<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-21297
FOUNDATION BANCORP, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Ohio 31-1465239
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Garfield Place, Cincinnati, Ohio 45202
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 721-0120
----------------
Securities registered pursuant to Section 12(b) of the Act:
None None
------------------ ---------------------
(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value per share
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the price of shares of the
Registrant in the most recent trade reported by the National Daily Quotation
Service, as of September 1, 1997, was $1,597,553. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
registrant).
As of September 15, 1997, there were 462,875 of the Registrant's common
shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of 1997 Annual Report to
Shareholders Part III of Form 10-KSB - Portions of Proxy Statement for
the 1997 Annual Meeting of Shareholders
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Foundation Bancorp, Inc. (the "Company") was incorporated under Ohio
law in April 1996 at the direction of the Board of Directors of Foundation
Savings Bank ("Foundation") for the purpose of purchasing all of the capital
stock of Foundation to be issued in connection with the conversion of Foundation
from mutual to stock form (the "Conversion"). On September 25, 1996, the
effective date of the Conversion, the Company acquired 100 common shares of
Foundation. The principal business of the Company since the effective date of
the Conversion has been holding all of the issued and outstanding shares of
Foundation.
Foundation is a permanent capital stock savings and loan association
which was organized under Ohio law in 1888 as "The Foundation Building and Loan
Company." In February 1942, the name of Foundation was changed to "The
Foundation Savings and Loan Company" and in October 1990 Foundation adopted its
present name. As an Ohio savings and loan association, Foundation is subject to
supervision and regulation by the Office of Thrift Supervision (the "OTS"), the
Ohio Department of Commerce, Division of Financial Institutions (the
"Division"), and the Federal Deposit Insurance Corporation (the "FDIC").
Foundation is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati
and the deposits of Foundation are insured up to applicable limits by the FDIC
in the Savings Association Insurance Fund (the "SAIF").
Foundation conducts business from its office at 25 Garfield Place in
Cincinnati, Ohio. The principal business of Foundation is the origination of
permanent mortgage loans secured by first mortgages on one- to four-family
residential real estate. Foundation also originates mortgage loans secured by
multifamily real estate (over four units) and nonresidential real estate. In
addition to real estate lending, Foundation originates a limited number of
secured and unsecured consumer loans. For liquidity and interest rate risk
management purposes, Foundation invests in interest-bearing deposits in other
financial institutions, U.S. Government and agency obligations, mortgage-backed
securities and other investments permitted by applicable law. Funds for lending
and other investment activities are obtained primarily from savings deposits,
which are insured up to applicable limits by the FDIC, and principal repayments
on loans. Advances from the FHLB of Cincinnati are utilized from time to time
when other sources of funds are inadequate to fund loan demand.
Interest on loans and investments is Foundation's primary source of
income. Foundation's principal expense is interest paid on deposit accounts.
Operating results are dependent to a significant degree on the net interest
income of Foundation, which is the difference between interest income earned on
loans, mortgage-backed securities and other investments and interest paid on
deposits and borrowings. Like most thrift institutions, Foundation's interest
income and interest expense are significantly affected by general economic
conditions and by the policies of various regulatory authorities.
MARKET AREA
Foundation conducts business from its office in downtown Cincinnati,
Ohio. Foundation's primary market area for lending and deposit activity is
Hamilton County, Ohio. Foundation also frequently receives deposits from, and
makes loans to, customers in the contiguous Ohio counties of Clermont, Butler
and Warren and the Kentucky counties of Kenton and Boone.
LENDING ACTIVITIES
GENERAL. Foundation's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family homes located in
Foundation's primary market area. Loans secured by multifamily properties
containing five units or more and nonresidential properties are also offered by
Foundation. Foundation does not originate first mortgage loans insured by the
Federal Housing Authority or guaranteed by the Veterans Administration. In
addition to real estate lending, Foundation originates a limited number of
consumer loans, including loans secured by deposit accounts, automobile loans
and unsecured loans.
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<PAGE> 3
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information regarding the composition of the loan portfolio of Foundation at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------
1997 1996
----------------------------- ------------------------------
Percent Percent
of total of total
Amount loans Amount loans
------ -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $23,817 91.82% $20,950 90.04%
Nonresidential 1,118 4.31 1,287 5.53
Multifamily 968 3.73 903 3.88
Consumer loans:
Passbook loans 27 0.10 56 0.24
Other consumer loans 389 1.50 296 1.27
------- ------ ------- ------
Total loans $26,319 101.46% $23,492 100.97%
======= ====== ======= ======
Less:
Loans in process 237 0.91 89 0.38
Allowance for loan losses 126 0.49 111 0.48
Deferred loan fees 17 0.07 25 0.11
------- ------ ------- ------
Net loans $25,939 100.00% $23,267 100.00%
======= ====== ======= ======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
June 30, 1997, regarding the dollar amount of loans maturing in the portfolio of
Foundation based on their contractual terms to maturity. Demand loans, home
equity loans and other loans having no stated schedule of repayments or no
stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due 4-5 Due 6-10 Due 11-20 Due more
June 30, years years years than 20
---------------------------- after after after years after
1998 1999 2000 6/30/97 6/30/97 6/30/97 6/30/97 Total
---- ---- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $576 $728 $799 $1,694 $4,469 $4,605 $10,709 $23,580
Multifamily 30 39 43 95 279 351 131 968
Nonresidential 50 57 57 101 336 387 130 1,118
Consumer loans 271 43 61 41 - - - 416
---- ---- ---- ------ ------ ------ ------- -------
Total $927 $867 $960 $1,931 $5,084 $5,343 $10,970 $26,082
==== ==== ==== ====== ====== ====== ======= =======
</TABLE>
The table below sets forth the dollar amount of all loans due after one
year from June 30, 1997, which have predetermined interest rates and loans which
have floating or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
June 30, 1997
----------------------------
(In thousands)
<S> <C>
Fixed rates of interest $15,059
Adjustable rates of interest 10,096
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of Foundation is the origination of permanent conventional loans
secured by one- to four-family residences, primarily single-family residences,
located within Foundation's primary market area. Each of such loans is secured
by a first mortgage on the underlying real
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<PAGE> 4
estate and improvements thereon, if any. At June 30, 1997, Foundation's one- to
four-family residential real estate loan portfolio was approximately $23.8
million, or 91.8% of total loans.
OTS regulations and Ohio law limit the amount which Foundation may lend
in relationship to the appraised value at the time of loan origination of the
real estate and improvements which will serve as collateral for the loan. In
accordance with such regulations and laws, Foundation typically makes loans on
owner-occupied one- to four-family residences of up to 80% of the value of the
real estate and improvements (the "Loan-to-Value Ratio" or "LTV"), although
Foundation occasionally makes loans with higher LTVs. Since 1994, Foundation has
required that the principal amount of any loan which exceeds 80% LTV at the time
of origination be covered by private mortgage insurance at the expense of the
borrower. Foundation makes loans on non-owner-occupied or investment properties
with maximum LTVs of 75%.
Fixed-rate loans are offered by Foundation, currently for terms of up
to 30 years. Adjustable-rate residential real estate loans ("ARMs") are also
offered by Foundation for terms of up to 30 years. The interest rate adjustment
periods on ARMs are one and three years, with adjustments tied to the one-year
and three-year U.S. Treasury bill rate. In addition, Foundation offers loans on
which the interest rates remain fixed for a period of three, five, seven or ten
years and then adjust annually according to the one-year U.S. Treasury bill
rate. The new interest rate at each change date is determined by adding 2.5% to
3.0% to the prevailing index. The maximum allowable adjustment at each
adjustment date is 2%, with a maximum adjustment of 6% over the term of the
loan.
The initial rate on ARMs originated by Foundation is sometimes less
than the sum of the index at the time of origination plus the specified margin.
Such loans may be subject to greater risk of default as the interest rate
adjusts to the fully-indexed level. Foundation attempts to reduce the risks by
underwriting such loans on the basis of the payment amount the borrower will be
required to pay, assuming the maximum possible rate increase at the first
adjustment date.
Adjustable-rate loans decrease Foundation's interest rate risk but
involve other risks, primarily credit risk, because as interest rates rise the
payment by the borrower rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. Foundation believes that these risks have not had a material
adverse effect on Foundation to date.
LOANS SECURED BY MULTIFAMILY REAL ESTATE. In addition to loans secured
by one- to four-family properties, Foundation originates loans secured by
multifamily properties containing over four units. Multifamily loans are offered
with fixed or adjustable rates for terms of up to 20 years and have maximum LTVs
of 75%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Foundation attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Foundation requests that borrowers submit rent
rolls and financial statements annually to enable Foundation to monitor loans
secured by multifamily properties.
At June 30, 1997, loans secured by multifamily properties totaled
approximately $968,000, or 3.7% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At June 30, 1997,
approximately $1.1 million, or 4.31%, of Foundation's total loans were secured
by permanent mortgages on nonresidential real estate. Such loans have both fixed
and adjustable rates, terms of up to 20 years and LTVs of up to 70%. Among the
properties securing nonresidential real estate loans are office buildings and
other nonresidential properties located in Foundation's primary market area.
Although loans secured by nonresidential real estate typically have
higher interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Foundation has endeavored to reduce
such risk by limiting loan amounts and evaluating the credit history, past
performance, and financial condition of the borrower, the location of the real
estate securing the loan, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation and
by obtaining personal guarantees from borrowers.
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<PAGE> 5
COMMERCIAL LOANS. In the past, Foundation has made commercial loans to
businesses in its primary market area. Such loans are typically secured by a
security interest in inventory, accounts receivable or other assets of the
borrower. At June 30, 1997, Foundation had no commercial loans in its portfolio.
CONSUMER LOANS. Foundation occasionally makes various types of consumer
loans, including loans made to depositors and secured by their deposit accounts,
automobile loans and other secured loans and unsecured personal loans. Consumer
loans are made at fixed rates of interest and for terms of up to five years. At
June 30, 1997, Foundation had approximately $416,000, or 1.6% of total loans,
invested in consumer loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by rapidly depreciating assets, such as automobiles, may entail greater
risk than residential real estate loans. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors and
borrowers, solicitations by Foundation's lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by a loan
originator. Foundation typically obtains a credit report, verification of
employment and other documentation concerning the creditworthiness of the
borrower. An appraisal of the fair market value of the real estate which will
secure the loan is prepared by a fee appraiser approved by the Board of
Directors. Upon the completion of the appraisal and the receipt of information
on the credit history of the borrower, the loan application is submitted for
review in accordance with Foundation's underwriting guidelines. Loans of amounts
less than $250,000 and which meet secondary market standards may be approved by
management, while loans of amounts greater than $250,000 or which do not meet
secondary market standards must be submitted to the full Board of Directors.
Under Foundation's loan guidelines, if a real estate loan application
is approved, title insurance is obtained on the real estate which will secure
the mortgage loan. Borrowers are required to carry satisfactory fire and
casualty insurance and flood insurance, if applicable, and to name Foundation as
an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs.
Foundation also evaluates the feasibility of the proposed construction project
and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
LOAN ORIGINATIONS, PURCHASES AND SALES. Foundation has sold a limited
number of loans in the secondary market in recent years. Foundation sells loans
in order to improve its liquidity or to manage its interest rate risk.
Foundation has released the right to service virtually all of the loans it has
sold.
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<PAGE> 6
The following table presents the loan origination activity of
Foundation for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1997 1996
------ ------
(In thousands)
<S> <C> <C>
Loans receivable-beginning of period $23,267 $20,511
Loans originated:
One- to four-family residential 7,210 7,954
Nonresidential 58 304
Multifamily 120 329
Consumer 264 119
------- -------
Total loans originated 7,652 8,706
Reductions:
Principal repayments 3,748 5,194
Loans sold 1,077 692
------- -------
Total reductions 4,825 5,886
Other items, net (1) (155) (64)
------- -------
Loans receivable, end of period $25,939 $23,267
======= =======
- -----------------------------
<FN>
(1) Other items consist of loans in process, deferred loan fees and
allowances for loan losses
</TABLE>
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's (i) core capital and supplementary
capital, as defined in the regulations, plus (ii) any loan loss reserves not
already included in the calculation of supplementary capital, and (iii) the
amount of loans and advances to the association's subsidiaries not already
included in the calculation of core capital (collectively, "Lending Limit
Capital"). A savings association may lend to one borrower an additional amount
not to exceed 10% of the association's Lending Limit Capital, if the additional
amount is fully secured by certain forms of "readily marketable collateral."
Real estate is not considered "readily marketable collateral." In applying this
limit, the regulations require that loans to certain related or affiliated
borrowers be aggregated.
Based on such limits, Foundation was able to lend $848,700 to one
borrower at June 30, 1997. The largest amount Foundation had outstanding to one
borrower and related persons or entities at June 30, 1997, was approximately
$445,000, consisting of two loans, the largest of which was approximately
$295,000. Each of such loans is secured by residential real estate and is
performing in accordance with its terms.
LOAN ORIGINATION AND OTHER FEES. Foundation realizes loan origination
fees and other fee income from its lending activities and also realizes income
from late payment charges, application fees and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement of
Financial Accounting Standards No. 91 as an adjustment to yield over the life of
the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS.
Foundation attempts to maintain a high level of asset quality through sound
underwriting policies and aggressive collection efforts.
A borrower who becomes one to 30 days delinquent is not considered
seriously delinquent unless delinquency at such level continues for several
months, in which case the borrower is treated as chronically delinquent.
Chronically delinquent borrowers are referred to debt counseling, are advised to
consider selling the subject property and, if such efforts are unsuccessful,
foreclosure proceedings are initiated. In the absence of chronic delinquency, a
borrower who is one to 30 days delinquent receives a delinquency notice at the
end of the month. A borrower who is 30 to 59 days delinquent for two consecutive
months or who is 60 to 89 days delinquent receives a telephone call or a
personalized letter. A borrower who becomes more than 90 days delinquent
receives a default notice and, absent corrective action, foreclosure proceedings
are instituted.
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<PAGE> 7
The following table reflects the amount of Foundation's loans in a
delinquent status as of the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------
1997 1996
--------------------------------- --------------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 1 $71 0.27% 4 $149 0.64%
60 - 89 days - - - 2 121 0.52
90 days and over 1 1 .01 - - -
- ----- ------ -- -------- -------
Total delinquent
loans 2 $72 0.28% 6 $270 1.16%
= === ==== = ==== ====
</TABLE>
Nonperforming assets include nonaccruing loans, accruing loans which
are delinquent 90 days or more, real estate acquired by foreclosure or by
deed-in-lieu thereof, in-substance foreclosures and repossessed assets.
Foundation ceases to accrue interest on real estate loans when the value of
collateral becomes inadequate, in the opinion of management, to cover the
outstanding principal and interest.
The following table sets forth information with respect to the accrual
and nonaccrual status of Foundation's loans and other nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Accruing loans delinquent 90+ days $ - $ -
Nonperforming loans $ - $ -
======= =======
Real estate owned - -
------- -------
Total nonperforming assets $ - $ -
======= =======
Allowance for loan losses $ 126 $ 111
======= =======
Nonperforming assets as a percent of total assets 0.00% 0.00%
Nonperforming loans as a percent of total loans 0.00% 0.00%
Allowance for loan losses as a percent of
nonperforming loans 0.00% 0.00%
</TABLE>
For the year ended June 30, 1997, Foundation had no gross interest
income which would have been recorded had nonaccruing loans been current in
accordance with their original terms.
Real estate acquired by Foundation as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. When
property is so acquired it is recorded by Foundation at the estimated fair value
of the real estate at the date of acquisition, less estimated selling expenses,
and any write-down resulting therefrom is charged to the allowance for loan
losses. Interest accrual, if any, ceases no later than the date of acquisition
of the real estate and all costs incurred from such date in maintaining the
property are expensed. Costs relating to the development and improvement of the
property are capitalized to the extent of fair value.
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<PAGE> 8
Foundation classifies its own assets on a quarterly basis in accordance
with federal regulations. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that Foundation will sustain
some loss if the deficiencies are not corrected. "Doubtful" assets have the same
weaknesses as "substandard" assets, with the additional characteristics that (i)
the weaknesses make collection or liquidation in full questionable, on the basis
of currently existing facts, conditions and values, and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of Foundation is not
warranted.
The aggregate amounts of Foundation's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Special mention $216 $ -
Substandard - 305
Doubtful - -
Loss - -
---- ----
Total classified assets $216 $305
==== ====
</TABLE>
Foundation establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, Foundation must either establish a specific allowance for
loss in the amount of 100% of the portion of the asset classified loss or charge
off the amount of the loss classification. Generally, Foundation has elected to
charge off the portion of any real estate loan deemed to be uncollectible.
Foundation analyzes each classified asset on a quarterly basis to
determine whether changes in the classifications are appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the use
of the real estate securing the loan, the status of the borrower and the
appraised value of the real estate. As such factors change, the classification
of the asset will change accordingly.
ALLOWANCE FOR LOAN LOSSES. Management, with oversight by the Board of
Directors, reviews on a quarterly basis the allowance for loan losses as it
relates to a number of relevant factors, including but not limited to, trends in
the level of delinquent and nonperforming assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a lesser
extent, management also considers loan concentrations to single borrowers and
changes in the composition of the loan portfolio. While management believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments and net income
could be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
The foregoing statement regarding the adequacy of the allowance for
loan losses is a "forward-looking" statement within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Factors that could affect the adequacy of the
loan loss allowance include, but are not limited to, the following: (1) changes
in the national and local economy which may negatively impact the ability of
borrowers to repay their loans and which may cause the value of real estate and
other properties that secure outstanding loans to decline; (2) unforeseen
adverse changes in circumstances with respect to certain large loans; (3)
decreases in the value of collateral securing consumer loans to amounts less
than the outstanding balances of the consumer loans; and (4) determinations by
various regulatory agencies that the Association must recognize additions to its
loan loss allowance based on such regulators' judgment of information available
to them at the time of their examinations.
