changes in
interest rates as its interest-bearing liabilities. While a significant
portion of the Company's assets have adjustable-rate features, such assets
are generally not as responsive to increases in interest rates due to terms
which generally permit only annual adjustments to the interest rate and which
generally limit the amount which interest rates thereon can adjust at such
time and over the life of the related asset.
5
NET PORTFOLIO VALUE
Management also presently monitors and evaluates the potential impact of
interest rate changes upon the market value of the Bank's portfolio equity
and the level of net interest income on a quarterly basis. The OTS adopted a
final rule in August 1993 incorporating an interest rate risk component into
the risk-based capital rules. Under the rule, an institution with a greater
than "normal" level of interest rate risk will be subject to a deduction of
its interest rate risk component from total capital for purposes of
calculating the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio value ("NPV") exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities, and off-balance
sheet contracts. A resulting change in NPV of more than 2% of the estimated
market value of an institution's assets will require the institution to
deduct from its capital 50% of that excess change. The rule provides that the
OTS will calculate the interest rate risk component quarterly for each
institution. The OTS has recently indicated that no institution will be
required to deduct capital for interest rate risk until further notice.
However, utilizing this measurement concept, at June 30, 1997, there would
have been a decrease in the Bank's NPV of approximately 22% of the present
value of its assets, assuming a 200 basis point increase in interest rates.
Small, highly capitalized institutions, such as the Bank, which have less
than $300 million of assets and a risk-based capital ratio in excess of 12%
are not subject to the interest rate risk component. However, if the director
of the OTS or his designee has reason to be concerned with an institution's
interest-rate risk, he may specifically require that the component be
included in the determination of the institution's risk-based capital.
The following table presents the Bank's most recently available estimated
NPV and the estimated NPV as a percentage of the present value ("PV") of
assets as of June 30, 1997, as calculated by the OTS, based on information
provided to the OTS by the Bank.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NET PORTFOLIO VALUE
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
(Dollars in Thousands)
CHANGE IN ESTIMATED NPV
INTEREST RATES AS A PERCENTAGE AMOUNT PERCENT
BASIS POINTS) ESTIMATED NPV OF PV OF ASSETS OF CHANGE OF CHANGE
------------- ------------- --------------- ---------- ---------
+400 $20,417 8.32% $(16,388) (45)
+300 24,314 9.68% (12,491) (34)
+200 28,707 11.14% (8,098) (22)
+100 32,983 12.50% (3,822) (10)
--- 36,805 13.64% -- --
-100 39,467 14.37% 2,662 7
-200 40,694 14.63% 3,889 11
-300 41,920 14.88% 5,115 14
-400 43,801 15.32% 6,996 19
6
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total consolidated assets increased $39.7 million
or 16.9% to $274.9 million at September 30, 1997 compared to $235.2 million
at September 30, 1996. Such increase was funded primarily through increases
in deposits of $6.9 million and $35.0 million in advances from the Federal
Home Loan Bank ("FHLB") of Cincinnati. Such increase in assets was primarily
due to a $42.0 million increase in loans receivable, net, which was partially
offset by a $4.0 million decrease in mortgage-backed securities. Total
liabilities increased $41.3 million or 20.4% to $243.5 million at September
30, 1997 compared to September 30, 1996.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased $1.8
million to $11.1 million at September 30, 1997 compared to September 30,
1996, as excess liquidity was utilized to fund growth in the loan portfolio.
LOANS RECEIVABLE, NET. Loans receivable, net increased $42.0 million or
28.2% to $191.1 million at September 30, 1997 compared to September 30, 1996,
as loan disbursements totaling $65.6 million were partially offset by
repayments of $23.4 million. The increase in loans receivable was primarily
due to increased originations of all types of loans. Loan disbursements
increased by $4.2 million, or 6.9% during fiscal 1997. Growth in the loan
portfolio was comprised of $33.4 million or 34.6% in one-to-four family
residential loans, $7.7 million or 64.0% in equity lines and $3.4 million or
9.5% in non-residential real estate loans.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased $4.0
million to $61.5 million at September 30, 1997 compared to September 30, 1996
as a result of the use of repayments and proceeds from the sale of
mortgage-backed securities to fund increased lending activity.
FHLB ADVANCES. Advances from the FHLB of Cincinnati amounted to $95.0
million at September 30, 1997 compared to $60.0 million at September 30,
1996, an increase of 58.3%. Such advances were incurred in order to leverage
the Company's capital and provide for future anticipated growth in the
Company's loan portfolio. The advances, a significant portion of which are
fixed rate and long-term in nature, were initially used to fund the purchase
of long-term mortgage-backed securities which adjust monthly to changes in
interest rates. The Company experienced increased loan demand in 1997 and in
1996 and intends to continue to fund higher rate loans with repayments and
sales proceeds from its mortgage-backed securities portfolio and future
advances from the FHLB.
DEPOSITS. Deposits increased $6.9 million or 4.9% to $146.3 million at
September 30, 1997 compared to September 30, 1996. The increase in deposits
was comprised of a $2.8 million or 6.4% increase in transaction accounts and
a $4.1 million or 4.2% increase in certificates of deposit. The increase was
primarily attributable to management's continuing marketing efforts coupled
with growth achieved at the new main office facility which opened in fiscal
1996.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $1.6 million to
$31.4 million at September 30, 1997 compared to September 30, 1996, as a
result of net cash distributions to stockholders of $3.4 million or $1.75 per
share and open market common stock repurchases totaling $1.3 million which
were partially offset by fiscal 1997 net earnings of $2.4 million.
7
RESULTS OF OPERATIONS
The following average balance sheet table sets forth for the periods
indicated, information on the Company regarding: (i) the total dollar amount
of interest income on interest-earning assets and the resulting average
yields; (ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iii) net interest income; (iv)
interest rate spread; (v) net interest-earning assets; (vi) the net yield
earned on interest-earning assets; and (vii) the ratio of total
interest-earning assets to total interest-bearing liabilities. Information is
based on average monthly balances during the periods presented.
AT
SEPTEMBER
30, YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------
1997 1997 1996 1995
--------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
------------- -------- --------- ------ ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Interest-earning
assets:
Loans receivable....... 8.08% $171,519 $14,067 8.20% $130,399 $10,853 8.32% $102,065 $ 8,444
Mortgage-backed
securities........... 6.30 64,100 4,147 6.47 67,316 4,164 6.19 50,415 3,026
Other interest-earning
assets............... 5.28 15,516 835 5.38 12,834 643 5.01 16,540 827
-------- ------- ------- ------- -------- ------
Total interest-earning
assets............... 7.51 251,135 19,049 7.59 210,549 15,660 7.44 169,020 12,297
Noninterest-earning
assets............... 3,905 4,721 2,116
-------- -------- --------
Total assets........... $255,040 $215,270 $171,136
-------- -------- --------
-------- -------- --------
Interest-bearing
liabilities:
Deposits............... 5.13 $143,681 7,299 5.08 $136,890 6,838 5.00 $120,460 5,837
Borrowings............. 5.98 77,692 4,620 5.95 40,000 2,554 6.39 11,111 741
-------- ------- -------- ------- -------- --------
Total interest-bearing
liabilities.......... 5.46 221,373 11,919 5.38 176,890 9,392 5.31 131,571 6,578
---- ------- ------ ------- ------ --------
Noninterest-bearing
liabilities.......... 1,427 2,615 1,452
-------- -------- --------
Total liabilities...... 222,800 179,505 133,023
Stockholders' equity... 32,240 35,765 38,113
-------- -------- --------
Total liabilities and
stockholders'
equity............... $255,040 $215,270 $171,136
-------- -------- --------
-------- -------- --------
Net interest-earning
assets............... $ 29,762 $ 33,659 $ 37,449
-------- -------- --------
-------- -------- --------
Net interest income/
interest rate
spread............... 2.05% $ 7,130 2.21% $ 6,268 2.13% $ 5,719
---- ------- ------- ------- ------ -------
---- ------- ------- ------- ------ -------
Net yield on
interest-earning
assets(1)............ 2.84% 2.98%
------ ------
------ ------
Ratio of interest-
earning assets to
interest-bearing
liabilities.......... 113.44% 119.03%
------ ------
------ ------
AVERAGE
YIELD/
RATE
--------
Interest-earning
assets:
Loans receivable....... 8.27%
Mortgage-backed
securities........... 6.00
Other interest-earning
assets............... 5.00
Total interest-earning
assets............... 7.28
Noninterest-earning
assets...............
Total assets...........
Interest-bearing
liabilities:
Deposits............... 4.85
Borrowings............. 6.67
Total interest-bearing
liabilities.......... 5.00
------
Noninterest-bearing
liabilities..........
Total liabilities......
Stockholders' equity...
Total liabilities and
stockholders'
equity...............
Net interest-earning
assets...............
Net interest income/
interest rate
spread............... 2.28%
------
------
Net yield on
interest-earning
assets(1)............ 3.38%
-------
-------
Ratio of interest-
earning assets to
interest-bearing
liabilities.......... 128.46%
-------
-------
- ------------------------
(1) Net interest income divided by total average interest-earning assets.
8
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (change in volume multiplied by prior period rate), (ii) changes in
rate (change in rate multiplied by prior period volume), (iii) changes in
rate/volume (changes in rate multiplied by changes in volume) and (iv) total
change in rate and volume.
