UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 0-24694
ENTERPRISE FEDERAL BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1396726
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
7810 Tylersville Square Drive
West Chester, Ohio 45069
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(Address or principal executive office) (Zip Code)
(513) 755-4600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of December 31,
1998, there were issued and outstanding 2,210,996 shares of the Registrant's
Common Stock, par value $.01 per share.
ENTERPRISE FEDERAL BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition 1
(as of December 31, 1998 (unaudited) and September 30, 1998)
Consolidated Statements of Earnings for the three months 2
ended December 31, 1998 (unaudited) and 1997 (unaudited)
Consolidated Statements of Cash Flows for the three months 3-4
ended December 31, 1998 (unaudited) and 1997 (unaudited)
Notes to unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Securities Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10-11
Signatures 12
i
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
(Unaudited)
ASSETS
Cash and due from banks $ 1,623 $ 854
Federal funds sold 17,000 --
Interest-bearing deposits in other financial institutions 9,325 7,513
----------- ---------
Cash and cash equivalents 27,948 8,367
Investment securities available for sale - at market 3,266 1,984
Mortgage-backed securities available for sale - at market 184,453 119,160
Loans receivable - net 298,556 250,922
Office premises and equipment-at depreciated cost 5,451 4,029
Federal Home Loan Bank stock - at cost 9,668 8,928
Accrued interest receivable on loans 1,292 1,017
Accrued interest receivable on mortgage-backed securities 1,261 569
Accrued interest receivable on interest-bearing deposits 175 161
Goodwill and other intangible assets 10,815 759
Prepaid expenses and other assets 391 278
Prepaid federal income taxes 776 344
----------- ---------
Total assets $ 544,052 $ 396,518
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 343,160 $ 205,829
Borrowings 159,384 150,000
Accrued interest payable 1,137 1,006
Other liabilities 504 1,466
Accrued federal income taxes 501 203
Deferred federal income taxes 621 554
----------- ---------
Total liabilities $ 505,307 $ 359,058
Commitments -- --
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value, 4,000,000 shares authorized,
2,268,596 issued 23 23
Additional paid-in capital 24,287 23,593
Less 57,600 and 282,768 shares of treasury stock - at cost (333) (333)
Less shares acquired by stock benefit plans (649) (1,315)
Retained earnings - restricted 15,108 15,113
Unrealized gains on securities designated as available
for sale, net of related tax effects 309 379
----------- ---------
Total stockholders' equity 38,745 37,460
----------- ---------
Total liabilities and stockholders' equity $ 544,052 $ 396,518
----------- ---------
----------- ---------
The accompanying notes are an integral part of these statements.
1
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except share data)
(unaudited)
Three Months Ended December 31,
--------------------------------------
1998 1997
---------------- ----------------
Interest income:
Loans $5,804 $4,138
Mortgage-backed securities 2,142 1,080
Investment securities 26 --
Interest-bearing deposits and other 552 227
---------------- ----------------
Total interest income 8,524 5,445
Interest expense:
Deposits 3,872 1,884
Borrowings 2,274 1,588
---------------- ----------------
Total interest expense 6,146 3,472
---------------- ----------------
Net interest income 2,378 1,973
Provision for losses on loans 45 45
---------------- ----------------
Net interest income after provision for losses on loans 2,333 1,928
---------------- ----------------
Other operating income:
Gain on sale of securities -- 23
Other operating income 80 45
---------------- ----------------
Total other income 80 68
---------------- ----------------
Operating expenses:
Employee compensation and benefits 898 807
Occupancy and equipment 187 96
Federal deposit insurance premiums 30 23
Franchise taxes 107 106
Data processing 72 34
Amortization of intangible assets 126 8
Other 147 135
---------------- ----------------
Total operating expenses 1,567 1,209
---------------- ----------------
Earnings before income taxes 846 787
Federal income taxes 298 271
---------------- ----------------
Net earnings $ 548 $516
---------------- ----------------
---------------- ----------------
Earnings per share:
Basic $.25 $.27
---------------- ----------------
---------------- ----------------
Diluted $.23 $.25
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---------------- ----------------
The accompanying narrative is an integral part of these statements.