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<PAGE> 9
The following table sets forth an analysis of Foundation's allowance
for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1997 1996
------ ------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 111 $ 98
Charge-offs (1) - (31)
Recoveries (1) - (-)
----- -----
Net (charge-offs) recoveries (1) - (31)
Provision for loan losses 15 44
----- -----
Balance at end of period $ 126 $ 111
===== =====
Ratio of net (charge-offs) recoveries
to average loans outstanding
during the period - (0.13)%
Ratio of allowance for loan losses
to total loans 0.49% 0.48%
- -----------------------------
<FN>
(1) All charge-offs and recoveries relate to loans secured by one- to
four-family real estate.
</TABLE>
Management does not allocate portions of the allowance for loan losses
to particular types of loans.
INVESTMENT ACTIVITIES
Federal regulations and Ohio law permit Foundation to invest in
interest-bearing deposits in other financial institutions, U.S. Treasury and
agency obligations, mortgage-backed securities and certain other specified
investments. The Board of Directors of Foundation has adopted an investment
policy which authorizes management, under the supervision of the Investment
Committee of the Board, to make investments in U.S. Government and agency
securities, deposits in the FHLB, certificates of deposit in federally-insured
financial institutions, banker's acceptances issued by major U.S. banks,
corporate debt securities rated by a major statistical rating firm as at least
"AA," or equivalent, and municipal or other tax free obligations. Laird L.
Lazelle, Foundation's President, Michael S. Schwartz, the Chairman of the Board
and Dianne K. Rabe, its Vice President, have primary responsibility for
implementation of the investment policy. Foundation's investment policy is
designed primarily to provide and maintain liquidity within regulatory
guidelines, to maintain a balance of high quality investments to minimize risk
and to maximize return without sacrificing liquidity and safety.
The following table sets forth the composition of Foundation's
interest-bearing deposits and investment securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
Carrying value Fair value Carrying value Fair value
-------------- ---------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits $ 54 $ 54 $ 80 $ 80
Certificates of deposit - - - -
Investment securities:
Federal funds 3,065 3,065 1,032 1,032
U.S. Government obligations 946 949 900 901
FHLB stock 299 299 279 279
Mortgage-backed securities 4,288 4,168 4,641 4,554
------ ------ ------ ------
Total investments $8,652 $8,535 $6,932 $6,846
====== ====== ====== ======
</TABLE>
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<PAGE> 10
The maturities of Foundation's interest-bearing deposits and investment
securities at June 30, 1997, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years Total
------------------ ----------------- ------------------ ------------------ ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Weighted
value yield value yield value yield value yield value average yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 54 6.10% $ - -% $ - -% $ - -% $ 54 6.10%
Investment securities:
Federal funds 3,065 5.63 - - - - - - 3,065 5.63
U.S. Government
obligations - - 946 6.76 - - - - 946 6.76
Mortgage-backed 134 7.16 58 7.31 83 7.02 4,013 6.13 4,288 6.20
securities
FHLB stock - - - - - - 299 7.25 299 7.25
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $3,253 5.70% $1,004 6.79% $ 83 7.02% $4,312 6.21% $8,652 6.09%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
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<PAGE> 11
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of
Foundation's funds for use in lending and other investment activities. In
addition to deposits, Foundation derives funds from interest payments and
principal repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
in response to prevailing interest rates and money market conditions. Foundation
also utilizes FHLB advances as an alternative source of funds.
DEPOSITS. Deposits are attracted principally from within Foundation's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, regular passbook savings accounts, term certificate accounts, IRAs and
Keogh accounts. Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by
management of Foundation based on Foundation's liquidity requirements, growth
goals and interest rates paid by competitors. Foundation does not use brokers to
attract deposits. The amount of deposits at Foundation from outside its primary
market area is not significant.
At June 30, 1997, Foundation's certificates of deposit totaled $24.8
million, or 90.8% of total deposits. Of such amount, approximately $15.2 million
in certificates of deposit mature within one year. Based on past experience and
Foundation's prevailing pricing strategies, management believes that a
substantial percentage of such certificates will be renewed with Foundation at
maturity. If there is a significant deviation from historical experience,
Foundation can utilize borrowings from the FHLB of Cincinnati as an alternative
source of funds.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Foundation at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1997 1996
------------------------ -------------------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
Passbook savings accounts (1) $ 791 2.90% $ 996 3.70%
NOW and money market accounts (2) 1,733 6.35 1,947 7.22
------- ------ ------- ------
Total transaction accounts 2,524 9.25 2,943 10.92
Certificates of deposit
3.00% or less 50 0.18 102 0.38
3.01 - 5.00% 347 1.27 1,546 5.74
5.01 - 7.00% 24,371 89.30 22,221 82.45
7.01 - 9.00% - - 139 0.52
------- ------ ------- ------
Total certificates of deposit (3) 24,768 90.75 24,008 89.08
------- ------ ------- ------
Total deposits $27,292 100.00% $26,951 100.00%
======= ====== ======= ======
- -----------------------------
<FN>
(1) The weighted average rate on passbook savings accounts was 2.56% and
2.50% at June 30, 1997 and 1996, respectively.
(2) The weighted average rate on NOW and money market accounts was 2.45%
and 2.49% at June 30, 1997 and 1996, respectively.
(3) The weighted average rate on all certificates of deposit was 5.94% and
5.82% at June 30, 1997 and 1996, respectively.
</TABLE>
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<PAGE> 12
The following table shows rate and maturity information for
Foundation's certificates of deposit at June 30, 1997:
<TABLE>
<CAPTION>
Amount due
----------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- -------- -------- -------- -----
(In thousands)
<C> <C> <C> <C> <C> <C>
3.00% or less $ 50 $ - $ - $ - $ 50
3.01% to 5.00% 147 200 - - 347
Over 5.01% 15,004 7,540 727 1,100 24,371
------ ----- --- ----- ------
Total certificates of deposit $15,201 $7,740 $727 $1,100 $24,768
======= ====== ==== ====== =======
</TABLE>
The following table presents the amount of Foundation's certificates of
deposit of $100,000 or more by the time remaining until maturity at June 30,
1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 589
Over 3 months to 6 months 871
Over 6 months to 12 months 531
Over 12 months 551
------
Total $2,542
======
</TABLE>
The following table sets forth Foundation's deposit account balance
activity for the fiscal years ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Beginning balance $ 26,951 $ 27,737
Net increase(decrease) before
interest credited (1,146) (2,326)
Interest credited 1,487 1,540
-------- --------
Ending balance $ 27,292 $ 26,951
======== ========
Net increase (decrease) $ 341 $ (786)
======== ========
</TABLE>
BORROWINGS. The FHLB functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions. As
a member in good standing of the FHLB of Cincinnati, Foundation is authorized to
apply for advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender Test (the "QTL Test"). If an association meets
the QTL Test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, it will be
eligible for such advances only to the extent it holds specified QTL Test
assets. At June 30, 1997, Foundation was in compliance with the QTL Test.
-11-
<PAGE> 13
During the year ended June 30, 1997, Foundation obtained advances from
the FHLB of Cincinnati as indicated in the following table:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------
1997 1996
------- ------
(Dollars in thousands)
<S> <C> <C>
Average balance outstanding $790 $906
Maximum amount outstanding at any month end during
the period 819 1,186
Balance outstanding at end of period 754 825
Weighted average interest rate during the period 5.50% 5.63%
Weighted average interest rate at end of period 5.50% 5.50%
</TABLE>
COMPETITION
Foundation competes for deposits with other savings associations,
savings banks, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Foundation competes with other
savings associations, savings banks, commercial banks, mortgage brokers,
consumer finance companies, credit unions, leasing companies and other lenders.
Foundation competes for loan originations primarily through the interest rates
and loan fees it charges and through the efficiency and quality of services it
provides to borrowers.
Competition in Hamilton County is intense due to the number of
financial institutions serving the area. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. Foundation does not offer all of the products and services offered
by some of its competitors, particularly commercial banks. Foundation monitors
the product offerings of its competitors and adds new products when it can do so
competitively and cost effectively. Foundation's deposit market share in
Hamilton County is negligible.
The size of financial institutions competing with Foundation is likely
to increase as a result of changes in statutes and regulations eliminating
various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon
Foundation.
EMPLOYEES
As of June 30, 1997, Foundation had eight full-time employees and no
part-time employees.
REGULATION
GENERAL
The Company is a savings and loan holding company within the meaning of
the Home Owners Loan Act, as amended (the "HOLA"). Consequently, the Company is
subject to regulation, examination and oversight by the OTS and must submit
periodic reports to the OTS concerning its activities and financial condition.
In addition, as a corporation organized under Ohio law, the Company is subject
to provisions of the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Foundation is subject to regulation, examination and oversight by the
Superintendent of the Division (the "Ohio Superintendent"). Because Foundation's
deposits are insured by the FDIC, Foundation also is subject to regulatory
oversight by the FDIC. Foundation must file periodic reports with the OTS
concerning its activities and financial condition. Examinations are conducted
periodically by federal and state regulators to determine whether Foundation is
in compliance with various regulatory requirements and is operating in a safe
and sound manner. Foundation is a member of the FHLB and is subject to certain
regulations promulgated by the Board of Governors of the Federal Reserve System
(the "FRB").
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<PAGE> 14
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations, and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all federally-chartered
financial institutions. Pursuant to such legislation, Congress may eliminate the
OTS and Foundation may be regulated under federal law as a bank or be required
to change its charter. Such change in regulation or charter would likely change
the range of activities in which Foundation may engage and would probably
subject Foundation to more regulation by the FDIC. In addition, the Company
might become subject to a different set of holding company regulations limiting
the activities in which the Company may engage and subjecting the Company to
additional regulatory requirements, including separate capital requirements. At
this time, the Company cannot predict when or whether Congress may actually pass
legislation regarding the Company's and Foundation's regulatory requirements or
charter. Although such legislation, if enacted, may change the activities in
which the Company or Foundation are authorized to engage, it is not anticipated
that the current activities of either the Company or Foundation will be
materially affected by those activity limits.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
the Company nor Foundation has opted out of the protection afforded by Chapter
1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Section 1701.041 of the Ohio Revised Code (the
"Takeover Bid Statute") provides that no offeror may make a takeover bid for an
Ohio corporation, including a savings and loan association, unless (i) at least
20 days prior thereto the offeror announces publicly the terms of the proposed
takeover bid and files with the Ohio Division of Securities (the "Securities
Division") and provides the target company with certain information regarding
the offeror, his ownership of the company's shares and his plans for the
company, and (ii) within ten days following such filing either (a) no hearing is
required by the Securities Division, (b) a hearing is requested by the target
company within such time but the Securities Division finds no cause for hearing
exists, or (c) a hearing is ordered and upon such hearing the Securities
Division adjudicates that the offeror proposes to make full, fair and effective
disclosure to offers of all information material to a decision to accept or
reject the offer.
-13-
<PAGE> 15
The Takeover Bid Statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Takeover Bid Statute is preempted by federal regulation.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, Foundation is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area.
REGULATORY CAPITAL REQUIREMENTS. Foundation is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk.
Foundation does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Foundation includes a general loan loss allowance of
$126,147 at June 30, 1997.
-14-
<PAGE> 16
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to the interest rate risk component, a savings association
will have to measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the methodology
of the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets and a
risk-based capital ratio in excess of 12% will not be subject to the interest
rate risk component. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individualized basis to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (1) well-capitalized associations are those
that have total risk-based capital of at least 10%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of at
least 6% and core capital of at least 5%; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8%, core risk-based capital of 4% and core capital of 4% (except for
associations receiving the highest examination rating, in which case the level
is 3%) but are not well-capitalized; (3) undercapitalized associations are those
that do not meet regulatory limits, but that are not significantly
undercapitalized; (4) significantly undercapitalized associations have total
risk-based capital of less than 6%, core risk-based capital of less than 3% or
core capital of less than 3%; and (5) critically undercapitalized associations
are those with tangible capital of 2% or less of total assets. In addition, the
OTS generally can downgrade an association's capital category, notwithstanding
its capital level, if, after notice and opportunity for hearing, the association
is deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. Foundation's capital at June 30, 1997, met the standards
for a well-capitalized institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
LIQUIDITY. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each association to maintain an average daily
balance of short-term liquid assets of not less than 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Foundation at June 30, 1997,
was approximately $4.9 million, or 17.5%, and exceeded the then applicable 5.0%
liquidity requirement by approximately $3.7 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans and stock issued by any FHLB, the FHLMC
or the FNMA. Under such test, 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to
-15-
<PAGE> 17
conduct business and 20% of liquid assets) must consist of QTI on a monthly
average basis in nine out of every 12 months. Effective September 30, 1996, a
savings association may also qualify as a QTL by meeting the definition of
"domestic building and loan association" under the Internal Revenue Code of
1986, as amended (the "Code"). In order for an institution to meet the
definition of a "domestic building and loan association" under the Code, at
least 60% of such institution's assets must consist of specified types of
property, including cash loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL test under certain circumstances. If a savings association
fails to meet the QTL test, the association and its holding company become
subject to certain operating and regulatory restrictions. A savings association
that fails to meet the QTL test will not be eligible for new FHLB advances. At
June 30, 1997, Foundation met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At June 30, 1997, Foundation was in compliance with
this lending limit.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Foundation was in compliance with such
restrictions at June 30, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. The
Company is an affiliate of Foundation. Generally, Sections 23A and 23B of the
FRA (i) limit the extent to which a savings association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, (ii) limit the aggregate of
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchasing of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. Foundation was in
compliance with these requirements and restrictions at June 30, 1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
from mutual to stock form is prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. Foundation meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision.
-16-
<PAGE> 18
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four quarters. Tier 3 associations do
not meet current minimum capital requirements and must obtain OTS approval of
any capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
As a subsidiary of the Company, Foundation is required to give the OTS
30 days' notice prior to declaring any dividend on its stock. The OTS may object
to the distribution during such 30-day period based on safety and soundness
concerns. Foundation paid no dividends to the Company during fiscal 1997.
HOLDING COMPANY REGULATION. The Company is a savings and loan holding
company within the meaning of the HOLA. As such, the Company has registered with
the OTS and is subject to OTS regulations, examination, supervision and
reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
Company. Except with the prior approval of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such holding company's stock may also acquire control
of any savings institution, other than a subsidiary institution, or any other
savings and loan holding company.
As a unitary savings and loan holding company, the Company generally
has no restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit the Company's ability to engage in these activities. It cannot
be predicted whether and in what form these proposals might become law. However,
such limits would not impact the Company's current activities, which consist
solely of holding stock of Foundation. The broad latitude to engage in
activities under current law can be restricted. If the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the OTS
may impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the Company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At June 30, 1997, Foundation met both those tests.
If the Company acquired control of another savings institution, other
than through a merger or other business combination with Foundation, the Company
would become a multiple savings and loan holding company. Unless the acquisition
was an emergency thrift acquisition and each subsidiary savings association met
the QTL test, the activities of the Company and any of its subsidiaries (other
than Foundation or other subsidiary savings associations) would thereafter be
subject to activity restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof that is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by federal regulation as of March 5, 1987, to be engaged in
by multiple holding companies, or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the OTS prior
to being engaged in by a multiple holding company.
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<PAGE> 19
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF THE COMPANY AND
FOUNDATION. In addition to the Ohio law limitations on the merger and
acquisition of Foundation and the Company, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent federal
law and regulations, no person, directly or indirectly, or acting in concert
with others, may acquire control of Foundation or the Company without 60 days'
prior notice to the OTS. "Control" is generally defined as having more than 25%
ownership or voting power; however, ownership or voting power of more than 10%
may be deemed "control" if certain factors are in place. If the acquisition of
control is by a company, the acquiror must obtain approval, rather than give
notice, of the acquisition as a savings and loan holding company.
In addition, any merger of Foundation must be approved by the OTS as
well as the Superintendent. Further, any merger of the Company in which the
Company is not the resulting company must also be approved by both the OTS and
the Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Foundation is a member of the SAIF and its deposit accounts are insured by the
FDIC up to the prescribed limits. The FDIC has examination authority over all
insured depository institutions, including Foundation, and has authority to
initiate enforcement actions against federally-insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, insitutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Foundation had
approximately $25.6 million in deposits at March 31, 1995, and paid a special
assessment of $168,364.
STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of
Foundation' activities and investments at June 30, 1997, were permissible for a
federal association.
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<PAGE> 20
FRB RESERVE REQUIREMENTS
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks provide credit to their members in the form
of advances. Foundation is a member of the FHLB of Cincinnati and must maintain
an investment in the capital stock of the FHLB of Cincinnati in an amount equal
to the greater of 1.0% of the aggregate outstanding principal amount of
Foundation's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB
of Cincinnati. Foundation was in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $298,800 at June 30, 1997.