YEAR ENDED SEPTEMBER 30,
----------------------------------------- --------------------------------------
1997 VS. 1996 1996 VS. 1995
----------------------------------------- --------------------------------------
INCREASE INCREASE
(DECREASE) DUE TO (DECREASE) DUE TO
----------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
TOTAL TOTAL
RATE/ INCREASE RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
------- ------- -------- ---------- ---- ------ ------ -----------
Interest-earnings assets:
Loans receivable........ $(156) $3,421 $( 51) $3,214 $ 51 $2,343 $ 15 $2,409
Mortgage-backed
securities............ 188 (199) (6) (17) 96 1,014 28 1,138
Other interest-earning
assets................ 47 134 11 192 2 (185) (1) (184)
---- ------ ----- ------ ---- ----- ---- ------
Total interest-earnings
assets.............. 79 3,356 (46) 3,389 149 3,172 42 3,363
---- ------ ----- ------ ---- ----- ---- ------
Interest-bearing
liabilities:
Deposits................ 110 340 11 461 181 797 23 1,001
Borrowings.............. (176) 2,409 (167) 2,066 (31) 1,927 (83) 1,813
---- ------ ----- ------ ---- ----- ---- ------
Total interest-bearing
liabilities......... (66) 2,749 (156) 2,527 150 2,724 (60) 2,814
---- ------ ----- ------ ---- ----- ---- ------
Increase (decrease) in net
interest income......... $145 $ 607 $ 110 $ 862 $ (1) $ 448 $102 $ 549
---- ------ ----- ------ ---- ----- ---- ------
---- ------ ----- ------ ---- ----- ---- ------
9
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1997 AND 1996
GENERAL. The Company's net earnings amounted to $2.4 million for the
year ended September 30, 1997 compared to net earnings of $1.4 million for
the year ended September 30, 1996, an increase of $928,000, or 64.4%. The
increase in fiscal 1997 earnings was due primarily to an $862,000 increase in
net interest income and the absence of a fiscal 1996 non recurring charge of
$770,000 related to the recapitalization of the Savings Association Insurance
Fund ("SAIF") fund, which were partially offset by decreases in other income
and increased federal income taxes.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Company's net interest income amounted to
$7.1 million for the year ended September 30, 1997, an $862,000 or 13.8%
increase over fiscal 1996. This increase in net interest income resulted from
a $3.4 million or 21.6% increase in total interest income, due primarily to
an increase in interest income on loans and interest-bearing deposits, which
were partially offset by a $2.5 million or 26.9% increase in total interest
expense during fiscal 1997. The Company's interest rate spread increased from
2.13% for the year ended September 30, 1996 to 2.21% for the year ended
September 30, 1997. The Company's net interest margin decreased from 2.98% in
fiscal 1996 to 2.84% in fiscal 1997. The decline in net interest margin
during fiscal 1997 was due primarily to the increase of the loan portfolio
through the Company's use of long term, fixed rate FHLB advances.
INTEREST INCOME. Interest income on loans increased $3.2 million or
29.6% during the year ended September 30, 1997 compared to the same period in
1996. Such increase was due primarily to a $41.1 million or 31.5% increase in
the average balance of such assets as a result of increased loan production
in fiscal 1997.
Interest income on the Company's mortgage-backed securities decreased
$17,000 or .4% during the year ended September 30, 1997 compared to the same
period in 1996. Such decrease was primarily due to a $3.2 million or 4.8%
decrease in the average balance of such assets, which was partially offset by
an increase in the average yield to 6.47% for fiscal 1997 compared to 6.19%
for fiscal 1996. The decrease in the average balance was primarily due to the
use of repayments and sales proceeds to fund loan originations.
Interest income on investment securities and other interest-earning
assets increased by $190,000 or 29.9% primarily due to an increase in the
average balance of such assets during the year ended September 30, 1997
compared to fiscal 1996.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $2.5 million or 26.9% during the year ended
September 30, 1997 compared to fiscal 1996. Interest expense on deposits
increased $461,000 or 6.7% during fiscal 1997 as a result of a $6.8 million
or 5.0% increase in the average balance of deposits as well as an increase in
the average rate paid to 5.08% for fiscal 1997 compared to 5.00% for fiscal
1996. The increase in deposits was primarily due to increased funding needs
related to increased loan volume, while the increase in the average yield
reflects the general increase in market interest rates. Interest expense on
borrowings increased to $4.6 million during the fiscal year ended September
30, 1997 compared to $2.6 million during the fiscal year ended September 30,
1996 primarily as a result of an increase in the average balance of
borrowings outstanding in order to assist in funding the Company's lending
activities.
10
PROVISION FOR LOAN LOSSES. The Company establishes a provision for loan
losses, which is charged to operations, in order to maintain the allowance
for loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, economic conditions
in the Company's market area generally and other factors related to the
collectability of the Company's loan portfolio. For fiscal 1997 the Company
established a provision for loan losses totaling $165,000. For fiscal 1996
the Company established a provision for loan losses totaling $90,000. At
September 30, 1997, the Company's allowance for loan losses totaled $575,000,
which represented 298% of non-performing loans and .30% of total loans at
such time.
Although management utilizes its best judgment in providing for losses on
loans, there can be no assurance that the Company will not have to increase
its provisions for loan losses in the future as a result of future increases
in non-performing loans or for other reasons, which could adversely affect
the Company's results of operations. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the adequacy of the Company's allowance for loan losses and the
carrying value of its other non-performing assets based on their judgments
about information available to them at the time of their examination.
OTHER INCOME. Total other income decreased $268,000 to $726,000 for the
year ended September 30, 1997 compared to $994,000 for the same period in
1996, primarily as a result of a $288,000 decrease in gains on sales of
securities during fiscal 1997.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For fiscal 1997, general,
administrative and other expense decreased by $907,000 or 18.2% to $4.1
million, compared to $5.0 million for 1996. Such decrease was due primarily
to a $947,000 or 88.6% decrease in federal deposit insurance premiums. The
decrease in federal deposit insurance premiums was primarily due to
legislation enacted in 1996 that authorized a one time charge to
re-capitalize the SAIF in fiscal 1996. The legislation authorized a one-time
charge on SAIF insured deposits at a rate of $.657 per $100.00 of March 31,
1995 deposits. As a result, the Bank's assessment amounted to $770,000
($508,000 next of tax). While the one-time special assessment had a
significant impact on fiscal 1996 earnings, the resulting lower annual
premiums had a positive impact on fiscal 1997 earnings and will continue to
benefit future earnings. A $69,000 or 2.8% increase in employee compensation
and benefits and a $78,000 or 25.4% increase in occupancy and equipment
expenses were partially offset by a $96,000 or 19.6% decrease in other
operating expenses. The increase in occupancy and equipment expenses reflects
the first full year of occupancy for the new Corporate Headquarters while the
decrease in other operating expenses was primarily due to lower professional
fees.
INCOME TAXES. The Company incurred income tax expense of $1.3 million
and $758,000 during fiscal 1997 and 1996, respectively. The effective tax
rates were 34.6% and 34.5% during fiscal 1997 and 1996, respectively. The
increase in income tax expense in fiscal 1997 was primarily due to a $1.4
million or 64.8% increase in pre-tax earnings.
11
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1995
GENERAL. The Company's net earnings amounted to $1.4 million for the
fiscal year ended September 30, 1996 compared to net earnings of $1.8 million
for the fiscal year ended September 30, 1995, a decrease of $396,000, or
21.6%. The decrease in fiscal 1996 earnings was due primarily to a charge of
$770,000 related to the recapitalization of the SAIF which was partially
offset by increases in net interest income and other income.
NET INTEREST INCOME. The Company's net interest income amounted to $6.3
million for the fiscal year ended September 30, 1996, a $549,000 or 9.6%
increase over fiscal 1995. This increase in net interest income resulted from
a $3.4 million or 27.3% increase in total interest income, due primarily to
an increase in interest income on loans and mortgage-backed securities, which
were partially offset by a $2.8 million or 42.8% increase in total interest
expense during fiscal 1996. The Company's interest rate spread decreased from
2.28% for fiscal 1995 to 2.13% for fiscal 1996. The Company's net interest
margin decreased from 3.38% in fiscal 1995 to 2.98% in fiscal 1996. The
decline in net interest margin during fiscal 1996 was due primarily to the
increase of the loan portfolio through the Company's use of long term, fixed
rate FHLB advances.
INTEREST INCOME. Interest income on loans increased $2.4 million or
28.5% during fiscal 1996 compared to fiscal 1995. Such increase was due
primarily to a $28.3 million or 27.8% increase in the average balance of such
assets as a result of increased loan production during fiscal 1996.
Interest income on the Company's mortgage-backed securities increased
$1.1 million or 37.6% during fiscal 1996 compared to fiscal 1995. Such
increase was primarily due to a $16.9 million or 33.5% increase in the
average balance of such assets, as well as an increase in the average yield
to 6.19% for fiscal 1996 compared to 6.00% for fiscal 1995. The increase in
the average balance was due to the use of borrowings to fund purchases of
such assets. The increase in the average yield reflects the general rise in
market interest rates in fiscal 1996.
Interest income on investment securities and other interest-earning
assets decreased by $184,000 or 22.2% due to a decrease in the average
balance of such assets during fiscal 1996 compared to fiscal 1995.