2
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
(unaudited)
Three Months Ended December 31,
-------------------------------------
1998 1997
---------------- ---------------
Cash flows from operating activities:
Net earnings for the period $548 $ 516
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 54 2
Amortization of deferred loan origination fees (130) (87)
Depreciation and amortization 195 43
Provision for losses on loans 45 45
Federal Home Loan Bank Stock dividends (177) (103)
Gains on sales of securities -- (23)
Amortization of expense related to stock benefit plans 1,360 676
Increase (decrease) in cash due to change in:
Accrued interest receivable (981) (134)
Prepaid expenses and other assets (104) (65)
Accrued interest payable 131 110
Other liabilities (962) (566)
Federal income taxes
Current 298 11
Deferred (365) 137
---------------- ---------------
Net cash provided by operating activities (88) 562
Cash flows provided by (used in) investing activities:
Purchase of investment securities (282) (318)
Purchase of mortgage-backed securities (69,252) (15,676)
Principal repayments of mortgage-backed securities 16,359 916
Sale of mortgage-backed securities -- 1,573
Purchase of FHLB Stock -- (397)
Loan principal repayments 29,023 6,605
Loan disbursements 28,202 (10,839)
Purchase of office premises and equipment (68) (40)
---------------- ---------------
Acquisition of Cornerstone Bank
Deposits - Net 67,762 --
Acquisition of Security Savings
Holding Company, Inc. Common Stock - Net (6,857) --
Net cash used in investing activities 8,483 (18,176)
---------------- ---------------
3
Enterprise Federal Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
(unaudited)
Three Months Ended December 31,
-------------------------------------
1998 1997
---------------- ---------------
Net cash used in operating and investing
activities (subtotal carried forward) $ 8,395 $(17,614)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 3,739 729
Proceeds from Borrowings 8,000 25,000
Distribution to stockholders (553) (496)
-------- --------
Net cash provided by financing activities 11,186 25,233
-------- --------
Net increase in cash and cash equivalents 19,581 7,619
Cash and cash equivalents at beginning of period 8,367 11,141
-------- --------
Cash and equivalents at end of period $ 27,948 $ 18,760
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes -- $ 260
-------- --------
-------- --------
Interest on deposits and borrowings $ 6,015 $ 3,362
-------- --------
-------- --------
Supplemental Disclosure of non cash investing activities:
Unrealized gains (losses) on securities
designated as available for sales, net of taxes $ (70) $ 267
-------- --------
-------- --------
Liabilities assumed in acquisition of
deposits of Cornerstone Bank $ 72,729 $ --
Less: Fair value of assets received 68,274 --
-------- --------
Amount assigned to goodwill $ 4,455 $ --
-------- --------
-------- --------
Liabilities assumed and cash paid in
acquisition of Security Savings Holding Company, Inc. $ 87,163 $ --
Less fair value of assets received 81,504 --
-------- --------
Amount assigned to goodwill $ 5,659 $ --
-------- --------
-------- --------
The accompanying narrative is an integral part of these statements.
4
ENTERPRISE FEDERAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Note 1 - BASIS OF PRESENTATION
Enterprise Federal Bancorp, Inc. (the "Corporation") was incorporated
under Ohio law in April 1994 by Enterprise Federal Savings and Loan Association
(the "Association") in connection with the conversion of the Association from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank, to be known as Enterprise Federal Savings Bank (the "Savings
Bank"), the issuance of the Association's stock to the Corporation and the offer
and sale of the Corporation's common stock by the Corporation (the
"Conversion"). Upon consummation of the Conversion on October 14, 1994, the
Corporation became the unitary holding company for the Savings Bank.