FHLB advances to member institutions who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At June 30, 1997, Foundation's
maximum limit on advances was approximately $8.82 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
TAXATION
FEDERAL TAXATION
The Company and Foundation are both subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, the Company and Foundation may be subject to the alternative minimum
tax which is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Foundation, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994, and
1993, Foundation used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of accounting
for bad debts by thrift institutions, effective for taxable years beginning
after 1995. Thrift institutions that are treated as small banks are allowed to
utilize the experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely
-19-
<PAGE> 21
with respect to the "applicable excess reserves" of the taxpayer. The amount of
the applicable excess reserves will be taken into account ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement described below. In the case
of a thrift institution that is treated as a large bank, the amount of the
institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans (generally
loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, like Foundation, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Foundation to the Company is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced
and the gross income of Foundation for tax purposes would be increased by the
amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of June 30, 1997, the pre-1988 reserves of
Foundation for tax purposes totaled approximately $653,000. Foundation believes
it had approximately $2.2 million of accumulated earnings and profits for tax
purposes as of June 30, 1997, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. No representation can be made as to whether Foundation will
have current or accumulated earnings and profits in subsequent years.
The tax returns of Foundation have been audited or closed without audit
through fiscal year 1993. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Foundation.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth. For tax years beginning after December 31,
1998, the rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess
of $50,000 or (ii) .400% times taxable net worth.
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<PAGE> 22
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Foundation is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the book net worth
of Foundation determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," Foundation is not subject to any tax based upon net income or net
profits imposed by the State of Ohio.
ITEM 2. DESCRIPTION OF PROPERTY
Foundation leases the property at 25 Garfield Place where its office is
located. There are approximately three and one-half years remaining in the term
of the lease.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor Foundation is presently involved in any
material legal proceedings. From time to time, Foundation is a party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by Foundation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information contained in the 1997 Annual Report to Shareholders (the
"Annual Report"), a copy of which is attached as Exhibit 13 hereto, under the
caption "Common Stock and Related Information" is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
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<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and the report of Clark, Schaefer,
Hackett & Co. dated July 17, 1997, appearing in the Annual Report are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of the Company (the "Proxy Statement"), a copy of
which is attached as Exhibit 99 hereto, under the captions "Board of Directors"
and "Executive Officers" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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<PAGE> 24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C> <C>
3(a) Articles of Incorporation Incorporated by reference to the Registration
Statement on Form S-1 filed by the Company on
June 18, 1996, and amended on August 2, 1996 (the
"Form S-1"), Exhibit 3.1
3(b) Amended Articles of
Incorporation
3(c) Code of Regulations Incorporated by reference to the Form S-1, Exhibit 3.2
10(a) Employment Agreement between Incorporated by reference to the Form S-1, Exhibit 10.4
Foundation Bancorp, Inc. and
Laird L. Lazelle
10(b) Employment Agreement between Incorporated by reference to the Form S-1, Exhibit 10.5
Foundation Savings Bank and Laird
L. Lazelle
10(c) Lease Agreement Incorporated by reference to the Form S-1, Exhibit 10.6
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement
</TABLE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fiscal year
ended June 30, 1997.
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FOUNDATION BANCORP, INC.
By: /s/ Laird L. Lazelle
------------------------------------
Laird L. Lazelle, President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Ruth C. Emden /s/ Mardelle Dickhaut
- ------------------------- ------------------------------
Ruth C. Emden Mardelle Dickhaut
Director Director
Date: September 24, 1997 Date: September 24, 1997
/s/ Laird L. Lazelle /s/ Robert E. Levitch
- ------------------------- ------------------------------
Laird L. Lazelle Robert E. Levitch
Director Director
Date: September 24, 1997 Date: September 24, 1997
/s/ Michael S. Schwartz /s/ Paul L. Silverglade
- ------------------------- ------------------------------
Michael S. Schwartz Paul L. Silverglade
Director Director
Date: September 24, 1997 Date: September 24, 1997
/s/ Ivan J. Silverman /s/ Dianne K. Rabe
- ------------------------- ------------------------------
Ivan J. Silverman Dianne K. Rabe
Director Principal Financial Officer
Date: September 24, 1997 Date: September 24, 1997
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<PAGE> 1
Exhibit 3(b)
AMENDED ARTICLES OF INCORPORATION
OF
FOUNDATION BANCORP, INC.
FIRST: The name of the corporation shall be Foundation
Bancorp, Inc.
SECOND: The place in Ohio where the principal office of the
corporation is to be located is the City of Cincinnati, County of Hamilton.
THIRD: The purpose for which the corporation is formed is to
engage in any lawful act or activity for which corporations may be formed under
Section 1701.01 to 1701.98, inclusive, of the Ohio Revised Code.
FOURTH: The authorized shares of the corporation shall be two
million (2,000,000) common shares, each without par value. The directors of the
corporation may adopt an amendment to the articles of incorporation of the
corporation in respect of any unissued or treasury shares of any class and
thereby fix or change: the division of such shares into series and the
designation and authorized number of each series; the dividend rate; the dates
of payment of dividends and the dates from which they are cumulative; the
liquidation price; the redemption rights and price; the sinking fund
requirements; the conversion rights; and the restrictions on the issuance of
shares of any class or series.
FIFTH: (A) The board of directors of the corporation shall
have the power to cause the corporation from time to time and at any time to
purchase, hold, sell, transfer or otherwise deal with (i) shares of any class or
series issued by it, (ii) any security or other obligation of the corporation
which may confer upon the holder thereof the right to convert the same into
shares of any class or series authorized by the articles of the corporation, and
(iii) any security or other obligation which may confer upon the holder thereof
the right to purchase shares of any class or series authorized by the Articles
of Incorporation of the corporation.
(B) The corporation shall have the right to repurchase, if and
when any shareholder desires to sell, or on the happening of any event is
required to sell, shares of any class or series issued by the corporation.
(C) The authority granted in this Article Fifth shall not
limit the plenary authority of the directors to purchase, hold, sell, transfer
or otherwise deal with shares of any class or series, securities or other
obligations issued by the corporation or authorized by the Articles of
Incorporation of the corporation.
SIXTH: Notwithstanding any provision of the Ohio Revised Code
requiring for any purpose the vote, consent, waiver or release of the holders of
shares of the corporation entitling them to exercise any proportion of the
voting power of the corporation or of any class or classes thereof, such action,
unless expressly otherwise provided by statute, may be taken by the vote,
consent, waiver or release of the holders of shares entitling them to exercise
not less than a majority of the voting power of the corporation or of such class
or classes; provided, however, that if the board of directors of the corporation
shall recommend against the approval of any of the following matters, the
affirmative vote of the holders of shares entitling them to exercise not less
than seventy-five percent (75%) of the voting power of any class or classes of
shares of the corporation which entitle the holders thereof to vote in respect
of any such matter as a class shall be required to adopt:
(A) A proposed amendment to the articles of incorporation
of the corporation;
(B) A proposed amendment to the code of regulations of
the corporation;
(C) A proposal to change the number of directors by
action of the shareholders;
(D) An agreement of merger or consolidation providing for
the proposed merger or consolidation of the
corporation with or into one or more other
corporations;
(E) A proposed combination or majority share acquisition
involving the issuance of shares of the corporation
and requiring shareholder approval;
<PAGE> 2
(F) A proposal to sell, exchange, transfer or otherwise
dispose of all, or substantially all, of the assets,
with or without the goodwill, of the corporation; or
(G) A proposed dissolution of the corporation.
SEVENTH: No shareholder of the corporation shall have, as a
matter of right, the pre-emptive right to purchase or subscribe for shares of
any class, now or hereafter authorized, or to purchase or subscribe for
securities or other obligations convertible into or exchangeable for such shares
or which by warrants or otherwise entitle the holders thereof to subscribe for
or purchase any such shares.
EIGHTH: No shareholder of the corporation shall have the right
to vote his or her shares cumulatively in the election of directors of the
corporation.
NINTH: These articles of incorporation shall supersede and
replace the existing articles of incorporation of the corporation.
<PAGE> 1
Exhibit 13
TO OUR SHAREHOLDERS:
Fiscal 1997 was a significant year for Foundation Bancorp Inc., and its
subsidiary, Foundation Savings Bank. Foundation consummated its conversion to a
public stock company on September 25, 1996, with the issuance of 462,875 shares.
At the end of September 1996, every thrift paid an assessment for the
recapitalization of the Savings Association Insurance Fund. Foundation Savings
Bank paid approximately $170,000 based upon its level of deposits. Although the
assessment was an immediate charge against earnings, it has resulted in lower
insurance premiums.
Despite the payment of the assessment, Foundation Bancorp's,
consolidated net earnings were $111,956, or $.242 per share for the fiscal year
ended June 30, 1997. Consequently, we do not consider fiscal 1997 earnings as
indicative of our future potential.
In August 1997, the Board of Directors of Foundation Bancorp declared
and paid its first annual dividend. The amount paid to shareholders was $.25 per
share. Due to our small size and number of shareholders, the board made the
decision to pay an annual dividend to reduce administrative costs. We will
continue to consider future dividends on an annual basis at the close of our
fiscal year.
It is my honor and pleasure to provide you with Foundation Bancorp's
first annual report. Thank you for being a shareholder.
Sincerely,
Laird L. Lazelle
President & CEO
<PAGE> 2
BUSINESS OF FOUNDATION BANCORP, INC.
================================================================================
Foundation Bancorp, Inc. (the "Company"), a unitary savings and loan holding
company incorporated under the laws of the State of Ohio, owns all of the issued
and outstanding common shares of Foundation Savings Bank ("Foundation"), a
savings association chartered under the laws of the State of Ohio. In September
1996, the Company acquired all of the common shares issued by Foundation upon
its conversion from a mutual savings association to a permanent capital stock
savings association (the "Conversion"). Since its formation, the Company's
activities have been limited primarily to holding the common shares of
Foundation.
As a savings and loan holding company, the Company is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings association
incorporated under the laws of Ohio, Foundation is subject to regulation,
supervision and examination by the OTS and the Ohio Department of Commerce,
Division of Financial Institutions (the "Division"). Foundation is also a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF THE COMPANY'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 462,875 common shares of the Company outstanding on June 30, 1997,
and held of record by approximately 154 shareholders. Price information with
respect to the Company's common shares is quoted on The National Daily Quotation
Service ("NDQS"). The high and low bids for the common shares of the Company for
the periods indicated, as quoted by NDQS, were as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------------ ------- -------
<S> <C> <C>
December 31, 1996 $11.00 $10.50
March 30, 1997 $12.50 $11.00
June 30, 1997 $12.75 $12.50
</TABLE>
A cash dividend in the amount of $.25 per share was paid on August 25, 1997, to
shareholders of the Company of record as of August 15, 1997.
The income of the Company consists of dividends which may periodically be
declared and paid by the Board of Directors of Foundation on the common shares
of Foundation held by the Company and earnings on the approximately $1.4 million
in net proceeds retained by the Company from the sale of the Company's common
shares in connection with the Conversion.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, Foundation is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Foundation, in the event of a complete liquidation, to those
members of Foundation before the Conversion who maintain a savings account at
Foundation after the Conversion) or applicable regulatory capital requirements
prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a savings
association which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital
1
<PAGE> 3
(as defined by OTS regulations) that is equal to or greater than the amount of
its capital requirements is generally permitted without OTS approval (but
subsequent to 30 days' prior notice to the OTS) to make capital distributions,
including dividends, during a calendar year in an amount not to exceed the
greater of (1) 100% of such association's net earnings to date during the
calendar year, plus an amount equal to one-half the amount by which its total
capital to assets ratio exceeded its required capital to assets ratio at the
beginning of the calendar year, or (2) 75% of its net earnings for the most
recent four-quarter period. Savings associations which have total capital in
excess of the capital requirements, but which have been notified by the OTS that
they are in need of more than normal supervision, will be subject to
restrictions on dividends. A savings association that fails to meet current
minimum capital requirements is prohibited from making any capital distributions
without the prior approval of the OTS.
Foundation currently meets all of its regulatory capital requirements and,
unless the OTS determines that Foundation is an institution requiring more than
normal supervision, Foundation may pay dividends in accordance with the
foregoing provisions of the OTS regulations.
2
<PAGE> 4
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding the Company at the dates
and for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
SELECTED FINANCIAL CONDITION 1997 1996 1995 1994 1993
AND OTHER DATA: ------- -------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $35,271 $30,835 $31,849 $31,056 $31,635
Cash and cash equivalents 3,289 1,172 3,943 2,462 4,639
Investment securities 1,245 1,179 1,310 2,691 1,644
Mortgage-backed securities 4,288 4,641 5,532 6,593 5,303
Loans receivable, net 25,939 23,267 20,511 18,794 19,550
Deposits 27,292 26,951 27,737 27,348 29,062
FHLB advances 754 825 1,192 955 -
Shareholders' equity (1) 6,934 2,793 2,706 2,581 2,385
Year ended June 30,
---------------------------------------------------------------------
SUMMARY OF EARNINGS: 1997 1996 1995 1994 1993
------- -------- ------- ------ -------
(In thousands)
Interest income $2,558 $2,359 $2,162 $2,069 $2,297
Interest expense 1,530 1,592 1,368 1,339 1,499
------- -------- ------- ------ -------
Net interest income 1,028 767 794 730 798
Provision for loan losses 15 44 12 33 83
------- -------- ------- ------ -------
Net interest income after
provision for loan losses 1,013 723 782 697 715
Other income 63 64 70 204 136
General, administrative and other
expense 919 674 679 627 639
------- -------- ------- ------ -------
Earnings before income taxes 157 113 173 274 212
Federal income taxes 45 27 48 79 85
------- -------- ------- ------ -------
Net earnings $ 112 $ 86 $ 125 $ 195 $ 127
======= ======== ======= ====== =======
- ----------------------
<FN>
(1) Consisted solely of retained earnings at June 30, 1993 through 1996,
inclusive.
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS: At June 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 0.33% 0.27% 0.41% 0.62% 0.40%
Return on average equity 1.82 3.11 4.72 7.92 5.42
Interest rate spread 2.10 2.04 2.25 2.02 2.22
Net interest margin 3.06 2.48 2.66 2.35 2.57
Non-interest expense to average assets 2.68 2.13 2.23 1.99 2.03
Average equity to average assets 17.89 8.72 8.71 7.80 7.42
Equity to assets, end of period 19.66 9.06 8.50 8.32 7.54
Asset quality ratios:
Nonperforming assets to average assets - - 0.64 0.29 1.05
Nonperforming loans to total loans - - 0.95 0.49 1.70
Allowance for loan losses to total 0.48 0.47 0.47 0.38 0.51
loans
Allowance for loan losses to
nonperforming loans - - 50.52 77.42 30.33
Net (charge-offs) recoveries to
average loans - (0.14) .07 (.32) .02
Average interest-earning assets to
average interest-bearing liabilities 121.15 108.51 108.92 107.70 107.33
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of the Company and Foundation should be read in conjunction with and
with reference to the consolidated financial statements and the notes thereto
presented in this Annual Report.
The Company was incorporated for the purpose of owning all of the outstanding
common shares of Foundation following the Conversion. As a result, the
discussion and analysis that follows pertains primarily to the financial
condition of the Company on a consolidated basis and to the results of
operations of Foundation.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
At June 30, 1997, assets totaled $35.3 million, an increase of $4.4 million, or
14.4%, as compared to June 30, 1996, totals. The increase in assets was
primarily the result of the stock conversion in September 1996 plus the net
earnings for fiscal 1997, which increased shareholder's equity by $4.1 million,
or 148.3%
Deposits increased by $340,981, or 1.3%, during fiscal 1997, despite over $1
million in withdrawals to buy stock in the conversion. The mortgage-backed
securities portfolio decreased $352,273, or 7.6%, as the result of more
repayments than reinvestment. The cash flow from these items funded an increase
in cash and equivalents of $2.1 million, or 180.5% during fiscal 1997.
Investment securities increased $46,153, or 5.13%. The investment securities
portfolio has less than five years to maturity and is for regulatory liquidity
purposes.
During fiscal 1997, loans increased $2.7 million, or 11.5%. In addition, a total
of $1.1 million of current period loan production, all lower-rate, fixed term
product, was sold in the secondary market. At June 30, 1997, Foundation had two
loans more than thirty days in arrears totaling $77,200 and no real estate
acquired through foreclosure. The allowance for loan losses totaled $126,146 at
June 30, 1997, an increase of $15,000, or 13.5%, from the previous period due to
the increase in the loan portfolio.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
Net earnings for the year ended June 30, 1997, totaled $111,956, an increase of
$25,508, or 29.5%, from the $86,448 in net earnings for the year ended June 30,
1996. The increase in net earnings was comprised of an increase in total
interest income of $198,945, or 8.4%, a decrease in total interest expense of
$61,262, or 3.8%, and a decrease in the provision for loan loss of $28,990, or
65.9%. These were partially offset by a decrease in other income of $1,162, or
1.8%, an increase in general, administrative and other expense of $244,312, or
36.2%, and an increase in federal income taxes of $18,215, or 67.9%.
The increase in total interest income was attributable to an increase in
interest on loans of $206,583, or 11.4%, the result of a larger portfolio, an
increase in interest on investments of $7,739, or 11.1%, attributable to a
higher average yield, and an increase in interest on interest bearing deposits
of $19,983, or 10.9%, attributable to a
5
<PAGE> 7
larger average balance. These increases were partially offset by a decrease in
interest on mortgage-backed securities of $34,760, or 11.4%, resulting from a
smaller portfolio.
The decrease in total interest expense was attributable to a decrease in
interest expense on deposits of $54,001, or 3.5%, resulting from the combined
effects of a decline in deposit balances and lower average rates paid on
savings, plus a decrease in interest expense on borrowings of $7,261, or 14.2%,
as the amount owed declined during the fiscal year. The provision for loan loss
decreased $28,990, or 65.9%, due to declining delinquencies.