INTEREST EXPENSE. Interest expense, consisting of interest on deposits
and borrowings, increased $2.8 million or 42.8% during fiscal 1996 compared
to fiscal 1995. Interest expense on deposits increased $1.0 million or 17.1%
during fiscal 1996 as a result of a $16.4 million or 13.6% increase in the
average balance of deposits as well as an increase in the average rate paid
to 5.00% for fiscal 1996 compared to 4.85% for fiscal 1995. The increase in
deposits was primarily due to increased funding needs related to increased
loan volume, while the increase in the average yield reflects the general
increase in market interest rates. Interest expense on borrowings increased
to $2.6 million during fiscal 1996 compared to $741,000 during fiscal 1995 as
a result of an increase in the average balance of borrowings outstanding in
order to assist in funding the Company's lending and investment activities.
PROVISION FOR LOAN LOSSES. For fiscal 1996, the Company established a
provision for loan losses totaling $90,000. For fiscal 1995, the Company did
not establish any provision for loan losses. At September 30, 1996, the
Company's allowance for loan losses totaled $410,000, which represented 202%
of non-performing loans and .28% of total loans at such time.
12
OTHER INCOME. Total other income increased $530,000 to $994,000 for
fiscal 1996 compared to $464,000 for fiscal 1995, as a result of a $554,000
increase in gains on sales of securities during fiscal 1996.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. For fiscal 1996, general,
administrative and other expense increased by $1.6 million or 45.8% to $5.0
million, compared to $3.4 million for fiscal 1995. Such increase was due
primarily to increases of $619,000 or 33.3% in employee compensation and
benefits and a $797,000 or 293% increase in federal deposit insurance
premiums. The increase in employee compensation and benefits was due
primarily to increase in staffing, normal salary increases and approximately
$368,000 of expense recognized in connection with the Company's employee
stock benefit plans. The increase in federal deposit insurance premiums was
primarily due to a charge of $770,000 to recapitalize the SAIF.
INCOME TAXES. The Company incurred income tax expense of $758,000 and
$936,000 during fiscal 1996 and 1995, respectively. The effective tax rates
were 34.5% and 33.8% during fiscal 1996 and 1995, respectively. The decrease
in income tax expense in fiscal 1996 was primarily due to a $574,000 or 20.7%
decline in pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, repayments, prepayments
and maturities of outstanding loans and mortgage-backed securities, sales of
mortgage-backed and investment securities, FHLB advances and funds provided
from operations. While scheduled loan and mortgage-backed securities
repayments are relatively predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by the movement of interest rates in
general, economic conditions and competition. The Bank manages the pricing of
its deposits to maintain a deposit balance deemed appropriate and desirable.
In addition, the Bank invests excess funds in FHLB overnight deposits and
other short-term interest-earning assets which provide liquidity to meet
lending requirements. The Bank has been able to generate cash through the
retail deposit market, its traditional funding source, to partially offset
the cash utilized in investing activities. As an additional source of funds,
the Bank may borrow from the FHLB of Cincinnati and has access to the Federal
Reserve Bank discount window. At September 30, 1997, the Company had $95.0
million of FHLB advances outstanding.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various mortgage-backed securities and lending
products. During the year ended September 30, 1997, the Bank used its sources
of funds primarily to meet its ongoing commitments to pay maturing savings
certificates and savings withdrawals, fund loan commitments and maintain its
portfolio of mortgage-backed securities. At September 30, 1997, the total
approved loan commitments outstanding amounted to $3.3 million. At the same
date, the Bank had approximately $9.5 million of commitments under unused
lines and letters of credit and the unadvanced portion of construction loans
approximated $7.8 million. Management of the Bank believes that the Bank has
adequate resources, including principal prepayments and repayments of loans
and mortgage-backed securities, to fund all of its commitments to the extent
required. In addition, although the Bank has extended commitments to fund
loans or lines and letters of credit, historically the Bank has not been
required to fund all of its outstanding commitments. Certificates of deposit
scheduled to mature in one year or less at September 30, 1997 totaled $52.8
million. Management believes that a significant portion of maturing deposits
will remain with the Bank.
13
The Bank is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets (as defined) in amounts equal to
5% and 1%, respectively, of net withdrawable deposits and borrowings payable
in one year or less to assure its ability to meet demand for withdrawals and
repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions
and deposit flows. The Bank generally maintains a liquidity ratio of between
5% and 10% of its net withdrawable deposits and borrowings payable in one
year or less. The Bank's average monthly liquidity ratio and short-term
liquid assets ratio were each 6.6% for September 1997.
As set forth below, as of September 30, 1997, the Bank's regulatory
capital substantially exceeded applicable limits.
SEPTEMBER 30, 1997
---------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
(IN THOUSANDS)
GAAP equity............................ $28,761 $28,761 $28,761
Unrealized gain on securities.......... (51) (51) (51)
Goodwill............................... (20) (20) (20)
General valuation allowances........... -- -- 575
-------- ------- ----------
Total regulatory capital............... 28,690 28,690 29,265
Minimum capital requirements........... 4,112 8,224 12,295
-------- ------- ----------
Excess capital......................... $24,578 $20,466 $16,970
-------- ------- ----------
-------- ------- ----------
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
14
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1994, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 122 "Accounting for Mortgage Servicing Rights," which requires that
the Company recognize as separate assets, rights to service mortgage loans
for others, regardless of how those servicing rights are acquired. An
institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells those loans with
servicing rights retained would allocate some of the cost of the loans to the
mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is measured based on fair value.
SFAS No. 122 is applied prospectively to fiscal years beginning after
December 15, 1995, (October 1, 1996, as to the Company) to transactions in
which an entity acquires mortgage servicing rights and to impairment
evaluations of all capitalized mortgage servicing rights and capitalized
excess servicing receivables whenever acquired. Retroactive application is
prohibited. Management adopted SFAS No. 122 effective October 1, 1996 without
material effect on the Company's consolidated financial position or results
of operations.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based compensation plans. SFAS No. 123 encourages all entities to adopt
a new method of accounting to measure compensation cost of all stock
compensation plans based on the estimated fair value of the award at the date
it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No.
123 has been adopted. The accounting requirements of SFAS No. 123 are
effective for transactions entered into during fiscal years that begin after
December 15, 1995; however, companies are required to disclose information
for awards granted in their first fiscal year beginning after December 15,
1994. Management has determined that the Company will continue to account for
stock-based compensation pursuant to Accounting Principles Board Opinion No.
25, and therefore SFAS No. 123 will have no effect on its consolidated
financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces
an approach to accounting for transfers of financial assets that provides a
means of dealing with more complex transactions in which the seller disposes
of only a partial interest in the assets, retains rights or obligations,
makes use of special purpose entities in the transaction, or otherwise has
continuing involvement with the transferred assets. The new accounting
method, referred to as the financial components approach, provides that the
carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No.
125 provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not
qualify as a sale, it is accounted for as a secured borrowing. Transactions
subject to the provisions of SFAS No. 125 include among others,
15
transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and
over the period of estimated net servicing income or net servicing loss and
are subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe that adoption of SFAS No. 125 will
have a material adverse effect on the Company's consolidated financial
position or results of operations.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS No. 128 requires restatement of all
prior-period EPS data presented.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure." Statement No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. Specifically, the
Statement requires all entities to provide the capital structure disclosures
previously required by Opinion 15. Companies that were exempt from the
provisions of Opinion 15 will now need to make those disclosures.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure
of all changes in equity of an enterprise that result from transactions and
other
16
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997 with earlier application permitted.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." Statement No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. The
Statement is effective for fiscal years beginning after December 15, 1997
with earlier application permitted.
17
Report of Independent Certified Public Accountants
Board of Directors
Enterprise Federal Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Enterprise Federal Bancorp, Inc. as of September 30, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years ended September 30, 1997,
1996 and 1995. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principals used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Enterprise Federal Bancorp, Inc. as of September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years ended September 30, 1997, 1996, and 1995, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton L.L.P.