The accompanying unaudited consolidated financial statements of the
Corporation have been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods.
The results of operations for the three months ended December 31,
1998 are not necessarily indicative of the results to be expected for the year
ending September 30, 1999. The unaudited consolidated financial statements and
notes hereto should be read in conjunction with the audited financial statements
and notes thereto for the year ended September 30, 1998, contained in the
Corporation's Form 10-K for the year ended September 30, 1998.
Note 2 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Corporation and the Savings Bank. All significant intercompany items have
been eliminated. The consolidated financial statements at December 31, 1998 and
for the three months then ended include all accounts of North Cincinnati Savings
Bank ("NCSB"), certain deposits and fixed assets acquired from Cornerstone Bank
("CB") and all accounts of Security Savings Holding Company, Inc. ("SSHC"). Each
of these transactions was accounted for as a purchase for financial reporting
purposes. Under this method of accounting, the Corporation recorded each
acquisition at its cost at the respective effective time of each acquisition
which costs included the cash paid in each merger (NCSB and SSHC only), the fair
value of the Corporation's common stock issued in each merger (NCSB only) and
all direct acquisition costs.
5
The purchase prices were allocated to the acquired assets and assumed
liabilities of NCSB, CB and SSHC, respectively, based upon their estimated fair
values at the respective effective times in accordance with generally accepted
accounting principles. The purchase prices in excess of their respective fair
values will be amortized over 15 years for financial accounting purposes.
Note 3 - EARNINGS PER SHARE
Basic earnings per share for the three month periods ended December
31, 1998 and 1997 were calculated assuming 2,181,958 and 1,904,663 shares were
issued and outstanding during the respective periods.
Diluted earnings per share for the three month periods ended
December 31, 1998 and 1997 were calculated assuming 2,363,446 and 2,035,316
shares were issued and outstanding during the respective periods.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Corporation's assets totaled $544.1 million at December 31, 1998
compared to $396.5 million at September 30, 1998. This $147.6 million or 37.2%
increase was primarily due to a $19.6 million or 234.0% increase in cash and
cash equivalents, a $47.6 million or 19.0% increase in loans receivable, net and
a $65.3 million or 54.8.% increase in mortgage-backed securities. Total
liabilities amounted to $505.3 million at December 31, 1998 compared to $359.1
million at September 30, 1998. This increase was primarily due to a $137.3
million or 66.7% increase deposits and a $9.3 million or 6.3% increase in
borrowings. The increase in total assets and liabilities at December 31, 1998
compared to September 30, 1998 primarily reflects the acquisition of certain
deposits of Cornerstone Bank in October 1998, the acquisition of Security
Savings Holding Company, Inc. in November 1998, as well as growth in the loan
and investment portfolios funded by increased deposits and borrowings. Total
stockholders' equity increased $1.3 million or 3.4% to $38.7 million at December
31, 1998 compared to $37.4 million at September 30, 1998. The increase in
stockholders' equity was primarily due to net earnings of $548,000, and stock
benefit allocations of $1.4 million, which were partially offset by decreased
unrealized gains on available for sale securities of $70,000 and dividend
distributions of $553,000.
RESULTS OF OPERATIONS
NET EARNINGS. The Corporation's net earnings amounted to $548,000 for
the three months ended December 31, 1998 compared to $516,000 for the comparable
period in 1997. The $32,000 or 6.2% increase was due primarily to a $405,000
increase in net interest income which was partially offset by a $35,800 increase
in operating expenses.
NET INTEREST INCOME. Net interest income before provision for loan
losses increased $405,000 or 20.5% to $2.3 million for the three months ended
December 31, 1998 compared to the same period in 1997. Net interest income is
determined by the Corporation's interest rate spread (i.e., the difference
between the yields earned on its interest-earning assets and the rates paid on
its interest-bearing liabilities) and the relative amounts of interest-earning
assets and interest-bearing liabilities.