Other operating income decreased $1,162, or 1.8%, primarily the result of lower
gains on sale of loans of $2,768, or 35.1%, as loan production was utilized to
invest the funds from the stock conversion. The increase in general,
administrative and other expense was primarily attributable to the increase in
deposit insurance of $142,439, or 228.4%, resulting from the SAIF
recapitalization fee of approximately $170,000. Employee compensation and
benefits increased $89,325, or 24.7%, which was primarily the expensing of the
ESOP. Occupancy and equipment increased $2,303, or 2.9%, franchise taxes
increased $2,572, or 7.5%, due to higher capital levels, and other operating
expense increased $7,064, or 6.7%, primarily due to expenses related to
operating a public company. Federal income taxes increased $18,215, or 67.9%,
the result of higher earnings.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
Net earnings for the year ended June 30, 1996 totaled $86,448, a decrease of
$38,916, or 31.0%, from the $125,364 in net earnings for the year ended June 30,
1995. The decrease in net earnings was attributable to a decrease in net
interest income of $26,655, or 3.4%, and an increase in the provision for loan
loss of $31,990, or 266.6%, resulting from loan loss plus a higher provision on
increased loan production.
The decrease in net interest income was generated by an increase in interest
expense on deposits of $231,849, or 17.7%, resulting from higher rates paid on a
larger savings portfolio, and a decrease in interest income on mortgage-backed
securities of $16,541, or 5.2%, resulting from a smaller portfolio. These were
partially offset by an increase in interest income on loans of $152,109, or
9.2%, primarily attributable to a larger portfolio, an increase in interest on
interest bearing deposits of $61,029, or 52.0%, primarily attributable to a
larger average balance, and a decrease in interest expense on borrowings of
$8,248, or 13.9%, attributable to the amortization of FHLB advances.
Other operating income decreased $5,226, or 7.5%, resulting from fewer gains on
sale of loans. General, administrative and other expense decreased $3,997, or
0.6%. The decrease was attributable to a decrease in other operating expense of
$6,362, or 5.7%, and a decrease in employee compensation and benefits of $2,374,
or 0.7%, partially offset by an increase in occupancy and equipment of $1,961,
or 2.6%, and an increase in franchise tax of $2,257, or 7.1%. Federal income tax
decreased $20,958, or 43.8%, as the result of lower earnings for fiscal 1996.
6
<PAGE> 8
YIELDS EARNED AND RATES PAID. The following table sets forth certain average
balance sheet information, including the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the years
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of interest-earning assets or interest-bearing
liabilities, respectively, for the years presented. Average balances are derived
from monthly balances, which include nonaccruing loans in the loan portfolio.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
Weighted average Average Interest Average Average Interest Average
yield/rate outstanding earned/ yield/ outstanding earned/ yield/
at June 30, 1997 balance paid rate balance paid rate
---------------- ------------ -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 5.63% $ 3,511 $198 5.64% $ 2,979 $ 178 5.97%
Investment securities 7.10 949 77 8.11 987 70 7.10
Mortgage-backed securities 6.20 4,413 269 6.10 5,109 304 5.95
Loans receivable 8.12 24,710 2,014 8.15 21,833 1,807 8.28
------- ----- -------- ------
Total interest-earning assets 7.61 33,583 2,558 7.62 30,908 2,359 7.63
Non-interest-earning assets 728 761
------- -------
Total assets $34,311 $31,670
======= =======
Interest-bearing liabilities:
Deposits 5.61 26,935 1,486 5.52 27,580 1,541 5.59
FHLB advances 5.52 787 44 5.59 906 51 5.63
------- ------- ------- -------
Total interest-bearing liabilities 5.61 27,721 1,530 5.52 28,485 1,592 5.59
------ -----
Non-interest-bearing liabilities 453 423
------- -------
Total liabilities 28,174 28,909
Retained earnings 6,137 2,766
------- -------
Total liabilities and retained
earnings $34,311 $31,670
======= =======
Net interest income $1,028 $ 767
====== =======
Interest rate spread 2.00% 2.10% 2.04%
===== ======== ========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.06% 2.48%
======== ========
Average interest-earning assets to
average interest-bearing liabilities 123.34% 121.14% 108.51%
======= ====== ======
<CAPTION>
1995
------------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 2,200 $ 117 5.32%
Investment securities 1,304 69 5.29
Mortgage-backed securities 6,028 321 5.33
Loans receivable 20,318 1,655 8.15
-------- -------
Total interest-earning assets 29,850 2,162 7.24
Non-interest-earning assets 553
-------
Total assets $30,403
=======
Interest-bearing liabilities:
Deposits 26,361 1,309 4.97
FHLB advances 1,046 59 5.64
------- ------
Total interest-bearing liabilities 27,407 1,368 4.99
------ -------
Non-interest-bearing liabilities 350
-------
Total liabilities 27,757
Retained earnings 2,646
-------
Total liabilities and retained
earnings $30,403
=======
Net interest income $ 794
======
Interest rate spread 2.25%
========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.66%
========
Average interest-earning assets to
average interest-bearing liabilities 108.92%
======
</TABLE>
7
<PAGE> 9
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the interest income and interest expense of Foundation during the
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided for changes attributable
to (i) increases and decreases in volume (change in volume multiplied by prior
year rate), (ii) increases and decreases in rate (change in rate multiplied by
prior year volume) and (iii) total increases and decreases in rate and volume.
The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------- ---------------------------------
Increase Total Increase Total
(decrease) due to increase (decrease) due to increase
----------------- -------- ----------------- --------
Volume Rate (decrease) Volume Rate (decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 32 $ (12) $ 20 $ 46 $ 15 $ 61
Investments (3) 10 7 (20) 21 1
Mortgage-backed securities (41) 6 (35) (53) 36 (17)
Loans receivable 238 (31) 207 125 27 152
----- ----- ----- ----- ----- -----
Total interest income 226 (27) 199 98 99 197
Interest-bearing liabilities
Deposits (36) (19) (55) 63 169 232
FHLB advances (7) - (7) (8) - (8)
----- ----- ----- ----- ----- -----
Total interest expense (43) (19) (62) 55 169 224
----- ----- ----- ----- ----- -----
Increase (decrease) in net
interest income $ 269 $ (8) $ 261 $ 43 $ (70) $ (27)
===== ===== ===== ===== ===== =====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Foundation, like other financial institutions, is subject to interest rate risk
to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Foundation uses the "net portfolio value" ("NPV")
methodology recently adopted by the OTS as part of its capital regulations.
Although Foundation is not currently subject to the NPV regulation because such
regulation does not apply to institutions with less than $300 million in assets
and risk-based capital in excess of 12%, the application of the NPV methodology
illustrates certain aspects of Foundation's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates.
8
<PAGE> 10
Presented below, as of June 30, 1997, is an analysis of Foundation's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. The table also contains the
policy limits set by the Board of Directors of Foundation as the maximum change
in NPV that the Board of Directors deems advisable in the event of various
changes in interest rates. Such limits have been established with consideration
of the dollar impact of various rate changes and Foundation's strong capital
position.
<TABLE>
<CAPTION>
June 30, 1997
----------------------------
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
------------------------ ------------ ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
+400 (70)% $(2,775) (44)%
+300 (55) (2,052) (33)
+200 (35) (1,325) (21)
+100 (20) (621) (10)
0 0 0 0
-100 (20) 405 6
-200 (35) 492 8
-300 (55) 512 8
-400 (70) 618 10
</TABLE>
As illustrated by the table, Foundation's NPV is more sensitive to rising rates
than declining rates. Such difference in sensitivity occurs principally because,
as rates rise, borrowers do not prepay fixed-rate loans as quickly as they do
when interest rates are declining. Thus, in a rising interest rate environment,
because Foundation has a significant amount of fixed-rate loans in its loan
portfolio, the amount of interest Foundation would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest Foundation would pay on its deposits would
increase rapidly because Foundation's deposits generally have shorter periods to
repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
A decrease or a significant increase in interest rates from the recent levels
could be expected to affect negatively the net interest income of Foundation.
Moreover, rising interest rates could negatively affect the earnings of
Foundation due to diminished loan demand. Foundation attempts to mitigate
interest rate risk by originating adjustable-rate loans.
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Foundation's liquidity, primarily represented by cash and cash
equivalents, is a result of the funds used in or provided by Foundation's
operating, investing and financing activities. These activities are summarized
below for the years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Net income $ 112 $ 86 $ 125
Adjustments to reconcile net income to
net cash from operating activities 103 60 12
------ ------ ------
Net cash from operating activities 215 146 137
Net cash provided by (used in)
investment activities (2,386) (1,764) 718
Net cash provided by (used in)
financing activities 4,288 (1,153) 626
------ ------ ------
Net change in cash and cash equivalents 2,117 (2,771) 1,481
Cash and cash equivalents at
beginning of period 1,172 3,943 2,462
------ ------ ------
Cash and cash equivalents at
end of period $3,289 $1,172 $3,943
====== ====== ======
</TABLE>
The principal sources of funds for Foundation are deposits, loan and
mortgage-backed security repayments, maturities of investment securities and
funds generated through operations. Foundation also has the ability to borrow
from the FHLB of Cincinnati. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan prepayments are
heavily influenced by interest rates, general economic conditions and
competition. Foundation maintains a level of investment in liquid assets which
is based upon management's assessment of (i) the need for funds, (ii) expected
deposit flows, (iii) the yields available on short-term liquid assets and (iv)
the objectives of the asset and liability management program of Foundation.
OTS regulations presently require Foundation to maintain an average daily
balance of liquid assets, which may include, but are not limited to, investments
in U. S. Treasury and federal agency obligations and other investments having
maturities of five years or less, in an amount equal to 5% of the sum of
Foundation' average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement, which may be
changed from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds upon which Foundation
may rely if necessary to fund deposit withdrawals or other short-term funding
needs. At June 30, 1997, Foundation liquid assets totaled approximately $4.4
million, which exceeded the OTS minimum requirements by $3.0 million. At such
date, Foundation had commitments to originate loans and loans in process
totaling $891,000 and a commitment to sell one loan, with a balance of
approximately $89,200. Foundation considers its liquidity and capital reserves
sufficient to meet its outstanding short-term and long-term needs.
10
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Foundation Bancorp, Inc.
We have audited the consolidated statements of financial condition of Foundation
Bancorp, Inc. (formerly Foundation Savings Bank) and its subsidiary as of June
30, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1997. These 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 principles 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 financial position of Foundation Bancorp, Inc. and
its Subsidiary as of June 30, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
July 17, 1997
11
<PAGE> 13
FOUNDATION BANCORP, INC.
Statements of Financial Condition
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets
------
June 30,
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash $ 170,153 $ 61,081
Interest-bearing deposits in other financial institutions 3,119,122 1,111,408
------------ ------------
3,289,275 1,172,489
Investment securities - at amortized cost (fair value of $948,715 and
$900,635 at June 30, 1997 and 1996, respectively) 945,840 899,687
Mortgage-backed securities - at amortized cost (fair value of
$4,167,556 and $4,553,889 at June 30, 1997 and 1996, respectively) 4,288,236 4,640,509
Loans receivable, net 25,939,500 23,266,664
Accrued interest receivable:
Loans 104,415 99,150
Investments and interest bearing deposits 8,732 14,198
Mortgage-backed securities 33,226 36,817
Federal Home Loan Bank stock - at cost 298,800 278,800
Property and equipment, net 298,934 313,281
Refundable federal income tax - 2,522
Prepaid expenses and other assets 64,478 111,038
------------ -----------
$35,271,436 $30,835,155
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $27,291,765 $26,950,784
Advances from Federal Home Loan Bank 754,403 824,847
Advances by borrowers for taxes, insurance and other 65,271 70,179
Accrued expenses 145,782 135,985
Accrued federal income tax 26,454 -
Deferred federal income tax 53,900 60,800
------------ -----------
28,337,575 28,042,595
Common stock, no par value; 2,000,000 shares authorized; 462,875
shares issues and outstanding as of June 30, 1997 - -
Paid in capital 4,341,126 -
Retained earnings, substantially restricted 2,904,516 2,792,560
Less unallocated ESOP shares (311,781) -
------------ -----------
Total stockholders' equity 6,933,861 2,792,560
------------ -----------
$35,271,436 $30,835,155
============ ===========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 14
FOUNDATION BANCORP, INC.
Statements of Income
Three Years Ended June 30, 1997
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 2,013,915 $ 1,807,332 $ 1,655,223
Mortgage-backed securities 269,075 303,835 320,376
Investment securities 77,192 69,453 69,104
Interest-bearing deposits 197,721 178,338 117,309
----------- ----------- -----------
Total interest income 2,557,903 2,358,958 2,162,012
----------- ----------- -----------
Interest expense:
Deposits 1,486,534 1,540,535 1,308,686
Borrowings 43,756 51,017 59,265
----------- ----------- -----------
Total interest expense 1,530,290 1,591,552 1,367,951
----------- ----------- -----------
Net interest income 1,027,613 767,406 794,061
Provision for loan losses 15,000 43,990 12,000
----------- ----------- -----------
Net interest income after provision for loan 1,012,613 723,416 782,061
losses ----------- ----------- -----------
Other income:
Gain on sale of loans 5,121 7,889 12,179
Net investment property income 53,935 49,495 50,446
Other operating income 4,232 7,066 7,051
----------- ----------- -----------
Total other income 63,288 64,450 69,676
----------- ----------- -----------
General, administration and other expense:
Employee compensation and benefits 451,558 362,233 364,607
Occupancy and equipment 80,868 78,565 76,604
Deposit insurance 204,792 62,353 61,911
Franchise tax 36,745 34,173 31,916
Computer processing costs 32,956 32,347 32,268
Other operating expense 111,969 104,905 111,267
----------- ----------- -----------
Total general, administration and other
operating expenses 918,888 674,576 678,573
----------- ----------- -----------
Income before income taxes 157,013 113,290 173,164
----------- ----------- -----------
Federal income taxes (credits):
Current 51,957 26,642 30,000
Deferred (6,900) 200 17,800
----------- ----------- -----------
45,057 26,842 47,800
----------- ----------- -----------
Net income 111,956 86,448 125,364
=========== =========== ===========
Earnings per share (since conversion) $ 0.49 N/A N/A
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE> 15
FOUNDATION BANCORP, INC.
Statements of Stockholders' Equity
Three Years Ended June 30, 1997
<TABLE>
<CAPTION>
Additional Unallocated
Common Paid-In Retained ESOP
Stock Capital Earnings Shares Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ - $ - $2,580,748 $ - $2,580,748
Net income for the year ended
June 30, 1995 - - 125,364 - 125,364
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 - - 2,706,112 - 2,706,112
Net income for the year ended
June 30, 1996 - - 86,448 - 86,448
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 - - 2,792,560 - 2,792,560
Reorganization to a stock company
with the issuance of common
stock - 4,341,126 - (370,300) 3,970,826
ESOP shares to be allocated at
average market price - - - 58,519 58,519
Net income for the year ended
June 30, 1997 - - 111,956 - 111,956
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 $ - $4,341,126 $2,904,516 $ (311,781) $6,933,861
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 16
FOUNDATION BANCORP, INC.
Statements of Cash Flows
Three Years Ended June 30, 1997
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 2,548,220 $ 2,335,168 $ 2,145,841
Interest paid (1,530,345) (1,589,414) (1,365,659)
Cash paid to suppliers and employees (857,817) (677,971) (679,261)
Fees and commissions received 4,232 7,066 7,051
Income taxes (paid) refunded (22,981) 2,763 (39,527)
Rental income received 73,200 68,400 68,400
----------- ----------- -----------
Net cash provided by operating
activities 214,509 146,012 136,845
----------- ----------- -----------
Cash flows from investing activities:
Purchase of mortgage-backed securities (236,237) (82,714) -
Repayments of mortgage-backed
securities 573,592 944,043 1,029,624
Maturities of certificates of deposit - - 1,400,000
Purchase of investment securities (446,153) (499,687) -
Maturities of investment securities 400,000 650,000 -
Loan disbursements (7,503,939) (8,706,053) (5,637,576)
Loan principal repayments 3,748,061 5,235,414 3,354,330
Proceeds from sale of loans 1,081,556 701,447 576,584
Purchase of property and equipment (3,227) (5,803) (4,249)
----------- ----------- -----------
Net cash provided by (used in)
investing activities (2,386,347) (1,763,353) 718,713
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 340,981 (786,420) 389,042
Proceeds from Federal Home Loan Bank
advances - - 300,000
Repayment of Federal Home Loan Bank
advances (70,444) (366,730) (63,211)
Proceeds from conversion to stock
company 4,018,087 - -
----------- ----------- -----------
Net cash provided by (used in)
financing activities 4,288,624 (1,153,150) 625,831
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,116,786 (2,770,491) 1,481,389
Cash and cash equivalents at beginning of
period 1,172,489 3,942,980 2,461,591
----------- ----------- -----------
Cash and cash equivalents at end of
period $ 3,289,275 $ 1,172,489 $ 3,942,980
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
15
<PAGE> 17
FOUNDATION BANCORP, INC.
Statement of Cash Flows
Three Years Ended June 30, 1997
Reconciliation of Net Income to Net Cash
Provided By Operating Activities
--------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $ 111,956 $ 86,448 $ 125,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of loans (5,121) (7,889) (12,179)
Depreciation and amortization 17,574 16,295 15,778
Amortization of premiums and discounts on
mortgage-backed securities 14,918 30,561 30,721
Federal Home Loan Bank stock dividends (20,000) (18,400) (22,600)
Provision for loan losses 15,000 43,990 12,000
Amortization of deferred loan fees (8,393) (23,032) (9,567)
Deferred federal income tax (6,900) 200 17,800
ESOP expense 58,519 - -
Effects of change in operating assets and liabilities:
Accrued interest receivable 3,792 (12,919) (14,725)
Refundable federal income tax 2,522 29,405 (9,527)
Prepaid expenses and other assets (701) (50,988) (20,380)
Advances by borrowers for taxes, insurance
and other (4,908) 31,103 17,462
Accrued expenses 9,797 21,238 6,698
Accrued federal income tax 26,454 - -
--------- --------- ---------
Net cash provided by operating activities $ 214,509 $ 146,012 $ 136,845
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE> 18
FOUNDATION BANCORP, INC.