- -------------------------
Cincinnati, Ohio
October 24, 1997
18
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
1997 1996
---------- ----------
ASSETS
Cash and due from banks............................................... $ 811 $ 736
Federal funds sold.................................................... 8,000 7,225
Interest-bearing deposits in other financial institutions............. 2,330 4,977
---------- ----------
Cash and cash equivalents......................................... 11,141 12,938
Investment securities available for sale--at market................... 698 --
Mortgage-backed securities available for sale--at market.............. 61,457 65,482
Loans receivable--net................................................. 191,096 149,050
Office premises and equipment-at depreciated cost..................... 3,544 3,603
Federal Home Loan Bank stock--at cost................................. 5,500 3,000
Accrued interest receivable on loans.................................. 608 360
Accrued interest receivable on mortgage-backed securities............. 409 371
Accrued interest receivable on interest-bearing deposits.............. 96 44
Goodwill and other intangible assets.................................. 20 50
Prepaid expenses and other assets..................................... 290 256
Prepaid federal income taxes.......................................... 29 --
Deferred federal income tax asset..................................... -- 37
---------- ----------
Total assets...................................................... $ 274,888 $ 235,191
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.............................................................. $ 146,297 $ 139,447
Advances from the Federal Home Loan Bank.............................. 95,000 60,000
Escrow deposits....................................................... -- 208
Accrued interest payable.............................................. 636 488
Other liabilities..................................................... 1,365 1,703
Accrued federal income taxes.......................................... -- 289
Deferred federal income taxes......................................... 166 --
---------- ----------
Total liabilities................................................. 243,464 202,135
Commitments........................................................... -- --
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares authorized, none
issued and outstanding.............................................. -- --
Common stock, $.01 par value, 4,000,000 shares authorized,
2,268,596 issued at September 30, 1997 and 1996..................... 23 23
Additional paid-in capital............................................ 23,082 22,713
Less 282,768 and 199,268 shares of treasury stock--at cost............ (4,386) (3,058)
Less shares acquired by stock benefit plans........................... (1,927) (2,593)
Retained earnings--restricted......................................... 14,581 15,736
Unrealized gains on securities designated as available for sale,
net of related tax effects.......................................... 51 235
---------- ----------
Total stockholders' equity........................................ 31,424 33,056
---------- ----------
Total liabilities and stockholders' equity........................ $ 274,888 $ 235,191
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
19
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
1997 1996 1995
--------- --------- ---------
Interest income
Loans....................................................... $ 14,067 $ 10,853 $ 8,444
Mortgage-backed securities.................................. 4,147 4,164 3,026
Investment securities....................................... 3 -- 114
Interest-bearing deposits and other......................... 832 643 713
--------- --------- ---------
Total interest income................................... 19,049 15,660 12,297
Interest expense
Deposits.................................................. 7,299 6,838 5,837
Borrowings................................................ 4,620 2,554 741
--------- --------- ---------
Total interest expense.................................. 11,919 9,392 6,578
--------- --------- ---------
Net interest income..................................... 7,130 6,268 5,719
Provision for losses on loans................................. 165 90 --
--------- --------- ---------
Net interest income after provision for losses on loans. 6,965 6,178 5,719
Other income
Gain on sale of investment and mortgage backed securities... 597 885 331
Gain on sale of real estate acquired through foreclosure.... -- -- 39
Other operating............................................. 129 109 94
--------- --------- ---------
Total other income...................................... 726 994 464
General, administrative and other expense
Employee compensation and benefits.......................... 2,548 2,479 1,860
Occupancy and equipment..................................... 385 307 223
Federal deposit insurance premiums.......................... 122 1,069 272
Franchise taxes............................................. 447 461 397
Data processing............................................. 140 137 131
Amortization of goodwill and other intangible assets........ 30 30 30
Other operating............................................. 394 490 497
--------- --------- ---------
Total general, administrative and other expense......... 4,066 4,973 3,410
--------- --------- ---------
Earnings before income taxes............................ 3,625 2,199 2,773
Federal income taxes
Current..................................................... 959 1,102 877
Deferred.................................................... 297 (344) 59
--------- --------- ---------
Total federal income taxes.............................. 1,256 758 936
--------- --------- ---------
NET EARNINGS............................................ $ 2,369 $ 1,441 $ 1,837
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE...................................... $ 1.23 $ .73 $ .90
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these statements.
20
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended September 30,
(In thousands, except share data)
UNREALIZED
SHARES GAINS (LOSSES)
ACQUIRED BY ON SECURITIES
ADDITIONAL STOCK DESIGNATED AS
COMMON PAID-IN TREASURY BENEFIT AVAILABLE RETAINED
STOCK CAPITAL STOCK PLANS FOR SALE EARNINGS TOTAL
------ ---------- -------- ----------- ------------- -------- --------
Balance at October 1, 1994................... $ -- $ -- $ -- $ -- $ -- $ 12,458 $ 12,458
Designation of securities as available for
sale upon adoption of SFAS No. 115......... -- -- -- -- (9) -- (9)
Net proceeds from issuance of common stock... 23 28,633 -- (2,359) -- -- 26,297
Purchase of treasury shares.................. -- -- (1,413) -- -- -- (1,413)
Stock acquired for stock benefit plans....... -- -- -- (1,329) -- -- (1,329)
Transfer of securities to an available
for sale classification.................... -- -- -- -- (788) -- (788)
Unrealized gains on securities designated
as available for sale, net of related
tax effects................................ -- -- -- -- 1,185 -- 1,185
Principal repayment on loan to ESOP.......... -- -- -- 236 -- -- 236
Net earnings for the year ended
September 30, 1995......................... -- -- -- -- -- 1,837 1,837
------ -------- -------- --------- --------- -------- --------
Balance at September 30, 1995................ 23 28,633 (1,413) (3,452) 388 14,295 38,474
Capital distribution of $3.00 per share...... -- (5,986) -- -- -- -- (5,986)
Purchase of treasury shares.................. -- -- (1,645) -- -- -- (1,645)
Unrealized losses on securities designated
as available for sale, net of related
tax effects................................ -- -- -- -- (153) -- (153)
Principal repayment on loan to
ESOP/amortization of expense related
to stock benefit plans..................... -- 66 -- 859 -- -- 925
Net earnings for the year ended
September 30, 1996......................... -- -- -- -- -- 1,441 1,441
------ -------- -------- --------- --------- -------- --------
Balance at September 30, 1996................ 23 22,713 (3,058) (2,593) 235 15,736 33,056
Dividends paid of $1.75 per share............ -- 170 -- -- -- (3,524) (3,354)
Purchase of treasury shares.................. -- -- (1,328) -- -- -- (1,328)
Unrealized losses on securities designated as
available for sale, net of related
tax effects................................. -- -- -- -- (184) -- (184)
Principal repayment on loan to
ESOP/amortization of expense related
to stock benefit plans...................... -- 199 -- 666 -- -- 865
Net earnings for the year ended
September 30, 1997.......................... -- -- -- -- -- 2,369 2,369
------ -------- -------- --------- --------- -------- --------
Balance at September 30, 1997................. $ 23 $ 23,082 $ (4,386) $ (1,927) $ 51 $ 14,581 $ 31,424
------ -------- -------- --------- --------- -------- --------
------ -------- -------- --------- --------- -------- --------
The accompanying notes are an integral part of these statements.
21
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net earnings for the year...................................................... $ 2,369 $ 1,441 $ 1,837
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities--net........................... 24 (34) 78
Amortization of deferred loan origination fees.............................. (189) (170) (142)
Amortization of expense related to stock benefit plans...................... 865 925 236
Depreciation and amortization............................................... 263 121 112
Provision for losses on loans............................................... 165 90 --
Gain on sale of securities designated as available for sale................. (597) (885) (331)
Gain on sale of real estate acquired through foreclosure.................... -- -- (39)
Federal Home Loan Bank stock dividends...................................... (297) (148) (78)
Increase (decrease) in cash due to changes in:
Accrued interest receivable............................................... (338) (272) (176)
Prepaid expenses and other assets......................................... (34) (36) 219
Accrued interest payable.................................................. 148 112 267
Other liabilities......................................................... (546) 878 131
Federal income taxes
Current................................................................... 1,053 304 (6)
Deferred.................................................................. 297 (344) 59
--------- --------- ---------
Net cash provided by operating activities............................... 3,183 1,982 2,167
Cash flows provided by (used in) investing activities:
Purchase of investment securities.............................................. (968) -- (7,427)
Proceeds from sale of investment securities designated
as available for sale......................................................... 356 -- 8,518
Purchase of mortgage-backed securities......................................... (55,302) (51,493) (68,464)
Proceeds from sale of mortgage-backed securities designated
as available for sale......................................................... 52,714 54,552 18,776
Principal repayments on mortgage-backed securities............................. 6,728 4,178 4,108
Loan principal repayments...................................................... 22,664 23,208 20,802
Loan disbursements............................................................. (65,585) (61,378) (31,213)
Purchase of office premises and equipment...................................... (174) (1,640) (253)
Proceeds from sale of real estate acquired through foreclosure................. -- 19 122
Purchase of Federal Home Loan Bank stock....................................... (2,203) (1,307) (457)
--------- --------- ---------
Net cash used in investing activities.................................. (41,770) (33,861) (55,488)
--------- --------- ---------
Net cash used in operating and investing activities
(subtotal carried forward)........................................... (38,587) (31,879) (53,321)
--------- --------- ---------
22
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
1997 1996 1995
--------- --------- ---------
Net cash used in operating and investing activities
(subtotal brought forward).......................................... $ (38,587) $ (31,879) $ (53,321)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts.................................... 6,850 11,760 (26,022)
Proceeds from Federal Home Loan Bank advances.................................. 65,000 40,000 30,000
Repayment of Federal Home Loan Bank advances................................... (30,000) (10,000) --
Escrow deposits................................................................ (208) 18 (7)
Net proceeds from issuance of common stock..................................... -- -- 26,297
Purchase of treasury shares.................................................... (1,328) (1,645) (1,413)
Purchase of shares for employee stock benefit plans............................ -- -- (1,329)
Return of capital distribution................................................. -- (5,986) --
Payment of dividends........................................................... (3,524) -- --
---------- ---------- ----------
Net cash provided by financing activities............................. 36,790 34,147 27,526
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............................. (1,797) 2,268 (25,795)
Cash and cash equivalents at beginning of year................................... 12,938 10,670 36,465
---------- ---------- ----------
Cash and cash equivalents at end of year......................................... $ 11,141 $ 12,938 $ 10,670
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes....................................................... $ 895 $ 361 $ 883
---------- ---------- ----------
---------- ---------- ----------
Interest on deposits and borrowings........................................ $ 11,771 $ 9,280 $ 6,311
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure............... $ -- $ 21 $ --
---------- ---------- ----------
---------- ---------- ----------
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects............................... $ (184) $ (153) $ 388
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these statements.