INTEREST INCOME. Interest income amounted to $8.5 million for the three
months ended December 31, 1998 compared to $5.4 million for the same period in
1997. The increase of $3.1 million or 56.5% was primarily due to an increase of
$1.7 million in interest income on loans. Such increase was primarily due to an
increase in the average balance of such assets due to the acquisitions
previously discussed and increased loan demand.
7
INTEREST EXPENSE. Interest expense increased $2.7 million or 77.0% to
$6.1 million for the three months ended December 31, 1998 compared to the same
period in 1997 as a result of an increase in interest expense on both deposits
and borrowings. Interest expense on deposits increased $2.0 million or 105.5%
due to an increase in the average balance of deposits while interest expense on
borrowings increased $686,600 or 43.2% due to an increase in the average balance
of borrowings. The average balance of deposits and borrowings primarily reflects
the acquisitions previously discussed.
OTHER INCOME. Other income amounted to $80,000 and $68,000 during the
three months ended December 31, 1998 and 1997, respectively. The $12,000
increase from the 1997 period to the 1998 period was primarily due to a $35,000
increase in other operating income partially offset by a $23,000 decrease in
gains on sales of securities as a result of decreased sales activity.
OPERATING EXPENSES. Operating expenses increased $358,000 or 29.6% to
$1.6 million for the three months ended December 31, 1998 compared to $1.2
million for the three months ended December 31, 1997. Such increase was
primarily due to increases in employee compensation and benefits, occupancy and
equipment and amortization of intangible assets as a result of three separate
acquisitions in the last year.
FEDERAL INCOME TAXES. Federal income taxes amounted to $298,000 and
$271,000 for the three months ended December 31, 1998 and 1997, respectively,
resulting in effective tax rates of 35.2% and 34.4%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans and mortgage-backed securities
and funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by the movement of interest rates in
general, economic conditions and competition. The Corporation manages the
pricing of its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Corporation invests excess funds in FHLB overnight
deposits and other short-term interest-earning assets which provide liquidity to
meet lending requirements. As an additional source of funds, the Corporation has
borrowed funds from the FHLB of Cincinnati and Fifth Third Bank and has access
to the Federal Reserve Bank discount window. At December 31, 1998, the
Corporation had $151.4 million of FHLB advances outstanding and borrowings of
$8.0 million from Fifth Third Bank.
Liquidity management is both a daily and long term function. Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits. On a longer-term basis, the Corporation maintains
a strategy of investing in
8
various mortgage-backed securities and lending products. During the three month
periods ended December 31, 1998 and 1997, the Corporation used its sources of
funds primarily to meet its ongoing commitments to pay maturing savings
certificates and savings withdrawals, fund loan commitments and maintain its
portfolio of mortgage-backed securities. At December 31, 1998, the total
approved loan commitments outstanding amounted to $2.2 million. At the same
time, the Corporation had $13.0 million of commitments under unused lines and
letters of credit and the unadvanced portion of construction loans approximated
$8.8 million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1998 totaled $139.7 million. Management of the Corporation believes
that the Corporation has adequate resources, including principal prepayments and
repayments of loans and mortgage-backed securities, to fund all of its
commitments to the extent required. In addition, although the Corporation has
extended commitments to fund loans or lines and letters of credit, historically,
the Corporation has not been required to fund all of its outstanding
commitments. Management believes that a significant portion of maturing deposits
will remain with the Corporation.
The Savings Bank is required by the Office of Thrift Supervision
("OTS") to maintain average daily balances of liquid assets (as defined) in
amounts equal to 4% respectively, of net withdrawal deposits and borrowings
payable in one year or less to assure its ability to meet demand for withdrawals
and repayments of short-term borrowings. The liquidity requirements may vary
from time to time at the direction of the OTS depending upon economic conditions
and deposit flows. The Savings Bank's average monthly liquidity ratio for
December 1998 was 153%. As of December 31, 1998, the Savings Bank's regulatory
capital substantially exceeded all regulatory capital requirements as
demonstrated in the table below.