Notes to Financial Statements
Three Years Ended June 30, 1997, 1996 and 1995
1. Organization and Summary of Significant Accounting Policies:
------------------------------------------------------------
The following describes the organization and the significant accounting
policies followed in the preparation of these consolidated financial
statements.
Nature of operations and principles of consolidation
----------------------------------------------------
Foundation Bancorp, Inc. (the Company) is a holding company formed in
1996 in conjunction with the conversion of Foundation Savings Bank
from a mutual savings bank to a stock savings bank in September 1996.
The conversion culminated in the Corporation's issuance of 462,875
shares. The Company's financial statements include the accounts of
its wholly-owned subsidiary, Foundation Savings Bank (the Savings
Bank). All significant intercompany transactions have been
eliminated.
The Savings Bank is a state chartered savings and loan association
and a member of the Federal Home Loan Bank System and subject to
regulation by the Office of Thrift Supervision (OTS), an office of
the U. S. Department of the Treasury. As a member of this system, the
Savings Bank maintains a required investment in capital stock of the
Federal Home Loan Bank of Cincinnati. The Savings Bank provides loans
to customers and receives deposits from customers primarily in the
metropolitan Cincinnati area.
Savings accounts are insured by the Savings Association Insurance
Fund (SAIF), administered by the Federal Deposit Insurance
Corporation (FDIC), within certain limitations. An annual premium is
required by the SAIF for the insurance of such savings accounts.
Cash and cash equivalents
-------------------------
For the purpose of reporting cash flows, the Company considers all
highly liquid debt instruments with original maturity when purchased
of three months or less to be cash equivalents.
Investment and mortgage-backed securities
-----------------------------------------
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard
addresses the accounting and reporting for securities based on
management's intent and ability to hold such securities to maturity.
The Savings Bank adopted this standard on July 1, 1994. Statement No.
115 requires the classification of investments in debt and equity
securities into three categories; held to maturity, trading, and
available for sale. Debt securities that the Savings Bank has the
positive intent and ability to hold to maturity are classified as
held to maturity securities and reported at amortized cost.
Debt and equity securities that are bought and held principally for
the purpose of selling in the near-term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in earnings. The Company has no trading securities.
Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available for sale
securities and reported at fair value, with unrealized gains or
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of deferred
17
<PAGE> 19
taxes. The Company has not identified any investment or
mortgage-backed securities as available for sale.
Premiums and discounts on investment securities and mortgage-backed
securities are amortized and accreted using the interest method over
the expected lives of the related securities.
The Company presently holds all investment securities as held to
maturity carried at amortized cost.
Loans receivable
----------------
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for deferred loan origination fees and costs,
and the allowance for loan losses.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan over the contractual life of the loan.
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.
Loans held for sale are carried at the lower of cost or market,
determined in the aggregate. In computing cost, deferred loan
origination fees and costs are aggregated with the principal balances
of the related loans. At June 30, 1997 and 1996, the Savings Bank had
identified $89,200 and $ -0-, respectively, as loans held for sale.
The Savings Bank will either sell the related servicing on loans or
retain the servicing on loans sold and agree to remit to the investor
loan principal and interest at agreed-upon rates. In May 1995, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 122, "Accounting for Mortgage Servicing
Rights." This statement requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage
banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing rights retained would allocate
the total cost of the mortgage loans to the mortgage servicing rights
and the loan based on their relative fair value. Statement No. 122 is
effective for fiscal years beginning after December 15, 1995. There
was no impact from the adoption of this standard in 1997.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities," which established accounting and reporting standards
for transfers and servicing of financial assets and extinguishments
of liabilities. The standards are based on a consistent application
of a financial components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when
extinguished. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 supersedes No.
122. SFAS No. 125 is effective for transactions occurring after
December 31, 1996. There was no impact from the adoption of this
standard in 1997.
18
<PAGE> 20
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 the 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). The amount of actual write-offs could differ from the
estimate. Because of uncertainties inherent in the estimation
process, management's estimate of credit losses inherent in the loan
portfolio and the related allowance may change in the near term.
However, the amount of the change that is reasonably possible cannot
be estimated.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan." This standard amends Statement
No. 5 to clarify that a creditor should evaluate the collectibility
of both contractual interest and contractual principal on all loans
when assessing the need for a loss accrual. In October, 1994, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure," which amends
Statement No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans. The statements were
effective for the fiscal year beginning July 1, 1995. The Savings
Bank adopted the statement effective July 1, 1995, without material
effect on financial condition or results of operations.
For impairment recognized in accordance with SFAS No. 114, as
amended, the entire change in present value of expected cash flows is
reported as bad debt expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad debt
expense that otherwise would be reported. Interest on impaired loans
is reported on the cash basis. Impaired loans are loans that are
considered to be permanently impaired in relation to principal or
interest based on the original contract. Impaired loans would be
charged off in the same manner as all loans subject to charge off.
The Savings Bank considers its investment in one to four family and
multi-family residential loans, non-residential loans and consumer
loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. The Savings Bank's
policy is that 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. For the year ended June 30, 1997, the Savings Bank
had no loans that were impaired as described in the pronouncement and
therefore no interest income was recognized or received on impaired
loans.
Real estate acquired through foreclosure
----------------------------------------
Real estate acquired through foreclosure results when property
collateralizing a loan is foreclosed upon or otherwise acquired by
the Savings Bank in satisfaction of the loan. Real estate acquired in
settlement of loans is recorded at the lower of the recorded
investment in the loan satisfied or the fair value of the assets
received at the time of acquisition less estimated costs to sell at
the date of foreclosure. The fair value of the assets received is
based upon a current appraisal adjusted for estimated carrying and
selling costs. Valuations are periodically performed by management,
and an allowance for losses is established by a charge to operations
if the carrying value of a property exceeds its estimated net
realizable value. The Savings Bank has no real estate acquired
through foreclosure at June 30, 1997 and 1996.
19
<PAGE> 21
Property and equipment
----------------------
Property and equipment is stated at cost. Depreciation of property
and equipment is provided by the straight-line method over the
estimated useful lives (range of lives five to fifteen years) of the
related classes of assets.
Income taxes
------------
Effective July 1, 1993, the Company adopted Financial Accounting
Standards Board Statement No. 109 (SFAS 109), "Accounting for Income
Taxes." The adoption of SFAS 109 changed the method of accounting for
income taxes from the deferred method to an asset and liability
approach which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets
and liabilities.
Under SFAS 109, deferred income tax assets and liabilities are
computed annually for differences between the financial statement and
tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
affect taxable income. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Income tax expense is the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and
liabilities.
Accounting estimates
--------------------
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentrations of credit risk
-----------------------------
The Savings Bank grants first mortgage and other loans to customers
located primarily in the metropolitan Cincinnati area. Accordingly, a
substantial portion of its debtors' ability to honor their contracts
is dependent upon the financial health of the local economy and
market.
Management may at times, maintain deposit accounts with financial
institutions in excess of federal deposit insurance limits.
Employee stock ownership plan
-----------------------------
Shares committed to be allocated to the Employee Stock Ownership Plan
(ESOP) are charged to expense at the average market price for the
year. The excess of average market value over cost is added to
additional paid-in capital.
Recent accounting pronouncements
--------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting No. 123, "Accounting for
Stock-Based Compensation." This statement establishes accounting and
reporting standards for stock-based employee compensation plans
including stock options. The statement defines a "fair value based
method" for employee stock options
20
<PAGE> 22
and encourages all entities to adopt that method for such options.
However, it allows an entity to continue to measure compensation cost
of those plans using the "intrinsic value based method" of accounting
prescribed by Accounting Principles Board Opinion No. 25. Entities
electing to remain with the accounting in Opinion 25 must make
proforma disclosures of net income and earnings per share, as if the
fair value method of accounting defined in this statement had been
applied. There was no impact from the adoption of this standard since
the Company presently does not have any stock options.
Earnings per share
------------------
Earnings per share for the period ended June 30, 1997 is based on the
Company's net income for the nine months ended since the effective
date of the Savings Bank's mutual-to-stock conversion divided by
432,456 weighted average shares outstanding. Weighted-average shares
outstanding do not include unallocated shares purchased by the ESOP.
Disclosure of earnings per share for 1996 and 1995 are not
applicable, as the Savings Bank completed its conversion from mutual
to Stock form in September 1996.
2. Investment Securities:
----------------------
The amortized cost, gross unrealized gains, gross unrealized losses and
fair values of investment securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $ 945,840 2,875 - 948,715
======= ======== ======== =======
June 30, 1996
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Obligations of U.S.
Government agencies $ 899,687 948 - 900,635
======= ======== ======== =======
</TABLE>
The amortized cost and fair value of investment securities at June 30,
1997 and 1996 by contractual maturity are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
21
<PAGE> 23
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due or callable in one year or less $ 795,840 798,850
Due after one year through five years 150,000 149,865
------- -------
$ 945,840 948,715
======= =======
June 30, 1996
-----------------------------------
Amortized Fair
Cost Value
---- -----
Due or callable in one year or less $ 899,687 900,635
Due after one year through five years - -
------- -------
$ 899,687 900,635
======= =======
</TABLE>
Included in investments at June 30, 1997 and 1996, are $500,000 of
callable notes with a final maturity in the year 2001 and $150,000 in
callable notes with maturity in the year 2000.
3. Mortgage-Backed Securities:
---------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp. $ 2,003,877 - 53,687 1,950,190
Federal National Mortgage Association 2,094,513 - 68,185 2,026,328
Government National Mortgage
Association 189,846 1,192 - 191,038
--------- ----- ------- ---------
$ 4,288,236 1,192 121,872 4,167,556
========= ===== ======= =========
June 30, 1996
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Federal Home Loan Mortgage Corp. $ 2,117,050 - 33,746 2,083,304
Federal National Mortgage Association 2,308,198 - 52,063 2,256,135
Government National Mortgage
Association 215,261 - 811 214,450
--------- ----- ------- ---------
$ 4,640,509 - 86,620 4,553,889
========= ===== ======= =========
</TABLE>
The maturity of the mortgage-backed securities is based on the repayment
terms of the underlying mortgages.
22
<PAGE> 24
4. Loans Receivable:
-----------------
Loans receivable consists of the following:
<TABLE>
<CAPTION>
June 30
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Residential one-to-four family real estate $ 23,816,788 20,949,519
Multi-family residential real estate 967,949 903,137
Commercial real estate 1,118,283 1,286,992
Consumer 389,459 296,332
Passbook 26,933 56,331
---------- ----------
26,319,412 23,492,311
Less:
Loans in process (237,042) (89,191)
Allowance for loan losses (126,147) (111,147)
Deferred loan fees (16,723) (25,309)
---------- ----------
$ 25,939,500 23,266,664
========== ==========
</TABLE>
At June 30, 1997 and 1996, adjustable rate loans approximated $9,175,000
and $9,240,000.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Beginning balance $ 111,147 98,138 72,107
Provision for loan losses 15,000 43,990 12,000
Write-offs net of recoveries - (30,981) 14,031
------- ------- ------
Ending balance $ 126,147 111,147 98,138
======= ======= ======
</TABLE>
Gross proceeds on sales of loans were $1,081,556, $701,447 and $576,584
for the years ended June 30, 1997, 1996 and 1995, respectively. Net
realized gains on sales of loans were $5,121, $7,889 and $12,179 for the
years ended June 30, 1997, 1996 and 1995. Loans serviced for others as of
June 30, 1997, 1996 and 1995, were $249,270, $251,280, and $198,076,
respectively.
At June 30, 1997 and 1996, the Company had no non-accrual loans.
Loans to officers, directors and employees totaled approximately $5,038
and $93,521 at June 30, 1997 and 1996, respectively. An analysis of loan
activity to such persons for the fiscal year ended June 30, 1997 and
1996, is as follows:
<TABLE>
<CAPTION>
June 30
-------------------------
1997 1996
---- ----
<S> <C> <C>
Outstanding balance, beginning $ 93,521 98,866
New loans issued - -
Repayments 88,483 5,345
------ -------
Outstanding balance, ending $ 5,038 93,521
======= ======
</TABLE>
23
<PAGE> 25
5. Property and Equipment:
-----------------------
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate owned - investment property $ 251,847 251,847
Furniture and equipment 141,387 153,264
Leasehold improvements 34,246 34,246
------- -------
427,480 439,357
Less accumulated depreciation 128,546 126,076
------- -------
$ 298,934 313,281
======= =======
</TABLE>
The Company leases its office facility under a ten year non-cancelable
lease which expires in March of 2001 with additional renewal options.
Rent expense for each of the years ended June 30, 1997, 1996 and 1995,
was $53,355.
Minimum commitments under the term of the lease are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
<S> <C>
1998 $ 51,628
1999 51,628
2000 51,628
Subsequent years 38,722
---------
$ 193,606
=========
</TABLE>
6. Investment Property:
--------------------
The Savings Bank acquired real estate at the southeast corner of Eighth
and Vine Streets in 1980. The Savings Bank has a lease agreement on the
property as a parking lot under a three year lease beginning July 1,
1994. The lease payments were $5,700 per month for the first two years
and $6,100 per month for the third year. Rent income for the years ended
June 30, 1997, 1996 and 1995, was $73,200, $68,400 and $68,400,
respectively. The lease was renewed in July 1997, for an additional three
years at $73,200 per year.
24
<PAGE> 26
7. Deposits:
---------
Deposits consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Passbook 2.56% $ 791,290 2.50% 995,905
NOW and money market accounts 2.45 1,732,157 2.49 1,947,215
---------- ---------
2.48 2,523,447 2.50 2,943,120
---------- ---------
Certificates of deposit:
3 months 5.03 59,765 4.42 291,311
6 months 5.58 1,361,002 4.33 1,416,086
10/11 months 2.81 23,618 2.81 22,961
12 months 5.87 10,272,679 5.62 9,976,064
18 months 2.47 33,624 6.42 5,538,925
2 years 6.07 9,844,447 6.12 4,735,688
3 years 6.11 1,364,492 5.94 829,830
4 years 5.41 221,198 5.38 209,055
5 years 5.92 1,587,493 5.76 987,744
---------- ----------
5.94 24,768,318 5.82 24,007,664
---------- ----------
5.60% $ 27,291,765 5.46% 26,950,784
========== ==========
</TABLE>
Maturities of outstanding certificates of deposit are summarized as
follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
------- ------
(In Thousands)
<S> <C> <C>
One year or less $ 15,201 19,151
1 - 2 years 7,740 3,476
2 - 3 years 727 859
Over 3 years 1,100 522
------ ------
$ 24,768 24,008
====== ======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Passbook $ 26,805 33,469 45,278
NOW and money market accounts 48,140 54,233 79,124
Certificates of deposit 1,411,589 1,452,833 1,184,284
--------- --------- ---------
$ 1,486,534 1,540,535 1,308,686
========= ========= =========
</TABLE>
25
<PAGE> 27
The aggregate amount of certificates of deposits in denominations of
$100,000 or more was $2,541,599 and $2,639,352 at June 30, 1997 and 1996,
respectively. Deposit accounts exceeding $100,000 are not federally
insured.
8. Advances from Federal Home Loan Bank:
-------------------------------------
The Savings Bank borrowed $1,000,000 in 1994 from the Federal Home Loan
Bank under a mortgage matched advance program. Interest is charged on the
advance at a weighted average rate of 5.50% and is due in 120 to 180
monthly installments of $9,517 including interest. The Savings Bank
borrowed an additional $300,000 in 1995. The note is an interest only
bearing an interest rate of 6.85%. The note matured September 1, 1995.
Future maturities on the advance are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
<S> <C>
1998 $ 74,366
1999 78,506
2000 82,878
2001 87,494
2002 92,368
2003 and subsequent 338,791
-------
$ 754,403
=========
</TABLE>
The advances are collateralized by a blanket agreement on residential
mortgage loans held by the Savings Bank. The Savings Bank has also
pledged its Federal Home Loan Bank stock and mortgage notes with unpaid
principal balances of approximately $1,140,631 for future advances.
9. Financial Instruments:
----------------------
The following fair value disclosures are made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." SFAS No. 107 requires the disclosure of fair value
information about both on-and-off-balance sheet financial instruments
where it is practical to estimate that value. In cases where quoted
market prices were not available, fair values were based on estimates
using present value or other valuation methods, as described below. The
use of different assumptions (e.g., discount rates and cash flow
estimates) and estimation methods could have a significant effect on fair
value amounts. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a
current market exchange. Because SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements, any aggregation of the fair value amounts presented would
not represent the underlying value of the Company.
The following methods and assumptions were used in estimating the fair
values of financial instruments, cash, interest bearing deposits and
investment in FHLB stock. The carrying value of cash and interest bearing
deposits approximates those assets' fair value.
Investments and mortgage-backed securities
------------------------------------------
For investment securities (debt instruments) and mortgage-backed
securities, fair values are based on quoted market prices, where
available. If a quoted market price is not available, fair value is
estimated using quoted market prices of comparable instruments.