23
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During fiscal 1994, the Board of Directors of Enterprise Federal Savings
Bank (the Savings Bank) adopted an overall plan of conversion and reorganization
(the Plan) whereby the Savings Bank would convert to the stock form of ownership
(the Conversion), followed by the issuance of all of the Savings Bank's
outstanding stock to a newly formed holding company, Enterprise Federal Bancorp,
Inc. (the Corporation), and the issuance of common shares of the Corporation to
subscribing members of the Savings Bank. The Conversion to the stock form of
ownership was completed on October 14, 1994, culminating in the Corporation's
issuance of 2,268,596 common shares. Condensed financial statements of the
Corporation as of the periods ended September 30, 1997, 1996 and 1995 are
presented in Note L. Future references are made to either the Corporation or the
Savings Bank as applicable.
The Corporation conducts a general banking business in southwestern Ohio
which consists of attracting deposits from the general public and applying those
funds to the origination of loans for residential, consumer and nonresidential
purposes. The Corporation's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of interest-
earning assets and interest-bearing liabilities and the interest received or
paid on these balances. The level of interest rates paid or received by the
Corporation can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and revenues and expenses
during the reporting period. Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiary, the Savings Bank. All significant intercompany
balances and transactions have been eliminated.
24
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried at
cost only if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available for sale are
carried at fair value with resulting unrealized gains or losses charged to
operations or stockholders' equity, respectively.
At September 30, 1997 and 1996, the Corporation's stockholders' equity
reflected an unrealized gain on securities designated as available for sale, net
of applicable tax effects, totaling $51,000 and $235,000 respectively.
Realized gains or losses on sales of securities are recognized using the
specific identification method.
3. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees, the allowance for loan losses and premiums
and discounts on purchased loans. Premiums and discounts on loans purchased are
amortized and accreted to operations using the interest method over the life of
the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
4. LOAN ORIGINATION FEES
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of certain
direct origination costs, are deferred and amortized to interest income using
the level-yield method, giving effect to actual loan prepayments. Additionally,
SFAS No. 91 generally limits the definition of loan origination costs to the
direct costs attributable to originating a loan, i.e. principally actual
personnel
25
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. LOAN ORIGINATION FEES (continued)
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Savings Bank's experience with similar commitments, are deferred
and amortized over the life of the loan using the level-yield method. Fees
for other loan commitments are deferred and amortized over the loan
commitment period on a straight-line basis.
5. ALLOWANCE FOR LOSSES ON LOANS
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level of
delinquent and problem loans, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and current
and anticipated economic conditions in its primary lending area. When the
collection of a loan becomes doubtful, or otherwise troubled, the Savings Bank
records a loan loss provision equal to the difference between the fair value of
the property securing the loan and the loan's carrying value. Major loans and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, which was amended by SFAS No. 118 as to
certain income recognition and financial statement disclosure provisions,
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as an alternative, at the loan's observable market price or fair value of the
collateral. The Savings Bank's current procedures for evaluating impaired loans
result in carrying such loans at the lower of cost or fair value. As a result,
the Corporation adopted SFAS No. 114 effective October 1, 1995, without material
financial statement effect.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Savings Bank considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Savings Bank's investment in
nonresidential and multi-family residential real estate loans, and its
evaluation of impairment thereof, such loans are generally collateral dependent
and, as a result, are carried as a practical expedient at the lower of cost or
fair value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
26
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. ALLOWANCE FOR LOSSES ON LOANS (continued)
At September 30, 1997 and 1996, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
6. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line and accelerated methods over the
useful lives of the assets, estimated to be forty to fifty years for buildings,
ten to forty years for building improvements, and five to ten years for
furniture and equipment. An accelerated method is used for tax reporting
purposes.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the amount determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and specifically identifiable intangible assets related to branch
acquisitions are amortized over a ten year estimated useful life using the
straight line method.
Goodwill represents the unidentified intangible assets resulting from the
Savings Bank's purchase of branch offices from other financial institutions.
Management periodically evaluates the carrying value of these intangible assets
in relation to the continuing earnings capacity of such offices.
9. INCOME TAXES
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the current
and previous years. Pursuant to the provisions of SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible differences between the tax basis of an
asset or liability and
27
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. INCOME TAXES (continued)
Its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax
assets are recorded only to the extent that the amount of net deductible
temporary differences or carryforward attributes may be utilized against
current period earnings, carried back against prior years earnings, offset
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from different methods of accounting
for deferred loan origination fees, Federal Home Loan Bank stock dividends,
certain components of retirement expense, the general loan loss allowance and
the percentage of earnings bad debt deduction. Additional differences result
from depreciation computed utilizing accelerated methods for tax purposes.
10. RETIREMENT AND INCENTIVE PLANS
The Corporation has several retirement and incentive plans covering the
directors and substantially all employees. Such plans are more fully described
as follows.
In conjunction with the Conversion, the Corporation implemented an Employee
Stock Ownership Plan (ESOP). The ESOP provides retirement benefits for all
employees who have completed one year of service and have attained the age of
21. The Corporation accounts for the ESOP in accordance with Statement of
Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans".
SOP 93-6 requires that compensation expense recorded by employers be based on
the fair value of ESOP shares allocated to participants during a fiscal year.
The Corporation recognized expense related to the ESOP totaling $545,000,
$652,000 and $252,000 for the fiscal years ended September 30, 1997, 1996 and
1995, respectively.
Additionally, the Corporation adopted a Management Recognition Plan (MRP).
The MRP purchased 90,744 shares of the Corporation's common stock during fiscal
1995 at an average price per share of $14.64. All of the shares available under
the plan were granted to executive officers of the Savings Bank. Common stock
granted under the MRP vests ratably over a five-year period, commencing in
November, 1994. A provision of $472,000, $234,000 and $199,000 was charged to
expense for the MRP for the fiscal years ended September 30, 1997, 1996 and
1995, respectively.
28
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. RETIREMENT AND INCENTIVE PLANS (continued)
The Savings Bank is a participant in a multi-employer defined benefit
pension plan that covers substantially all employees. The Savings Bank funds its
pension plan through participation in the Pentegra Fund (the Fund). The
provision for pension expense totaled $22,000, $99,000 and $105,000 for the
fiscal years ended September 30, 1997, 1996 and 1995 respectively. Pension
expense is computed by the Fund's actuaries utilizing the frozen initial
liability method and assuming a 7.5% return on Fund assets. The Savings Bank is
not required to disclose separate actuarial information due the Fund's
classification as a multi-employer pension plan.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September 30,
1997 and 1996:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash equivalents
are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted market
price.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates offered for
loans with similar terms to borrowers of similar credit quality. For
consumer and other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued interest on loans
is deemed to approximate fair value.
29
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate fair
value.
Deposits: The fair value of NOW accounts, passbook accounts, money
market and escrow deposits is deemed to approximate the amount payable on
demand. Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the interest rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank: The fair value of these advances
is estimated using the rates currently offered for similar advances of
similar remaining maturities.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At September 30, 1997
and 1996, the difference between the fair value and notional amount of loan
commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30 are as follows:
1997 1996
---------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- --------- ----------
(IN THOUSANDS)
Financial assets
Cash and cash equivalents...................................... $ 11,141 $ 11,141 $ 12,938 $ 12,938
Investment securities.......................................... 698 698 -- --
Mortgage-backed securities..................................... 61,457 61,457 65,482 65,482
Loans receivable............................................... 191,096 190,597 149,050 148,178
Stock in Federal Home Loan Bank................................ 5,500 5,500 3,000 3,000
---------- ---------- ---------- ----------
$ 269,892 $ 269,393 $ 230,470 $ 229,598
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Financial liabilities
Deposits....................................................... $ 146,297 $ 147,136 $ 139,447 $ 140,209
Advances from Federal Home Loan Bank........................... 95,000 94,936 60,000 59,792
Escrow deposits................................................ -- -- 208 208
---------- ---------- ---------- ----------
$ 241,297 $ 242,072 $ 199,655 $ 200,209
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
30
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold, and interest-bearing deposits due from
other financial institutions with original maturities of less than ninety days.
13. EARNINGS PER SHARE AND DIVIDENDS PER SHARE
Primary earnings per share for the years ended September 30, 1997, 1996 and
1995 is based upon the weighted-average shares outstanding during the period
plus those stock options that are dilutive, less 85,518, 113,714 and 181,488
shares, respectively, in the ESOP that are unallocated and not committed to be
released. Weighted-average common shares deemed outstanding totaled 1,920,482,
1,984,616 and 2,046,991 for the years ended September 30, 1997, 1996 and 1995,
respectively. There was no material dilutive effect attendant to the
Corporation's stock option plan during the years ended September 30, 1997, 1996
and 1995.