Regulatory Capital
--------------------------------------------------------------------------------
Tangible Core Risk-based
Capital Percent Capital Percent Capital Percent
--------- -------- ----------- -------- ------------ ---------
(Dollars in Thousands)
Capital under generally
accepted accounting
principles $ 42,683 $ 42,683 $ 42,683
Goodwill (10,815) (10,815) (10,815)
Unrealized gain on securities (309) (309) (309)
General valuation allowances -- -- 1,267
-----
Regulatory capital computed 31,559 5.9% 31,559 5.9% 32,826 13.3%
------ ------ ------
Minimum capital requirement 7,958 1.5 21,221 4.0 19,772 8.0
------- --- ------ --- ------ ---
Regulatory capital - excess $23,601 4.4% $10,338 1.9% $13,054 5.3%
------- --- ------- --- ------- ---
------- --- ------- --- ------- ---
YEAR 2000. The Company out sources its primary data processing
functions. A challenging problem exists as the millennium ("year 2000")
approaches as many computer systems worldwide do not have the capability of
recognizing the year 2000 or years thereafter. To date, the Company has received
confirmations from its primary vendors that plans have been developed by them to
address and correct the issues associated with the year 2000 problem.
9
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data 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 as measured by the
consumer price index.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and
information relating to the Corporation that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. In addition, in those and other portions of this document, the words
"anticipate," "believe," "except," "intend," "should" and similar expressions,
or the negative thereof, as they relate to the Corporation or the Corporation's
management, are intended to identify forward-looking statements. Such statements
reflect the current views of the Corporation with respect to future looking
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. The
Corporation does not intend to update these forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Corporation's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Savings Bank's portfolio equity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Form 10-K for the year ended September 30, 1998. There has been no material
change in the Corporation's asset liability position or market value of
portfolio equity since September 30, 1998.
10
ENTERPRISE FEDERAL BANCORP, INC. AND SUBSIDIARY
PART II
Item 1. LEGAL PROCEEDINGS
Neither the Corporation nor the Savings Bank is involved in
any pending legal proceedings other than non-material legal
proceedings occurring in the ordinary course of business.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
Item 5. OTHER INFORMATION
On September 25, 1998, the Corporation entered into an
affiliation agreement with Fifth Third Bancorp which sets
forth the terms and conditions under which the Corporation
will merge with and into Fifth Third (the "Merger"). The
agreement provides that upon consummation of the Merger,
each issued and outstanding share of Corporation common
stock shall, by virtue of the Merger, be converted into and
represent the right to reserve .68516 shares of common stock
of Fifth Third. The agreement was set forth in an exhibit to
the Corporation's Form 8-K filed on October 28, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
11
b. Reports on Form 8-K
1. On October 28, 1998, the Corporation filed a Form 8-K
to report under Item 5 the execution of an
affiliation agreement which provides for the Merger
of the Corporation with Fifth Third. No financial
statements were filed.
2. On November 25, 1998, the Corporation filed a Form
8-K under Item 2 to report the consummation of the
acquisition of certain assets and liabilities of
Cornerstone Bank. No financial statements were filed.
3. On November 25, 1998, the Corporation filed a Form
8-K under Item 5 to report the consummation of the
acquisition of Security Savings Holding Company, Inc.
No financial statements were filed.
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE FEDERAL BANCORP, INC.
Date: FEBRUARY 12, 1999 By: /S/ OTTO L. KEETON
------------------------ ------------------------------------
Otto L. Keeton
President & Chief Executive Officer
Date: FEBRUARY 12, 1999 By: /S/ THOMAS J. NOE
------------------------ ------------------------------------
Thomas J. Noe
Vice President and Chief Financial Officer
13