26
<PAGE> 28
Loans receivable
----------------
The fair value of the loan portfolio is estimated by evaluating
homogeneous categories of loans with similar financial
characteristics. Loans are segregated by types, such as residential
mortgage, commercial real estate and consumer. Each loan category is
further segmented into fixed and adjustable rate interest, terms, and
by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage
loans, is calculated by discounting contractual cash flows using
estimated market discount rates which reflect the credit and interest
rate risk inherent in the loan. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates based on
secondary market sources. The fair value for significant
nonperforming loans is based on recent internal or external
appraisals. Assumptions regarding credit risk, cash flow, and
discount rates are subjectively determined by using available market
information.
Savings accounts
----------------
The fair values of passbook accounts, NOW accounts, and money market
savings and demand deposits approximates their carrying values. The
fair value of fixed maturity certificates of deposit is estimated
using a discounted cash flow calculation that applies interest rates
currently offered for deposits of similar remaining maturities.
Off-balance sheet items
-----------------------
Carrying value is a reasonable estimate of fair value. These
instruments are generally variable rate or short-term in nature, with
minimal fees charged.
27
<PAGE> 29
The estimated fair values of the Company's financial instruments were as
follows at :
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and due from banks, interest bearing
deposits with banks and federal funds sold $3,289,275 3,289,275
Investment securities 945,840 948,715
Mortgage-backed securities 4,288,236 4,167,556
Loans receivable 25,939,500 26,252,000
Accrued interest receivable 146,373 146,373
Financial liabilities:
Deposit liabilities 27,291,765 27,349,000
Federal Home Loan Bank advances 754,403 624,000
Off balance sheet items - -
Financial assets:
Cash and due from banks, interest bearing
deposits with banks and federal funds
sold $ 1,172,489 1,172,489
Investment securities 899,687 900,635
Mortgage-backed securities 4,640,509 4,553,889
Loans receivable 23,266,664 23,191,000
Accrued interest receivable 150,165 150,165
Financial liabilities:
Deposit liabilities 26,950,784 27,001,000
Advances Federal Home Loan Bank 825,000 667,000
Off balance sheet items - -
</TABLE>
10. Capital Requirements:
---------------------
The Savings Bank is subject to minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). The 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) equal to 3.0% of
adjusted total assets. The risk-based capital requirement currently
provides for the maintenance of core capital plus general 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-weighing factor, e.g., one-to-four
family residential loans carry a risk-weighted factor of 50%.
28
<PAGE> 30
The Savings Bank's regulatory capital exceed all minimum capital
requirements as shown in the following table:
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------------------
Regulatory Capital
Risk-
Tangible Core based
Capital % Capital % Capital %
------- - ------- - ------- -
(in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $ 5,532 5,532 5,532
General valuation allowances - - 126
------- ------ ----- ------ ----- ------
Regulatory capital computed 5,532 15.70 5,532 15.70 5,658 34.10
Minimum capital requirements 529 1.50 1,058 3.00 1,325 8.00
------- ------ ----- ------ ----- ------
Regulatory capital-excess $ 5,003 14.20 4,474 12.70 4,333 26.10
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------------------------------
Regulatory Capital
Risk-
Tangible Core based
Capital % Capital % Capital %
------- - ------- - ------- -
(in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $ 2,792 2,792 2,792
General valuation allowances - - 111
------- ------ ----- ------ ----- ------
Regulatory capital computed 2,792 9.05 2,792 9.05 2,903 19.4
Minimum capital requirements 462 1.50 925 3.00 1,198 8.0
------- ------ ----- ------ ----- ------
Regulatory capital-excess $ 2,330 7.55 $ 1,867 6.05 $ 1,705 11.4
===== ==== ===== ==== ===== ====
</TABLE>
11. Commitments:
------------
At June 30, 1997, the Savings Bank had commitments to originate loans
totaling $654,450. The entire amount was for fixed rate loans. No portion
of these loans were disbursed prior to June 30, 1997, and the financial
statements do not reflect any liability for such commitments. Management
anticipates that all originations will be funded from existing liquidity
and normal monthly cash flows. Loan commitments as of June 30, 1996 were
$1,026,900.
12. Retirement Plans:
-----------------
The Savings Bank had a 401(k) Salary Savings Plan with the Ohio Savings
and Loan League. The plan was terminated as of June 30, 1996. During
years ended June 30, 1996 and 1995, respectively, retirement expense
amounted to $ 12,700 and $10,585. The plan covered all employees having
completed one year of service and having attained the age of 21. The
employee could contribute up to nine percent with the employer matching
contribution of three percent and a discretionary three percent employer
matching contribution.
Concurrent with the Savings Bank's conversion from the mutual to stock
form of organization, in September 1996, the Company established an ESOP
which provides retirement benefits for substantially all employees
29
<PAGE> 31
who have completed one year of service and have attained age 21. The ESOP
initially acquired 37,030 common shares in the conversion offering. The
funds used by the ESOP to purchase the stock were provided by a loan from
the Company which will be repaid by contributions to the ESOP by the
Company in the future. Management intends to allocate these shares to
eligible employees' accounts over the next five to seven years. Expense
for shares committed to be allocated during 1997 was $53,451. Remaining
unearned shares at June 30, 1997, was 31,685.
13. Federal Income Taxes:
---------------------
The Company has qualified under provisions of the Internal Revenue Code
which permit the Savings Bank to deduct from taxable income an allowance
for bad debts based on a percentage of taxable income before such
deduction. The Tax Reform Act of 1969 gradually reduced this reduction to
40% for years beginning in 1979. The Tax Reform Act of 1986 reduced this
deduction to 8% beginning in 1988 and starting in 1997, the percentage of
taxable income method is no longer allowed.
Appropriated and unappropriated retained income at June 30, 1997 included
earnings of approximately $653,000, representing such bad debt deductions
for which no provision for federal income taxes has been made. In the
future, if the Company does not meet the federal income tax requirements
necessary to permit it to deduct an allowance for bad debts, the Company
will be subject to federal income tax at the then current corporate rate.
Management does not contemplate any action which would cause such
pre-1988 cumulative bad debt deduction to be subject to federal income
taxes, although it is possible that changes in legislation could, at a
future date require recapture of all or part of this bad debt deduction.
An analysis of income tax expense, setting forth the reasons for the
variations from the statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income taxes at the statutory
rate of 34% $ 53,385 38,519 58,876
Bad debt deduction - - -
Other, primarily surtax exemptions (8,328) (11,677) (11,076)
------ ------ ------
Federal income taxes per consolidated
financial statements $ 45,057 26,842 47,800
====== ====== ======
Effective tax rate 28.7% 23.7% 27.6%
====== ====== ======
</TABLE>
30
<PAGE> 32
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
June 30
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets arising from:
Allowance for loan losses $ 31,800 26,800 15,000
Deferred loan fees and costs 8,000 11,100 15,500
Basis of investments 2,000 2,000 2,000
------ ------ ------
Total deferred tax assets 41,800 39,900 32,500
------ ------ ------
Deferred tax liabilities arising from:
Accrual to cash conversion 23,700 32,300 30,300
Depreciation 17,000 20,200 20,800
FHLB stock 55,000 48,200 42,000
------ --------- -------
Total deferred tax liabilities (95,700) (100,700) (93,100)
------ -------- -------
Net deferred tax liability $ 53,900 60,800 60,600
====== ========= =======
</TABLE>
The Savings Bank has not recorded a valuation allowance, as the deferred
tax assets are presently considered to be realizable based on the level
of anticipated future taxable income. Net deferred tax liabilities and
federal income tax expense in future years can be significantly affected
by changes in enacted tax rates.
The components of deferred income tax expense (credit) are as follows:
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loan origination fees $ 3,100 4,400 4,200
FHLB stock dividend 6,800 6,200 5,400
Depreciation (3,300) (600) (900)
Accrual to cash conversion (8,300) 2,000 10,800
Bad debt reserves and other (5,200) (11,800) (1,700)
------ ------- ------
$ (6,900) 200 17,800
====== ========= ======
</TABLE>
14. SAIF Special Assessment:
------------------------
The deposits of the Savings Bank are presently insured by the SAIF, which
together with the Bank Insurance Fund (BIF), are the two insurance funds
administered by the FDIC. On November 8, 1995, the FDIC revised the
premium schedule for BIF-insured banks to provide a range of .00% to .31%
of deposits (as compared to the current range of .23% to .31% of deposits
for SAIF-insured institutions) due to the BIF achieving its statutory
reserve ratio. As a result, BIF members generally would pay substantially
lower premiums than SAIF members. It was previously anticipated that the
SAIF would not be adequately recapitalized until 2002, absent a
substantial increase in premium rates or the imposition of special
assessments or other significant developments.
On September 30, 1996, the President signed an omnibus appropriations
package which included the recapitalization of the SAIF. All SAIF members
were required to pay a one-time assessment of 65.7 cents per $100 in
deposits held on March 31, 1995. The Savings Bank's special assessment
was approximately $168,000. The assessment was charged against earnings
during the 1997 year. Beginning January 1, 1997, SAIF members were
assessed a premium of 6.4 cents per $100 of deposits. Other provisions of
the appropriations package require the Treasury Department to provide
Congress, by March 31, 1997, with a report on merging of the bank and
thrift charters and merging the SAIF and BIF by January 1, 1999,
31
<PAGE> 33
provided the bank and thrift charters have been merged by that date. It
also required BIF and SAIF members to begin sharing the FICO obligation
on a pro-rata basis at the earlier of January 1, 2000, or when the BIF
and SAIF funds are merged.
15. Bad Debt Reserve Recapture:
---------------------------
A bill repealing the thrift bad debt reserve has been signed into law and
is effective for taxable years beginning after December 31, 1995. All
savings banks and thrifts will be required to account for tax reserves
for bad debts in the same manner as banks. Such entities with assets less
than $500 million will be required to maintain a moving average
expense-based reserve and no longer will be able to calculate a reserve
based on a percentage of taxable income.
Tax reserves accumulated after 1987 will automatically be subject to
recapture. The recapture will occur in equal amounts over six years
beginning in 1997 and can be deferred up to two years, depending on the
level of loans originated.
As a result of the tax law change, the Company is expected to ultimately
recapture approximately $32,500 of tax reserves accumulated after 1987,
resulting in additional tax payments of $11,000. The recapture of these
reserves will not result in any significant income statement effect to
the Company. Pre-1988 tax reserves will not have to be recaptured unless
the thrift or its successor institution liquidates, redeems shares or
pays a dividend in excess of earnings and profits.
16. Conversion and Liquidation Account:
-----------------------------------
On May 31, 1996, 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 shares to the Company.
In September 1996, the Savings Bank completed its conversion to the stock
form of ownership and issued all of its outstanding common shares to the
Company.
In connection with the conversion, the Company sold 462,875 at a price of
$10.00 per share which, after consideration of offering expenses totaling
$287,624 and shares purchased by employee benefit plans, resulted in net
cash proceeds of $3.97 million.
At the time of the conversion in September 1996, the Savings Bank
established a liquidation account in an amount of $2,772,105, which is
equal to the Savings Bank's regulatory capital at March 31, 1996. The
liquidation account will be maintained for the benefit of eligible
savings account holders who maintain their savings account 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 savings accounts held before any liquidation
distribution may be made with respect to capital stock. Except for the
repurchase of shares and payment of dividends by the Company, the
existence of the liquidation account will not restrict the use or
application of such related earnings.
The Savings Bank may not declare or pay a cash dividend on/or repurchase
any of, its capital stock if the effect thereof would cause the
regulatory capital of the Savings Bank to be reduced below either the
amount required for the liquidation account or the regulatory capital
requirements imposed by the FDIC.
32
<PAGE> 34
17. Summarized Financial Information of the Parent Company:
-------------------------------------------------------
FOUNDATION BANCORP, INC.
<TABLE>
<CAPTION>
Statement of Financial Condition
--------------------------------
June 30, 1997
<S> <C>
Assets:
Cash $ 109,679
Investment in Foundation Savings Bank 2,970,826
Note receivable-Foundation Savings Bank 1,000,000
-----------
$ 4,080,505
===========
Liabilities and stockholders' equity:
Liabilities:
Accrued expenses $ 19,952
-----------
Stockholders' equity:
Common stock $ -
Additional paid in capital 4,341,126
Retained earnings 31,208
Less unearned ESOP shares (311,781)
-----------
4,060,553
-----------
$ 4,080,505
===========
Statement of Income
-------------------
Interest income $ 57,350
Professional fees (6,140)
Income taxes (20,002)
-----------
$ 31,208
===========
</TABLE>
33
<PAGE> 35
18. Selected Quarterly Financial Data (unaudited):
---------------------------------------------
Summarized quarterly financial information for the quarters after the
conversion is as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Quarter Ended
December 31, 1996 March 31, 1997 June 30, 1997
----------------- -------------- -------------
<S> <C> <C> <C>
Interest income $640 649 663
Interest expense 372 379 389
---- ---- ----
Net interest income 268 270 274
Other income 18 16 15
Other expenses 187 188 183
---- ---- ----
Income (loss) before
provision for income taxes 99 98 106
Provision (credit) for income taxes 32 31 29
---- ---- ----
Net income (loss) $ 67 67 77
==== ==== ====
Earnings (loss) per share 0.16 0.16 0.17
==== ==== ====
</TABLE>
34
<PAGE> 36
================================================================================
DIRECTORS OF
FOUNDATION BANCORP, INC.
AND
FOUNDATION SAVINGS BANK
<TABLE>
<S> <C>
LAIRD L. LAZELLE MARDELLE DICKHAUT
President, Foundation Bancorp, Inc. Retired from Foundation Savings Bank.
and Foundation Savings Bank
RUTH C. EMDEN ROBERT E. LEVITCH
Retired. Currently active in community work. Corrections Officer with the Hamilton County
Sheriff's Office.
MICHAEL S. SCHWARTZ PAUL L. SILVERGLADE
Attorney at law practicing in Cincinnati Retired Corporate Office Personnel
and operates a title insurance agency. Director for Federated Department Stores.
IVAN J. SILVERMAN
Investment Consultant and Associate Vice
President with Gradison Division of McDonald
& Company Securities, Inc. Mr. Silverman is
also the Mayor of the City of Montgomery.
EXECUTIVE OFFICERS OF
FOUNDATION BANCORP, INC.
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President & Chief Executive Officer Secretary and Treasurer
EXECUTIVE OFFICERS OF
FOUNDATION SAVINGS BANK
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President & Chief Executive Officer Vice President
MICHAEL S. SCHWARTZ MARDELLE DICKHAUT
Chairman of the Board Secretary
MARGO A. LIEBERT MICHELLE BARTH
Treasurer Assistant Secretary
</TABLE>
================================================================================
35
<PAGE> 37
FOUNDATION BANCORP, INC.
AND
FOUNDATION SAVINGS BANK
CORPORATE INFORMATION
CORPORATE OFFICES
-----------------
25 Garfield Place
Cincinnati, Ohio 45202
Phone (513) 721-0120
Fax (513) 721-0140
STOCK TRANSFER AGENT & REGISTRAR
--------------------------------
Fifth Third Bank
Corporate Trust Operations
Mail Drop 1090F5
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Toll Free # (800) 837-2755
CORPORATE LEGAL COUNSEL
-----------------------
Vorys, Sater, Seymour & Pease
Suite 2100 Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45201-0236
INDEPENDENT AUDITORS
--------------------
Clark, Schaefer, Hackett & Company
Suite 1600
105 east Fourth Street
Cincinnati, Ohio 45202
MARKET MAKERS
-------------
Ernst & Co.
Friedman, Billings, Ramsey & Co.
Monroe Securities
Mesirow & Co.
Trident Securities
TRADING SYMBOL
--------------
Foundation Bancorp, Inc., is traded on the National Daily Quotation Service
"Pink Sheets" under the symbol "FOUN".
A COPY OF FORM 10-KSB OF FOUNDATION BANCORP, INC. FOR THE FISCAL YEAR ENDED JUNE
30, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN
REQUEST TO LAIRD L. LAZELLE, PRESIDENT, FOUNDATION BANCORP, INC., 25 GARFIELD
PLACE, CINCINNATI, OHIO 45202.
36
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Foundation Savings Bank
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 170
<INT-BEARING-DEPOSITS> 3,119
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 5,234
<INVESTMENTS-MARKET> 5,116
<LOANS> 25,940
<ALLOWANCE> 126
<TOTAL-ASSETS> 35,271
<DEPOSITS> 27,292
<SHORT-TERM> 65
<LIABILITIES-OTHER> 226
<LONG-TERM> 754
0
0
<COMMON> 0
<OTHER-SE> 6,934
<TOTAL-LIABILITIES-AND-EQUITY> 35,271
<INTEREST-LOAN> 2,013
<INTEREST-INVEST> 346
<INTEREST-OTHER> 198
<INTEREST-TOTAL> 2,558
<INTEREST-DEPOSIT> 1,487
<INTEREST-EXPENSE> 1,530
<INTEREST-INCOME-NET> 1,028
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 919
<INCOME-PRETAX> 157
<INCOME-PRE-EXTRAORDINARY> 157
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
<YIELD-ACTUAL> 7.40
<LOANS-NON> 0
<LOANS-PAST> 84
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 111
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 126
<ALLOWANCE-DOMESTIC> 126
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 126
</TABLE>
<PAGE> 1
Exhibit 99
FOUNDATION BANCORP, INC.