During fiscal 1996, the Corporation declared a dividend of $3.00 per common
share, which was paid in October, 1995 from funds retained by the Corporation in
the Conversion and was deemed by management to constitute a return of excess
capital. Accordingly, the Corporation charged the return of capital dividend to
additional paid-in-capital. Management has obtained a Private Letter Ruling from
the Internal Revenue Service which states that the Corporation's dividend
payments in excess of accumulated earnings and profits are considered a tax-free
return of capital for federal income tax purposes. As a result, management
determined that approximately $2.95 of the fiscal 1996 distribution constitutes
a tax-free return of capital.
14. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
31
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE B--INVESTMENTS AND MORTGAGE-BACKED SECURITIES
At September 30, 1997, the Corporation's investment securities consisted
entirely of equity securities of another financial institution totaling
$698,000. At September 30, 1997, the cost and carrying value of such securities
approximated market value.
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at September 30, 1997 and
1996 are summarized as follows:
1997
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ---------- ---------
(IN THOUSANDS)
Available for sale:
Federal Home Loan Mortgage Corporation participation
certificates.................................................... $ 14,943 $ 53 $ 75 $ 14,921
Federal National Mortgage Association participation certificates.. 33,906 48 122 33,832
Collateralized mortgage obligations............................... 12,530 178 4 12,704
----------- --------- --------- ---------
$ 61,379 $ 279 $ 201 $ 61,457
----------- --------- --------- ---------
----------- --------- --------- ---------
1996
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- --------- ----------
(IN THOUSANDS)
Available for sale:
Federal Home Loan Mortgage Corporation participation
certificates.................................................... $ 3,559 $ -- $ 161 $ 3,398
Federal National Mortgage Association participation certificates.. 23,497 82 215 23,364
Small Business Administration participation certificates.......... 1,082 36 -- 1,118
Collateralized mortgage obligations............................... 36,988 655 41 37,602
----------- ----- ----- ---------
$ 65,126 $ 773 $ 417 $ 65,482
----------- ----- ----- ---------
----------- ----- ----- ---------
32
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE B--INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost of mortgage-backed securities at September 30, 1997, by
contractual term to maturity, is shown below. Expected maturities will differ
from contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
AMORTIZED
COST
--------------
(IN THOUSANDS)
Due within ten years......................................... $ 358
Due after ten years.......................................... 61,021
----------
$ 61,379
----------
----------
Federal funds sold with an approximate carrying value of $2.5 million were
pledged to secure public deposits at September 30, 1997.
NOTE C--LOANS RECEIVABLE
The composition of the loan portfolio is as follows at September 30:
1997 1996
---------- ----------
(IN THOUSANDS)
Residential real estate
One-to-four family................................. $ 130,022 $ 96,605
Equity lines....................................... 19,781 12,065
Multi-family....................................... 4,693 6,525
Construction....................................... 15,960 15,567
Nonresidential real estate and land.................. 38,516 35,162
Consumer and other................................... 1,009 942
---------- ----------
209,981 166,866
Less:
Undisbursed portion of loans in process............ 7,821 9,928
Deferred loan origination fees..................... 1,017 874
Allowance for loan losses.......................... 575 410
Undisbursed portion of equity lines................ 9,472 6,604
---------- ----------
$ 191,096 $ 149,050
---------- ----------
---------- ----------
The Savings Bank's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans, which comprise
approximately $141.3 million, or 74%, of the total loan portfolio at September
30, 1997, and $107.5 million, or 72%, of the total loan portfolio at September
30, 1996. Generally, such loans have been underwritten
33
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE C -- LOANS RECEIVABLE (Continued)
on the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Savings Bank with adequate collateral coverage in
the event of default. Nevertheless, the Savings Bank, as with any lending
institution, is subject to the risk that real estate values could deteriorate
in its primary lending area of southwestern Ohio, thereby impairing
collateral values. However, management is of the belief that residential real
estate values in the Savings Bank's primary lending area are presently stable.
NOTE D--ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows:
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Balance at beginning of period............. $ 410 $ 323 $ 323
Provision for losses on loans.............. 165 90 --
Charge-offs of loans....................... -- (3) --
--------- --------- ---------
Balance at end of period................... $ 575 $ 410 $ 323
--------- --------- ---------
--------- --------- ---------
As of September 30, 1997, the Savings Bank's allowance for loan losses was
solely general in nature, and is includible as a component of regulatory
risk-based capital.
Nonperforming and renegotiated loans for which interest has been reduced
totaled approximately $33,000, $203,000 and $454,000 at September 30, 1997, 1996
and 1995, respectively. Interest income which would have been recognized if such
loans had been performing pursuant to contractual terms totaled approximately
$3,000, $12,000 and $6,000 for the years ended September 30, 1997, 1996, and
1995, respectively.
NOTE E--OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
1997 1996
--------- ---------
(IN THOUSANDS)
Land and improvements................................. $ 839 $ 839
Office buildings and improvement...................... 3,110 3,089
Furniture, fixtures and equipment..................... 1,009 932
--------- ---------
4,958 4,860
Less accumulated depreciation and amortization........ 1,414 1,257
--------- ---------
$ 3,544 $ 3,603
--------- ---------
--------- ---------
34
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE F--DEPOSITS
Deposits consist of the following major classifications at September 30:
1997 1996
---------------------- ---------------------
AMOUNT % AMOUNT %
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Deposit type and weighted-
average interest rate
Now accounts
1997--1.44%......................................................... $ 9,208 6.29%
1996--1.35%......................................................... $ 8,378 6.01%
Passbook
1997--3.00%......................................................... 15,949 10.90
1996--3.00%......................................................... 17,192 12.33
Money market deposit accounts
1997--4.35%......................................................... 21,694 14.83
1996--4.06%......................................................... 18,446 13.23
---------- --------- ---------- ---------
Total demand, transaction and passbook deposits....................... 46,851 32.02 44,016 31.57
Certificates of deposit
Original maturities of:
12 months or less
1997--5.59%......................................................... 36,902 25.23
1996--5.33%......................................................... 39,106 28.04
Over 12 months to 36 months
1997--5.96%......................................................... 32,655 22.32
1996--5.94%......................................................... 29,583 21.21
More than 36 months
1997--6.42%......................................................... 29,889 20.43
1996--6.43%......................................................... 26,742 19.18
---------- --------- ---------- ---------
Total certificates of deposit......................................... 99,446 67.98 95,431 68.43
---------- --------- ---------- ---------
Total deposits........................................................ $ 146,297 100.00% $ 139,447 100.00%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
The Savings Bank had deposit accounts with balances greater than $100,000
totaling $19.3 million and $16.0 million at September 30, 1997 and 1996,
respectively.
35
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE F -- DEPOSITS (continued)
Interest expense on deposits for the years ended September 30 is summarized
as follows:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS)
Passbook..................................... $ 497 $ 528 $ 564
NOW and money market deposit
accounts................................... 1,000 738 513
Certificates of deposit...................... 5,802 5,572 4,760
---------- --------- ---------
$ 7,299 $ 6,838 $ 5,837
---------- --------- ---------
---------- --------- ---------
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
1997 1996
--------- ---------
(IN THOUSANDS)
Less than one year..................................... $ 52,763 $ 52,810
One to three years..................................... 36,598 25,820
Over three years....................................... 10,085 16,801
--------- ---------
$ 99,446 $ 95,431
--------- ---------
--------- ---------
NOTE G--ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1997 by certain residential mortgage loans totaling $130.0 million, certain
mortgage-backed securities totaling $30.0 million and the Savings Bank's
investment in Federal Home Loan Bank stock are summarized as follows:
SEPTEMBER 30,
WEIGHTED AVERAGE MATURING IN FISCAL ---------------------
INTEREST RATE YEAR ENDING IN 1997 1996
- ---------------------------------------------- ---------------- --------- ---------
(IN THOUSANDS)
5.38%........................................... 1997 $ -- $ 10,000
5.51%-5.60%..................................... 1998 25,000 20,000
5.60%........................................... 1999 30,000 --
6.25%........................................... 2000 10,000 10,000
6.75%........................................... 2005 10,000 10,000
6.50%........................................... 2006 10,000 10,000
6.51%........................................... 2007 10,000 --
--------- ---------
$ 95,000 $ 60,000
--------- ---------
--------- ---------
Weighted-average interest rate.................. 5.98% 5.98%
--------- ---------
--------- ---------
36
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE H--FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate as follows at September 30:
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Federal income taxes computed at
statutory rate............................... $1,233 $748 $943
Increase (decrease) in taxes resulting from:
Amortization of goodwill.................... 10 10 10
Other....................................... 13 -- (17)
------ ---- ----
Federal income tax provision per
consolidated financial statements............ $1,256 $758 $936
------ ---- ----
------ ---- ----
The composition of the Corporation's net deferred tax asset (liability) is
as follows at September 30:
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT STATUTORY RATE: 1997 1996
--------- ---------
(IN THOUSANDS)
Deferred tax liabilities:
Federal Home Loan Bank stock dividends......................................................... $ (346) $ (245)
Difference between book and tax depreciation................................................... (167) (151)
Percentage of earnings bad debt deduction...................................................... (386) (386)
Unrealized gain on securities designated as available for sale................................. (27) (121)
--------- ---------
Total deferred tax liabilities........................................................... (926) (903)
Deferred tax assets:
General loan loss allowance.................................................................... 195 139
Deferred loan origination fees................................................................. 346 297
Deferred compensation.......................................................................... 72 157
Employee stock benefit plans................................................................... 130 65
SAIF recapitalization assessment............................................................... -- 262
Other.......................................................................................... 17 20
--------- ---------
Total deferred tax assets................................................................ 760 940
--------- ---------
Net deferred tax asset (liability)....................................................... $ (166) $ 37
--------- ---------
--------- ---------
37
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE H--FEDERAL INCOME TAXES (continued)
In prior years, the Savings Bank was allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income, and subject to certain
limitations based on aggregate loans and deposit account balances at the end
of the year. If the amounts that qualify as deductions for federal income
taxes are later used for purposes other than bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. Retained earnings
at September 30, 1997, includes approximately $2.5 million for which federal
income taxes have not been provided. The amount of unrecognized deferred tax
liability relating to the cumulative bad debt deduction was approximately
$470,000 at September 30, 1997. See Note K for additional information
regarding the Savings Bank's future percentage of earnings bad debt
deductions.