25 GARFIELD PLACE
CINCINNATI, OHIO 45202
(513) 721-0120
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1997 Annual Meeting of Shareholders of
Foundation Bancorp, Inc. (the "Company") will be held at Parlor F/G, The
Cincinnati Club Building, 30 Garfield Place, Cincinnati, Ohio 45202, on October
23, 1997, at 1:00 p.m., local time (the "Annual Meeting"), for the following
purposes, all of which are more completely set forth in the accompanying Proxy
Statement:
1. To elect four directors of the Company for terms
expiring in 1999;
2. To approve the Foundation Bancorp, Inc. 1997
Stock Option and Incentive Plan, a copy of which
is attached hereto as Exhibit A;
3. To approve the Foundation Savings Bank
Recognition and Retention Plan and Trust
Agreement, a copy of which is attached hereto as
Exhibit B;
4. To ratify the selection of Clark, Schaefer,
Hackett & Co. as the auditors of the Company for
the current fiscal year; and
5. To transact such other business as may properly
come before the Annual Meeting or any
adjournments thereof.
Only shareholders of the Company of record at the close of business on
August 29, 1997, will be entitled to receive notice of and to vote at the Annual
Meeting and at any adjournments thereof. Whether or not you expect to attend the
Annual Meeting, we urge you to consider the accompanying Proxy Statement
carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM
MAY BE ASSURED. The giving of a proxy does not affect your right to vote in
person in the event you attend the Annual Meeting.
By Order of the Board of Directors
Cincinnati, Ohio Laird L. Lazelle
September 17, 1997
<PAGE> 2
FOUNDATION BANCORP, INC.
25 GARFIELD PLACE
CINCINNATI, OHIO 45202
(513) 721-0120
PROXY STATEMENT
PROXIES
The enclosed proxy (the "Proxy") is being solicited by the Board of
Directors of Foundation Bancorp, Inc. (the "Company") for use at the 1997 Annual
Meeting of Shareholders of the Company to be held at Parlor F/G, The Cincinnati
Club Building, 30 Garfield Place, Cincinnati, Ohio 45202, on October 23, 1997,
at 1:00 p.m., local time, and at any adjournments thereof (the "Annual
Meeting"). Without affecting any vote previously taken, the Proxy may be revoked
by executing a later dated proxy which is received by the Company before the
Proxy is exercised or by giving notice of revocation to the Company in writing
or in open meeting before the Proxy is exercised. Attendance at the Annual
Meeting will not, of itself, revoke the Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of Mardelle Dickhaut, Laird L. Lazelle,
Robert E. Levitch and Michael S. Schwartz as directors of the
Company for terms expiring in 1999;
FOR the approval of the Foundation Bancorp, Inc. 1997 Stock
Option and Incentive Plan (the "Stock Option Plan"), a copy of
which is attached hereto as Exhibit A;
FOR the approval of the Foundation Savings Bank Recognition
and Retention Plan and Trust Agreement (the "RRP"), a copy of
which is attached hereto as Exhibit B;
FOR the ratification of the selection of Clark, Schaefer,
Hackett & Co. as the auditors of the Company for the current
fiscal year.
The Proxies may be solicited by the directors, officers and other
employees of the Company and Foundation Savings Bank ("Foundation"), in person
or by telephone, telegraph or mail only for use at the Annual Meeting. The Proxy
will not be used for any other meeting. The cost of soliciting the Proxies will
be borne by the Company.
Only shareholders of record as of the close of business on August 29,
1997 (the "Voting Record Date"), are entitled to vote at the Annual Meeting.
Each such shareholder will be entitled to cast one vote for each share owned.
The Company's records disclose that, as of the Voting Record Date, there were
462,875 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of the
Company on or about September 17, 1997.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and the Company's Code of Regulations (the
"Regulations"), the four nominees receiving the greatest number of votes will be
elected as directors. Shares held by a nominee for a beneficial owner which are
represented in person or by proxy but not voted with respect to the election of
directors and shares as to which the authority to vote is withheld are not
counted toward the election of directors or toward the election of the
individual nominees specified on the Proxy.
-1-
<PAGE> 3
APPROVAL OF THE STOCK OPTION PLAN AND THE RRP
The affirmative vote of the holders of a majority of the outstanding
common shares of the Company is necessary to approve the Stock Option Plan and
the RRP. The effect of an abstention is, therefore, the same as a vote against
the approval of the Stock Option Plan and the RRP. If the accompanying Proxy is
signed and dated by the shareholder but no vote or instruction to abstain is
specified thereon, however, the shares held by such shareholder will be voted
FOR the adoption of the Stock Option Plan and the RRP.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Clark, Schaefer, Hackett & Co. as the auditors of the Company
for the current fiscal year. The effect of an abstention is, therefore, the same
as a "no" vote. If the accompanying Proxy is signed and dated by the shareholder
but no vote or instruction to abstain is specified thereon, however, the shares
held by such shareholder will be voted FOR the ratification of the selection of
Clark, Schaefer, Hackett & Co. as the auditors of the Company for the current
fiscal year.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only persons known to the Company to own beneficially more than five percent of
the outstanding common shares of the Company as of September 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
First Bankers Trust Company, N.A.
1201 Broadway
Quincy, Illinois 62301 37,030 (1) 8.00%
Laird L. Lazelle
25 Garfield Place 24,666 (2) 5.32%
Cincinnati, Ohio 45202
- ---------------------------
<FN>
(1) Consists of the shares held by First Bankers Trust Company, N.A., as
the Trustee for the Foundation Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP"). The Trustee has voting power over shares that have
not been allocated to an ESOP participant and shares that have been
allocated to an ESOP participant but as to which no voting
instructions are given by the recipient. The Trustee has limited
shared investment power over all ESOP shares.
(2) Includes 1,649 common shares allocated to Mr. Lazelle's ESOP account.
Mr. Lazelle has voting power but no investment power over such shares.
Also includes 11,517 shares owned by Mr. Lazelle's spouse.
</TABLE>
-2-
<PAGE> 4
The following table sets forth certain information with respect to the
number of common shares of the Company beneficially owned by each director and
by all directors and executive officers of the Company as a group as of
September 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership Shares Outstanding
- -------------------- --------------------- ------------------
(2)
<S> <C> <C>
Mardelle Dickhaut 4,400 0.95%
Ruth C. Emden 5,000 1.08
Laird L. Lazelle 24,666 (3) 5.32
Robert E. Levitch 25 0.00
Michael S. Schwartz 16,517 (4) 3.56
Paul L. Silverglade 8,750 1.89
Ivan J. Silverman 11,571 (5) 2.49
All directors and executive officers of
the Company as a group (8 people) 75,079 16.22
- ----------------------------
<FN>
(1) Each of the persons listed in this table may be contacted at the
address of the Company.
(2) All shares are owned directly with sole voting or investment power
unless otherwise indicated by footnote.
(3) Includes 11,517 shares owned by Mr. Lazelle's spouse.
(4) Includes 5,000 shares held by Mr. Schwartz as trustee and over which
Mr. Schwartz shares voting power.
(5) Includes 6,571 shares owned by Mr. Silverman's spouse.
</TABLE>
PROPOSAL ONE - ELECTION OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of seven
persons. In accordance with Section 2.03 of the Regulations, nominees for
election as directors may be proposed only by the directors or by a shareholder
entitled to vote for directors. A nomination by a shareholder with respect to
the election of directors at an annual meeting of shareholders must be submitted
in writing to the Secretary of the Company and received by the Secretary not
later than the sixtieth day before the first anniversary of the most recent
annual meeting of shareholders held for the election of directors. A nomination
by a shareholder with respect to the election of directors at a special meeting
of shareholders must be submitted in writing and received by the Secretary of
the Company not later than the close of business on the seventh day following
the day on which notice of such special meeting was mailed to shareholders. Each
written nomination must state the name, age, business or residence address of
the nominee, the principal occupation or employment of the nominee, the number
of common shares of the Company owned either beneficially or of record by each
such nominee and the length of time such shares have been so owned.
-3-
<PAGE> 5
The Board of Directors proposes the reelection at the Annual Meeting of
the following persons to terms which will expire in 1999:
<TABLE>
<CAPTION>
Director of Director of
the Company Foundation
Name Age (1) Position(s) Held Since (2) Since
- ---- ------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Mardelle Dickhaut 64 Director 1996 1989
Laird L. Lazelle 58 Director, President and 1996 1994
Chief Executive Officer
Robert E. Levitch 63 Director 1996 1964
Michael S. Schwartz 53 Director 1996 1967
- -----------------------------
<FN>
(1) As of September 1, 1997.
(2) Each director of the Company is also a director of Foundation. Each
nominee became a director of the Company in connection with the
conversion of Foundation from mutual to stock form (the "Conversion")
and the formation of the Company as the holding company for Foundation.
</TABLE>
If any nominee is unable to stand for election, any Proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends.
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Director of Director of
the Company Foundation
Name Age (1) Positions Held Since (2) Since Term Expires
- ---- --------- -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ruth C. Emden 70 Director 1996 1994 1998
Paul L. Silverglade 72 Director 1996 1988 1998
Ivan J. Silverman 56 Director 1996 1992 1998
- -----------------------------
<FN>
(1) As of September 1, 1997.
(2) Each director of the Company is also a director of Foundation. Each
director became a director of the Company in connection with the
Conversion.
</TABLE>
MARDELLE DICKHAUT has served as Secretary of Foundation since 1979 and
as a director since 1989. Mrs. Dickhaut was employed at Foundation for 23 years
prior to her retirement in 1995.
RUTH C. EMDEN has served as a director of Foundation since 1994. Mrs.
Emden is the widow of Narvin I. Emden, who served Foundation as President,
Managing Officer and Director for over 46 years. Mrs. Emden is active in
community service.
LAIRD L. LAZELLE is President and Chief Executive Officer of both the
Company and Foundation and is the designated Managing Officer of Foundation. Mr.
Lazelle served as President and Chief Executive Officer of The TriState Bancorp
from February 1988 until joining Foundation in January 1994.
ROBERT E. LEVITCH has served as a director of Foundation since 1964.
Mr. Levitch has been a corrections officer with the Hamilton County Sheriff's
Department since 1980.
MICHAEL S. SCHWARTZ is an attorney at law practicing in Cincinnati,
Ohio and operates a title insurance agency. Mr. Schwartz is legal counsel to
Foundation and also provides title services for loans granted by Foundation. Mr.
Schwartz has served as a director of Foundation since 1967 and succeeded his
father as Chairman of the Board in 1993.
-4-
<PAGE> 6
PAUL L. SILVERGLADE retired as the Corporate Office Personnel Director
for Federated Department Stores in 1981, after serving for 33 years. Mr.
Silverglade has been a director of Foundation since 1988 and serves as Chairman
of the Compensation Committee.
IVAN J. SILVERMAN is an investment consultant and Associate Vice
President with Gradison Division of McDonald & Company Securities, Inc. Mr.
Silverman is also the Mayor of the City of Montgomery, Ohio. Mr. Silverman has
served as a director of Foundation since 1992 and serves as Chairman of the
Audit Committee.
MEETINGS OF DIRECTORS
The Board of Directors of the Company met nine times for regularly
scheduled and special meetings during the fiscal year ended June 30, 1997. Due
to illness, Mrs. Emden attended fewer than 75% of the regularly scheduled and
special meetings of the Board of Directors during fiscal 1997.
COMMITTEES OF DIRECTORS
The Board of Directors of the Company has an Audit Committee. The
Company has no Executive Committee and the entire board serves as a Nominating
Committee.
The Board of Directors of Foundation has an Audit Committee and a
Compensation Committee.
The Audit Committee of both the Company and Foundation is comprised of
Mr. Silverman, who serves as chairman of the Audit Committee, Ms. Dickhaut and
Mr. Silverglade. The Audit Committee reviews and monitors the process of
auditing the Company and Foundation. The final audit is presented to the full
board of directors by the auditors. The Audit Committee met one time during the
fiscal year ended June 30, 1997.
Mr. Silverglade serves as chairman of the Compensation Committee. Mr.
Schwartz and Mr. Silverman also serve on the Compensation Committee. The
function of the Compensation Committee is to determine compensation for
Foundation's employees and to make recommendations to the Board of Directors
regarding employee benefits and related matters. The Compensation Committee met
two times during the fiscal year ended June 30, 1997.
EXECUTIVE OFFICERS
Mr. Lazelle is the President and Chief Executive Officer of the
Company. Dianne K. Rabe serves as Secretary and Treasurer of the Company. Mrs.
Rabe, a Certified Public Accountant, is Vice President and Chief Operating
Officer of Foundation. Mrs. Rabe came to Foundation in 1992 from another thrift
institution located in Cincinnati, Ohio.
-5-
<PAGE> 7
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Foundation to
Laird L. Lazelle, the President and Chief Executive Officer of the Company and
Foundation, for the fiscal years ended June 30, 1997, 1996 and 1995. No
executive officer of the Company earned salary and bonus in excess of $100,000
during fiscal 1997.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Annual Compensation All Other Compensation
(1)
- -----------------------------------------------------------------------------------
Name and Principal Year Salary ($) Bonus ($)
Position
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Laird L. Lazelle 1997 $80,000 $15,000 $24,998
President and Chief 1996 65,000 9,800 6,000
Executive Officer 1995 69,488 5,200 6,000
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Consists of director's fees and for 1997 also includes director fees of
$1,500 and the $23,498 aggregate value of the 1,649 shares of the
Company allocated to Mr. Lazelle's account pursuant to the ESOP, based
on the price of shares of the Company in the most recent trade quoted
on the National Daily Quotation Service ("NDQS"), as of September 1,
1997. Does not include amounts attributable to other miscellaneous
benefits, the cost of which was less than 10% of Mr. Lazelle's cash
compensation.
</TABLE>
DIRECTOR COMPENSATION
Each director who is not an employee of the Company or Foundation
currently receives directors' fees of $7,500 per year. Effective September 1996,
directors who are employees of the Company or Foundation receive no directors'
fees.
EMPLOYMENT AGREEMENT
Foundation has entered into an employment agreement with Mr. Lazelle
(the "Employment Agreement"), effective September 25, 1996. The Employment
Agreement provides for a term of three years and salary and performance review
by the Board of Directors not less often than annually. The Employment Agreement
provides for inclusion of Mr. Lazelle in any formally established employee
benefit, bonus, pension and profit-sharing plans for which senior management
personnel are eligible. The Employment Agreement also provides for vacation and
sick leave in accordance with Foundation's prevailing policies.
The Employment Agreement is terminable by Foundation at any time. In
the event of termination by Foundation for "just cause," as defined in the
Employment Agreement, Mr. Lazelle will have no right to receive any compensation
or other benefits for any period after such termination. In the event of
termination by Foundation other than (i) for just cause, (ii) at the end of the
term of the Employment Agreement or (iii) in connection with a "change of
control," as defined in the Employment Agreement, the Employment Agreement
entitles Mr. Lazelle to a continuation of salary payments for the remainder of
the term of the Employment Agreement and a continuation of benefits
substantially equal to those being provided at the date of termination of
employment until the earliest to occur of the end of the term of the Employment
Agreement or the date Mr. Lazelle becomes employed full-time by another
employer.
The Employment Agreement also contains provisions with respect to the
occurrence within six months prior to or one year following a "change of
control" of (i) the termination of employment of Mr. Lazelle for any reason
other than just cause, retirement or termination at the end of the term of the
agreement, or (ii) a constructive termination resulting from change in the
capacity or circumstances in which Mr. Lazelle is employed or a material
reduction in his responsibilities, authority,
-6-
<PAGE> 8
compensation or other benefits provided under the Employment Agreement without
his written consent. In the event of any such occurrence, Mr. Lazelle will be
entitled to payment of an amount equal to three times his then current annual
salary. In addition, Mr. Lazelle would be entitled to continued coverage under
all benefit plans until the earliest of the end of the term of the Employment
Agreement or the date on which he is included in another employer's benefit
plans as a full-time employee. The maximum which Mr. Lazelle may receive,
however, is limited to an amount which will not result in the imposition of a
penalty tax pursuant to Section 280G(b)(3) of Internal Revenue Code of 1986, as
amended (the "Code"). A "change of control," as defined in the Employment
Agreement, generally refers to the acquisition by any person or entity of the
ownership or power to vote 25% or more of the voting stock of Foundation or the
Company, the control of the election of a majority of the directors of
Foundation or the Company or the acquisition of control, as defined in the
regulations of the OTS, of Foundation or the Company. For purposes of
illustration, the payment that would have been made to Mr. Lazelle under the
Employment Agreement, had his employment been terminated at June 30, 1997,
following a change of control, totals approximately $240,000.
CERTAIN TRANSACTIONS WITH FOUNDATION
Foundation has extended loans to certain of its and the Company's
directors and executive officers, their affiliates and members of their
families. All such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with
other persons and did not present more than the normal risk of collectibility or
other unfavorable features.
PROPOSAL TWO - APPROVAL OF THE FOUNDATION BANCORP, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
STOCK OPTION PLAN
The following is a summary of the terms of the Stock Option Plan and is
qualified in its entirety by reference to the full text of the Stock Option
Plan, a copy of which is attached hereto as Exhibit A.
PURPOSE. The purposes of the Stock Option Plan include retaining and
providing incentives to the directors, managerial and other key employees of the
Company and Foundation by facilitating their purchase of a stock interest in the
Company. Pursuant to the Stock Option Plan, 46,288 common shares have been
reserved for issuance by the Company upon the exercise of options to be granted
to certain directors, officers and employees of Foundation and the Company from
time to time under the Stock Option Plan.
ADMINISTRATION AND ELIGIBILITY. The Stock Option Plan will be
administered by a committee composed of at least three directors of the Company
(the "Stock Option Committee"). The Stock Option Committee may grant options
under the Stock Option Plan at such times as it deems most beneficial to
Foundation and the Company on the basis of the individual participant's
responsibility, tenure and future potential to Foundation and the Company.
Pursuant to the terms of the Stock Option Plan, no employee may receive options
to purchase more than 25% of the shares which may be subject to options pursuant
to the Stock Option Plan, and directors who are not employees of the Company or
Foundation may not receive options to purchase more than 5% of such shares
individually or 30% in the aggregate.