NOTE I--LOAN COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of the
Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At September 30, 1997, the Savings Bank had outstanding commitments of
approximately $3.3 million to originate loans, consisting of $345,000 of
fifteen year fixed rate loans at interest rates ranging from 7.25% to 8.50%,
$522,000 of thirty year fixed rate loans at interest rates ranging from 8.00%
to 8.50%, and $2.4 million in adjustable rate loans. Additionally, the
Savings Bank had commitments under unused lines of credit totaling $9.5
million. In the opinion of management all loan commitments equaled or
exceeded prevalent market interest rates as of September 30, 1997, and will
be funded from existing excess liquidity and normal cash flow from operations.
38
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE J--REGULATORY CAPITAL
The Savings Bank is subject to regulatory capital requirements promulgated by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Such minimum capital standards generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as stockholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible assets
such as capitalized mortgage servicing rights) equal to 3.0% of adjusted
total assets. A recent OTS proposal, if adopted in present form, would
increase the core capital requirement to a range of 4.0%--5.0% of adjusted
total assets for substantially all savings institutions. Management
anticipates no material change to the Savings Bank's present excess
regulatory capital position as a result of this change to the regulatory
capital requirement. The risk-based capital requirement provides for the
maintenance of core capital plus general loan loss allowances equal to 8.0%
of risk-weighted assets. In computing risk-weighted assets, the Savings Bank
multiplies the value of each asset on its statement of financial condition by
a defined risk-weighting factor, e.g., one-to-four family residential loans
carry a risk-weighted factor of 50%.
During the 1997 fiscal year, the Savings Bank was notified from its regulator
that it was categorized as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized" the
Savings Bank must maintain minimum capital ratios as set forth in the
following table.
As of September 30, 1997, management believes that the Savings Bank met all
capital adequacy requirements to which it is subject.
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------- --------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
------- ----- -------------------------------- ----------------------------
(DOLLARS IN THOUSANDS)
Risk-based capital..... $29,265 19.0% GREATER THAN OR EQUAL TO $12,295 GREATER THAN OR EQUAL TO 8.0%
Core capital........... $28,690 10.5% GREATER THAN OR EQUAL TO $8,224 GREATER THAN OR EQUAL TO 3.0%
Tangible capital....... $28,690 10.5% GREATER THAN OR EQUAL TO $4,112 GREATER THAN OR EQUAL TO 1.5%
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
---------------------------------------------------------------
AMOUNT RATIO
-------------------------------- -----------------------------
Risk-based capital.... GREATER THAN OR EQUAL TO $15,369 GREATER THAN OR EQUAL TO 10.0%
Core capital.......... GREATER THAN OR EQUAL TO $16,448 GREATER THAN OR EQUAL TO 6.0%
Tangible capital...... GREATER THAN OR EQUAL TO $13,707 GREATER THAN OR EQUAL TO 5.0%
39
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE J--REGULATORY CAPITAL (continued)
The Corporation's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the management, such as a protracted increase in interest rates or
a downturn in the economy in the Savings Bank's market areas, could adversely
affect future earnings and, consequently, the ability to meet future minimum
regulatory capital requirements.
NOTE K--LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC through the Savings Association Insurance Fund
("SAIF"). The reserves of the SAIF were below the level required by law,
because a significant portion of the assessments paid into the fund were used
to pay the cost of prior thrift failures. The deposit accounts of commercial
banks are insured by the FDIC through the Bank Insurance Fund ("BIF"), except
to the extent such banks have acquired SAIF deposits. The reserves of the BIF
met the level required by law in May, 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996 and 1997, no BIF
assessments were required for healthy commercial banks except for a $2,000
minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Savings
Bank had $115.9 million in deposits at March 31, 1995, resulting in an
assessment of approximately $770,000, or $508,000 after tax, which was
charged to operations in fiscal 1996.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 1999. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Savings Bank would be regulated as a bank
under federal laws which would subject it to the more restrictive activity
limits imposed on national banks. In the opinion of management, such activity
limit restrictions would not have a material effect on the Corporation's
financial position or results of operations.
Under separate legislation related to the recapitalization plan, the Savings
Bank is required to recapture as taxable income approximately $1.1 million of
its bad debt reserve, which represents the post-1987 additions to the
reserve, and will be unable to utilize the percentage of earnings method to
compute its reserve in the future. The Savings Bank has provided deferred
taxes for this amount and will be permitted to amortize the recapture of its
bad debt reserve over six years.
40
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1997, 1996 and 1995
NOTE L--CONDENSED FINANCIAL STATEMENTS OF ENTERPRISE FEDERAL BANCORP, INC.
The following condensed financial statements summarize the financial position
of Enterprise Federal Bancorp, Inc. as of September 30, 1997 and 1996 and the
results of its operations for the periods ended September 30, 1997, 1996 and
1995.
Enterprise Federal Bancorp, Inc.
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
1997 1996
--------- ---------
ASSETS
Cash and due from banks..................................................................... $ 1,357 $ 91
Loan receivable from Enterprise Federal Savings Bank........................................ -- 3,572
Loan receivable from Employee Stock Ownership Plan.......................................... 1,114 1,520
Investment in Enterprise Federal Savings Bank............................................... 28,761 27,735
Investment in North Cincinnati Savings Bank................................................. 698 --
Prepaid expense and other assets............................................................ 110 138
--------- ---------
Total assets............................................................................ $ 32,040 $ 33,056
--------- ---------
--------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
Other liabilities........................................................................... $ 616 $ --
Common stock................................................................................ 23 23
Additional paid-in capital.................................................................. 33,503 32,638
Treasury stock.............................................................................. (4,386) (3,058)
Unrealized gains on securities designated as available for sale............................. 51 235
Retained earnings........................................................................... 2,233 3,218
--------- ---------
Total liabilities and stockholders' equity.............................................. $ 32,040 $ 33,056
--------- ---------
--------- ---------
Enterprise Federal Bancorp, Inc.
STATEMENTS OF EARNINGS
Periods ended September 30,
(In thousands)
1997 1996 1995
--------- --------- ---------
Revenue
Interest and dividend income........................................................ $ 143 $ 165 $ 422
Gain on sale of investments......................................................... 86 -- --
Equity in earnings of subsidiary.................................................... 2,334 1,541 1,632
--------- --------- ---------
Total revenue..................................................................... 2,563 1,706 2,054
General and administrative expenses.................................................. 194 265 277
--------- --------- ---------
NET EARNINGS...................................................................... $ 2,369 $ 1,441 $ 1,777
--------- --------- ---------
--------- --------- ---------
41
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE L--CONDENSED FINANCIAL STATEMENTS OF ENTERPRISE FEDERAL BANCORP, INC.
(continued)
Enterprise Federal Bancorp, Inc.
STATEMENTS OF CASH FLOWS
Period ended September 30,
(In thousands)
1997 1996 1995
--------- --------- ----------
Cash provided by (used in) operating activities:
Net earnings for the period.................................................... $ 2,369 $ 1,441 $ 1,777
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities
Undistributed earnings of consolidated subsidiary.......................... (175) -- (1,632)
Dividend received from subsidiary in excess of earnings.................... -- 436 --
Gain on sale of investments................................................ (86) -- --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets.......................................... 28 (137) (1)
Other liabilities.......................................................... 616 -- --
--------- --------- ----------
Net cash provided by operating activities.............................. 2,752 1,740 144
Cash flows provided by (used in) investing activities:
Purchase of investments........................................................ (270) -- --
Proceeds from sale of investments.............................................. 356 -- --
Proceeds from repayment of loan to ESOP........................................ 406 603 236
Purchase of common shares of Enterprise Federal Savings Bank................... -- -- (13,954)
Issuance of loan to ESOP....................................................... -- -- (2,359)
Purchase of common shares of North Cincinnati Savings Bank..................... (698) -- --
Issuance of loan to Enterprise Federal Savings Bank............................ -- -- (7,000)
Repayment of loan to Enterprise Federal Savings Bank........................... 3,572 3,428 --
--------- --------- ----------
Net cash provided by (used in) investing activities.................... 3,366 4,031 (23,077)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock......................................... -- -- 26,297
Payment of dividends and distributions on common stock......................... (3,524) (5,986) --
Purchase of treasury stock..................................................... (1,328) (1,645) (1,413)
Purchase of stock for stock benefit plan....................................... -- -- (1,329)
Sale of stock for stock benefit plan........................................... -- 1,329 --
--------- --------- ----------
Net cash provided by (used in) financing activities.................... (4,852) (6,302) 23,555
Net increase (decrease) in cash and cash equivalents............................. 1,266 (531) 622
Cash and cash equivalents at beginning of period................................. 91 622 --
--------- --------- ----------
Cash and cash equivalents at end of period....................................... $ 1,357 $ 91 $ 622
--------- --------- ----------
--------- --------- ----------
42
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995
Regulations of the Office of Thrift Supervision (OTS) impose limitations
on the payment of dividends and other capital distributions by savings
associations. Under such regulations a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal
to or greater than the amount of its fully phased-in capital requirement is
generally permitted without OTS approval (but subsequent to 30 days prior
notice to the OTS of the planned dividend) to make capital distributions
during a calendar year in the amount of (i) up to 100% of its net earnings to
date during the year plus an amount equal to one-half of the amount by which
its total capital to assets ratio exceeded its fully phased-in capital to
assets ratio at the beginning of the year (ii) or 75% of its net earnings for
the most recent four quarters. Pursuant to such OTS dividend regulations, the
Savings Bank had the ability to pay dividends of approximately $5.5 million
to the Corporation at September 30, 1997.
NOTE M--STOCK OPTION PLAN
During fiscal 1995, the Board of Directors adopted a Stock Option Plan that
provided for the issuance of 226,860 shares of authorized, but unissued shares
of common stock. The Board of Directors granted options to purchase shares of
stock at an exercise price equal to the fair value of the shares on the date of
the grant, as subsequently adjusted for return of capital distribution. The plan
provides for one-fifth of the shares granted to be exercisable on each of the
first five anniversaries of the date of the Plan, commencing in November, 1994.
As of September 30, 1997 none of the stock options granted had been exercised.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the Corporation's stock option plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the accounting method
utilized in SFAS No. 123, the Corporation's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
1997 1996 1995
Net earnings........... As reported $ 2,369 $ 1,441 $ 1,837
------- ------- -------
------- ------- -------
Pro-forma $ 2,333 $ 1,403 $ 1,816
------- ------- -------
------- ------- -------
Earnings per share..... As reported $ 1.23 $ .73 $ .90
------- ------- -------
------- ------- -------
Pro-forma $ 1.21 $ .71 $ .89
------- ------- -------
------- ------- -------
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, respectively;
dividend yield of 7.0% and expected volatility of 20.0% for all years; risk-free
interest rates of 6.5% in fiscal 1997 and 6.0% in each of fiscal 1996 and 1995,
expected lives of ten years.
43
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE M--STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's fixed stock option plans as of
September 30, 1997, 1996 and 1995 and changes during the periods ending on those
dates is presented below:
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- -------- ------ --------
Outstanding at
beginning of year..... 222,324 $ 9.25 217,788 $ 9.25 -- --
Granted................. 4,536 $ 9.25 4,536 $ 9.25 217,788 $ 9.25
Exercised............... -- $ -- -- $ -- -- $ --
Forfeited............... -- $ -- -- $ -- -- $ --
------- ------ ------- ------ ------- ------
Outstanding at end
of year............... 226,860 $ 9.25 222,324 $ 9.25 217,788 $ 9.25
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Options exercisable
at year-end ........... 88,015 $ 9.25 43,554 $ 9.25 -- $N/A
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Weighted-average fair
value of options
granted during the
year.................. $ 1.77 $ 1.75 $.96
------ ------ ------
------ ------ ------
The following information applies to options outstanding at September 30,
1997:
Number outstanding................................. 226,860
Exercise price..................................... $9.25
Weighted-average exercise price.................... $9.25
Weighted-average remaining contractual life........ 7.3 years
NOTE N--CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
During fiscal 1994, the Savings Bank's Board of Directors adopted an overall
plan of conversion and reorganization (the Plan) whereby the Savings Bank would
convert to the stock form of ownership, followed by the issuance of all of the
Savings Bank's outstanding common stock to a newly formed holding company,
Enterprise Federal Bancorp, Inc. (the Corporation).
On October 14, 1994, the Savings Bank completed its conversion to the stock
form of ownership, and issued all of the Savings Bank's outstanding common
shares to the Corporation.
44
Enterprise Federal Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 1997, 1996 AND 1995 (CONTINUED)
NOTE N--CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
(continued)
In connection with the conversion, the Corporation sold 2,268,596 shares to
depositors of the Savings Bank at a price of $13.00 per share which, after
consideration of offering expenses totaling $836,000, and shares purchased by
employee stock benefit plans, resulted in net cash proceeds of $26.3 million.
At the date of the conversion, the Savings Bank established a liquidation
account in an amount equal to retained earnings reflected in the statement of
financial condition used in the conversion offering circular. The liquidation
account will be maintained for the benefit of eligible savings account holders
who maintained deposit accounts in the Savings Bank after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to the common shares. Except for the repurchase of
stock and payment of dividends by the Savings Bank, the existence of the
liquidation account will not restrict the use or further application of such
retained earnings.
The Savings Bank may not declare or pay a cash dividend on, or repurchase
any of its common shares, if the effect thereof would cause the Savings Bank's
stockholders' equity to be reduced below either the amount required for the
liquidation account or the regulatory capital requirements for insured
institutions.
NOTE O--PENDING BUSINESS COMBINATION
In July 1997, the Corporation entered into a definitive agreement to acquire
all the outstanding shares of North Cincinnati Savings Bank for consideration of
cash and common shares aggregating approximately $7.6 million. The acquisition
will be accounted for using the purchase method of accounting. Consummation of
the pending combination is anticipated in January 1998 following the receipt of
required regulatory and stockholder approval.
45
ENTERPRISE FEDERAL BANCORP, INC.
ENTERPRISE FEDERAL SAVINGS BANK
- -------------------------------------------------------------------------------
DIRECTORS OFFICERS
Otto L. Keeton Otto L. Keeton
Chairman of the Board, President and Chairman of the Board, President and
Chief Executive Officer Chief Executive Officer
Michael R. Meister Michael R. Meister
Vice President and Chief Vice President and Chief
Operating Officer Operating Officer
Terrell G. Marty Thomas J. Noe
Owner, Terry G. Marty Vice President, Chief
CLU & Associates Financial Officer and
Cincinnati, Ohio Treasurer
Edith P. Mayer Steven M. Pomeroy
Corporate Secretary, Retired Vice President and Loan Officer
Steven A. Wilson
President and Chief Operating Officer,
The Bases Group
Covington, Kentucky
William H. Kreeger
Retired
BANKING LOCATIONS
- -------------------------------------------------------------------------------
Corporate Headquarters
7810 Tylersville Square Drive
West Chester, Ohio 45069
BRANCH OFFICES
718 E. Main Street 9235 Cincinnati Columbus Road 117 Mill Street
Lebanon, Ohio Pisgah, Ohio Cincinnati, Ohio
7820 Tylersville Square 401 Wyoming Avenue
Drive West Chester, Ohio Wyoming Ohio
46
STOCKHOLDER INFORMATION
- ------------------------------------------------------------------------------
Enterprise Federal Bancorp Inc. is a unitary savings and loan holding
company conducting business through its wholly-owned subsidiary, Enterprise
Federal Savings Bank. The Bank is a federally-chartered, SAIF-insured savings
institution operating through its five full-service offices. The Company's
headquarters is located at 7810 Tylersville Square Drive, West Chester, Ohio
45069.
TRANSFER AGENT/REGISTRAR:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
STOCKHOLDER REQUESTS:
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Corporate Secretary, Enterprise Federal
Bancorp, Inc., 7810 Tylersville Square Drive, West Chester, Ohio 45069.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Registrar and
Transfer Company.
COMMON STOCK INFORMATION:
Shares of Enterprise Federal Bancorp, Inc.'s common stock are traded
nationally under the symbol "EFBI" on the Nasdaq National Market System. At
September 30, 1997, the Company had 1,985,828 shares of common stock outstanding
and had 680 stockholders of record. Such holdings do not reflect the number of
beneficial owners of common stock.
47
The following table sets forth the reported high and low sale prices of a
share of the Company's common stock as reported by Nasdaq (the common stock
commenced trading on the Nasdaq National Market System on October 17, 1994).
A $.25 per share dividend was declared on September 30, 1997, payable to
stockholders of record as of October 15, 1997.
HIGH LOW DIVIDENDS PAID*
Quarter ended
December 31, 1994............... $ 14.00 $11.25 N/A
Quarter ended
March 31, 1995.................. 14.00 12.25 N/A
Quarter ended
June 30, 1995................... 15.00 13.25 N/A
Quarter ended
September 30, 1995.............. 16.75 14.25 N/A
Quarter ended
December 31, 1995............... 18.00 13.75 $ 3.00*
Quarter ended
March 31, 1996.................. 15.75 14.25 N/A
Quarter ended
June 30, 1996................... 15.00 14.00 N/A
Quarter ended
September 30, 1996.............. 14.75 12.75 N/A
Quarter ended
December 31, 1996............... 16.00 13.75 $ 1.00
Quarter ended
March 31, 1997.................. 17.00 14.00 N/A
Quarter ended
June 30, 1997................... 19.25 15.25 $ .25
Quarter ended
September 30, 1997.............. 25.13 18.25 $ .25
*A $3.00 per share capital distribution was paid on the common stock
during the quarter ended December 31, 1995 of which $2.95 was a return of
capital and $.05 was a taxable dividend.
48