Without further approval of the shareholders, the Board of Directors
may at any time terminate the Stock Option Plan or may amend it from time to
time in such respects as the Board of Directors may deem advisable, except that
the Board of Directors may not, without the approval of the shareholders, make
any amendment which would (a) increase the aggregate number of common shares
which may be issued under the Stock Option Plan (except for adjustments to
reflect certain changes in the capitalization of the Company), (b) materially
modify the requirements as to eligibility for participation in the Stock Option
Plan, or (c) materially increase the benefits accruing to participants under the
Stock Option Plan. Notwithstanding the foregoing, the Board of Directors may
amend the Stock Option Plan to take into account changes in applicable
securities, federal income tax and other applicable laws.
-7-
<PAGE> 9
No determination of which directors and employees of Foundation will
receive options has been made. If the shareholders approve the Stock Option
Plan, the Stock Option Committee will be appointed and will determine which
directors and employees will receive options and the number of options to be
granted.
OPTION TERMS. Options granted to the officers and employees under the
Stock Option Plan may be "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Code, or may be options which do not qualify under Section
422 of the Code ("Non-Qualified Stock Options"). Options granted under the Stock
Option Plan to directors who are not employees of the Company or Foundation will
not qualify under the Code and thus will be Non-Qualified Stock Options. No
determination has been made regarding the extent to which options granted to
employees of Foundation will be ISOs.
The option exercise price of each option granted under the Stock Option
Plan will be determined by the Stock Option Committee at the time the option is
granted; provided, however, that the exercise price of an ISO may not be less
than 100% of the fair market value of the shares on the date of the grant, and
the exercise price of an ISO may not be less than 110% of the fair market value
of the shares on the date of the grant if the recipient owns more than 10% of
the Company's outstanding common shares. The option exercise price of
Non-Qualified Stock Options may be less than the fair market value of the shares
on the date of grant. The Stock Option Committee will fix the term of each
option, except that an ISO will not be exercisable after the expiration of ten
years from the date it is granted; provided, however, that if a recipient of an
ISO owns a number of shares representing more than 10% of the Company shares
outstanding at the time the ISO is granted, the term of the ISO will not exceed
five years. If the fair market value of shares awarded pursuant to ISOs
exercisable for the first time by a participant under the Stock Option Plan
during any calendar year exceeds $100,000, however, the ISOs will be considered
Non-Qualified Stock Options to the extent of such excess.
An option recipient cannot transfer or assign an option other than by
will or in accordance with the laws of descent and distribution. Termination of
an option recipient's employment for cause, as defined in the Stock Option Plan,
will result in the annulment of any outstanding exercisable options. Any options
which have not yet become exercisable will terminate upon the resignation or
removal of a director of the Company or Foundation, or upon the termination of
employment of an officer or employee of the Company or Foundation, except in the
case of death, disability or retirement of the recipient or a change of control
of the Company or Foundation.
The Company will receive no monetary consideration for the granting of
options under the Stock Option Plan. Upon the exercise of options, the Company
will receive payment of cash or, if acceptable to the Stock Option Committee,
common shares of the Company or outstanding awarded stock options. The market
value of the common shares underlying the options reserved for the Stock Option
Plan is $659,604, based upon the number of shares reserved, multiplied by the
price of shares of the Company on September 1, 1997, as quoted on the NDQS.
TAX TREATMENT OF INCENTIVE STOCK OPTIONS. An optionee who is granted an
ISO will not recognize taxable income either on the date of grant or on the date
of exercise, although the alternative minimum tax may apply. Upon disposition of
shares acquired from the exercise of an ISO, long-term capital gain or loss is
generally recognized in an amount equal to the difference between the amount
realized on the sale or disposition and the exercise price. If the optionee
disposes of the shares within two years of the date of grant or within one year
from the date of the transfer of the shares to the optionee (a "Disqualifying
Disposition"), then the optionee will recognize ordinary income, as opposed to
capital gain, at the time of disposition in an amount generally equal to the
lesser of (i) the amount of gain realized on the disposition, or (ii) the
difference between the fair market value of the shares received on the date of
exercise and the exercise price. Any remaining gain or loss is treated as a
short-term, mid-term or long-term capital gain or loss, depending upon the
period of time the shares have been held.
The Company will not be entitled to a tax deduction upon either the
exercise of an ISO or the disposition of shares acquired pursuant to such
exercise, except to the extent that the optionee recognizes ordinary income in a
Disqualifying Disposition. Ordinary income from a Disqualifying Disposition will
constitute compensation but will not be subject to tax withholding, nor will it
be considered wages for payroll tax purposes.
If the holder of an ISO pays the exercise price, in whole or in part,
with previously acquired shares, the exchange should not affect the ISO tax
treatment of the exercise. Upon such exchange, and except as otherwise described
herein, no gain or loss is recognized by the optionee upon delivering previously
acquired shares to the Company, and shares received
-8-
<PAGE> 10
by the optionee equal in number to the previously acquired common shares
exchanged therefor will have the same basis and holding period for long-term or
mid-term capital gain purposes as the previously acquired shares. (The optionee,
however, will not be able to utilize the prior holding period for the purpose of
satisfying the ISO statutory holding period requirements for avoidance of a
Disqualifying Disposition.) Shares received by the optionee in excess of the
number of shares previously acquired will have a basis of zero and a holding
period which commences as of the date the shares are transferred to the optionee
upon exercise of the ISO. If the exercise of an ISO is effected using shares
previously acquired through the exercise of an ISO, the exchange of such
previously acquired shares will be considered a disposition of such shares for
the purpose of determining whether a Disqualifying Disposition has occurred.
TAX TREATMENT OF NON-QUALIFIED STOCK OPTIONS. An optionee receiving a
Non-Qualified Stock Option does not recognize taxable income on the date of
grant of the option, provided that the option does not have a readily
ascertainable fair market value at the time it is granted. The optionee must
recognize ordinary income generally at the time of exercise of a Non-Qualified
Stock Option in the amount of the difference between the fair market value of
the shares on the date of exercise and the option price. The ordinary income
received will constitute compensation for which tax withholding by the Company
generally will be required. The amount of ordinary income recognized by an
optionee will be deductible by the Company in the year that the optionee
recognizes the income if the Company complies with the applicable withholding
requirement.
Shares acquired upon the exercise of a Non-Qualified Stock Option will
have a tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized, and the holding period for
the shares generally will begin on the date of exercise or such other relevant
date. Upon subsequent disposition of the shares, the optionee will recognize
long-term capital gain or loss if the optionee has held the shares for more than
eighteen months prior to disposition, mid-term capital gain or loss if the
optionee has held the shares for more than one year but no more than eighteen
months prior to disposition, or short-term capital gain or loss if the optionee
has held the shares for one year or less prior to disposition.
If a holder of a Non-Qualified Stock Option pays the exercise price, in
whole or in part, with previously acquired shares, the optionee will recognize
ordinary income in the amount by which the fair market value of the shares
received exceeds the exercise price. The optionee will not recognize gain or
loss upon delivering such previously acquired shares to the Company. Shares
received by an optionee equal in number to the previously acquired shares
exchanged therefor will have the same basis and holding period as such
previously acquired shares. Shares received by an optionee in excess of the
number of such previously acquired shares will have a basis equal to the fair
market value of such additional shares as of the date ordinary income is
recognized. The holding period for such additional shares will commence as of
the date of exercise or such other relevant date.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE SHAREHOLDERS
OF THE COMPANY APPROVE THE STOCK OPTION PLAN.
PROPOSAL THREE - APPROVAL OF THE FOUNDATION SAVINGS BANK
MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST
RECOGNITION AND RETENTION PLAN
The following is a summary of the terms of the RRP and is qualified in
its entirety by reference to the full text of the RRP, a copy of which is
attached hereto as Exhibit B.
PURPOSE. Foundation has proposed the RRP to compensate its directors
and key employees for services to Foundation in a manner which will provide such
persons with an additional incentive to strive for the success of Foundation and
the Company. Foundation expects to contribute sufficient funds to enable the RRP
to purchase up to 18,515 common shares of the Company.
-9-
<PAGE> 11
ADMINISTRATION AND ELIGIBILITY. The RRP will be administered by a
committee of directors composed of at least three directors of Foundation (the
"RRP Committee"). The RRP Committee will determine which directors and employees
of Foundation will be awarded shares under the RRP and the number of shares
awarded; provided, however, that the terms of the RRP provide that the aggregate
number of shares covered by awards to any one employee may not exceed 25% of the
shares held pursuant to the RRP and directors who are not employees of
Foundation may not receive more than 5% of such shares individually or 30% in
the aggregate. The shares to be awarded pursuant to the RRP may be purchased by
the Company on the open market or may consist of authorized but unissued shares
of the Company. In the event that all 18,515 shares which may be awarded under
the RRP consist of authorized but unissued shares of the Company, the interests
of current shareholders will be diluted by approximately 3.85%.
No determination of which directors and key employees of Foundation
will awarded shares under the RRP has been made. If the shareholders approve the
RRP, the RRP Committee will be appointed and will determine which directors and
key employees will receive awards and the number of shares to be awarded.
TERMS. Unless the RRP Committee specifically states to the contrary at
the time of an award of shares, one-tenth of such shares will become earned and
non-forfeitable on each of the first ten anniversaries of the date of the award.
Until shares awarded are earned by the participant, such shares will be
forfeited in the event that the participant ceases to be either a director or an
employee of Foundation, except that in the event of the death, disability or
retirement of a participant or a change of control of the Company or Foundation
all of the participant's awarded shares will be deemed to be earned and
nonforfeitable.
The shares, together with any cash dividends or distributions paid
thereon, will be distributed as soon as practicable after they are earned. A
participant may direct the voting of all shares which have been earned but have
not yet been distributed to him or her. Shares that have been awarded, but not
earned, may not be transferred.
TAX TREATMENT OF SHARES AWARDED UNDER THE RRP. Persons receiving shares
under the RRP generally will not recognize income upon the award of such shares,
but will recognize ordinary income when and to the extent the restrictions on
such shares lapse, in an amount equal to the fair market value of the shares at
the time such restrictions lapse plus the amount of any dividends distributed to
the participant with respect to such shares. If applicable withholding
requirements are satisfied, the Company will be entitled to a deduction each
year in an amount equal to the income, if any, recognized by participants for
such year.
Under Section 83(b) of the Code, a participant may elect, within 30
days after the shares are awarded, to recognize ordinary income on the date the
shares are awarded based on the fair market value of the shares on such date. If
the election is made, Foundation would be entitled to a deduction for an
equivalent amount. A participant making such an election will have a tax basis
in the shares equal to the amount of ordinary income recognized, and the
participant's holding period for capital gains purposes for such shares will
commence on the date the shares are awarded. If a Section 83(b) election is
made, however, and the shares are subsequently forfeited, the participant will
not be entitled to either a deduction of the amount previously recognized as
income with respect to such shares or a refund of any tax paid thereon.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE SHAREHOLDERS
OF THE COMPANY APPROVE THE RRP.
PROPOSAL FOUR - RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected Clark, Schaefer, Hackett & Co. as
the auditors of the Company for the current fiscal year and recommends that the
shareholders ratify the selection. Management expects that a representative of
Clark, Schaefer, Hackett & Co. will be present at the Annual Meeting, will have
the opportunity to make a statement if he or she so desires and will be
available to respond to appropriate questions.
-10-
<PAGE> 12
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any proposals of shareholders intended to be included in the Company's
proxy statement for the 1998 Annual Meeting of Shareholders should be sent to
the Company by certified mail and must be received by the Company not later than
May 20, 1998.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
Cincinnati, Ohio Laird L. Lazelle, President
September 17, 1997
-11-
<PAGE> 13
FOUNDATION BANCORP, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The purpose of the Foundation Bancorp, Inc. 1997 Stock
Option and Incentive Plan (this "Plan") is to promote and advance the interests
of Foundation Bancorp, Inc. (the "Company") and its shareholders by enabling the
Company to attract, retain and reward directors, managerial and other key
employees of the Company and any Subsidiary (hereinafter defined), and to
strengthen the mutuality of interests between such directors and employees and
the Company's shareholders by providing such persons with a proprietary interest
in pursuing the long-term growth, profitability and financial success of the
Company.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with the rules, regulations
and interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares, without par
value, of the Company or any security of the Company issued in
substitution, in exchange or in lieu thereof.
(e) "Company" means Foundation Bancorp, Inc., an Ohio
corporation, or any successor corporation.
(f) "Employment" means regular employment with the Company or
a Subsidiary and does not include service as a director only.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
(h) "Fair Market Value" shall be determined as follows:
(i) If the Common Shares are traded on a
national securities exchange at the time of grant of the Stock
Option, then the Fair Market Value shall be the average of the
highest and the lowest selling price on such exchange on the
date such Stock Option is granted or, if there were no sales
on such date, then on the next prior business day on which
there was a sale.
(ii) If the Common Shares are quoted on The
Nasdaq SmallCap Market at the time of the grant of the Stock
Option, then the Fair Market Value shall be the mean between
the closing high bid and low asked quotation with respect to a
Common Share on such date on The Nasdaq SmallCap Market.
(iii) If the Common Shares are not traded on
a national securities exchange or quoted on The Nasdaq
SmallCap Market, then the Fair Market Value shall be as
determined by the Committee.
(i) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 6 of this Plan that is intended
to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(j) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of this Plan that is
not an Incentive Stock Option.
(k) "OTS" means the Office of Thrift Supervision, Department
of the Treasury.
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(l) "Participant" means an employee or director of the Company
or a Subsidiary who is granted an Award under this Plan.
Notwithstanding the foregoing, for the purposes of the granting of any
Incentive Stock Option under this Plan, the term "Participant" shall
include only employees of the Company or a Subsidiary.
(m) "Plan" means the Foundation Bancorp, Inc. 1997 Stock
Option and Incentive Plan, as set forth herein and as it may be
hereafter amended from time to time.
(n) "Stock Option" means an option to purchase Common Shares
granted pursuant to the provisions of Section 6 of this Plan.
(o) "Subsidiary" means any corporation or entity of which the
Company directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and includes,
without limitation, Foundation Savings Bank.
(p) "Terminated for Cause" means any removal of a director or
discharge of an employee for the personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a
material provision of any law, rule or regulation (other than traffic
violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a director or employee
which results in a substantial financial loss to the Company or a
Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee, which
shall be comprised of not less than three members of the Board. The
members of the Committee shall be appointed from time to time by the
Board. Members of the Committee shall serve at the pleasure of the
Board and the Board may from time to time remove members from, or add
members to, the Committee. A majority of the members of the Committee
shall constitute a quorum for the transaction of business. An action
approved in writing by a majority of the members of the Committee then
serving shall be fully as effective as if the action had been taken by
unanimous vote at a meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for
the administration of this Plan. The Committee may designate persons
other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe. Any
determination, decision or action of the Committee in connection with
the construction, interpretation, administration, or application of
this Plan shall be final, conclusive and binding upon all persons
participating in this Plan and any person validly claiming under or
through persons participating in this Plan. The Company shall effect
the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in
writing in such form as approved by the Committee.
4. DURATION OF, AND COMMON SHARES SUBJECT TO, THIS PLAN.
(a) Term. This Plan shall terminate on the date which is ten
(10) years from the date on which this Plan is adopted by the Board,
except with respect to Stock Options then outstanding. Notwithstanding
the foregoing, no Incentive Stock Option may be granted under this Plan
after the date which is ten (10) years from the date on which this Plan
is adopted by the Board or the date on which this Plan is approved by
the shareholders of the Company, whichever is earlier.
(b) Common Shares Subject to Plan. The maximum number of
Common Shares in respect of which Stock Options may be granted under
this Plan, subject to adjustment as provided in Section 9 of this Plan,
shall be ten percent of the total Common Shares sold by the Company in
connection with the conversion of Foundation Savings Bank from mutual
to stock form.
For the purpose of computing the total number of Common Shares
available for Stock Options under this Plan, there shall be counted against the
foregoing limitations the number of Common Shares subject to issuance upon the
exercise or
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settlement of Stock Options as of the dates on which such Stock Options are
granted. If any Stock Options are forfeited, terminated or exchanged for other
Stock Options, or expire unexercised, the Common Shares which were theretofore
subject to such Stock Options shall again be available for Stock Options under
this Plan to the extent of such forfeiture, termination or expiration of such
Stock Options.
Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
5. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors and managerial and other key employees of
the Company or a Subsidiary who hold positions with significant responsibilities
or whose performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Company or a Subsidiary. In
selecting the directors and employees to whom Stock Options will be awarded and
the number of shares subject to such Stock Options, the Committee shall consider
the position, duties and responsibilities of the eligible directors and
employees, the value of their services to the Company and the Subsidiaries and
any other factors the Committee may deem relevant.
6. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions, as the Committee
shall deem desirable:
(a) Grant. Stock Options may be granted under this Plan on
terms and conditions not inconsistent with the provisions of this Plan
and in such form as the Committee may from time to time approve and
shall contain such additional terms and conditions, not inconsistent
with the express provisions of this Plan, as the Committee shall deem
desirable; provided, however, that no more than 25% of the shares
subject to Stock Options may be awarded to any individual who is an
employee of the Company or a Subsidiary, no more than 5% of such shares
may be awarded to any director who is not an employee of the Company or
a Subsidiary and no more than 30% of such shares may be awarded to
non-employee directors in the aggregate.
(b) Stock Option Price. The option exercise price per Common
Share purchasable under a Stock Option shall be determined by the
Committee at the time of grant; provided, however, that in no event
shall the exercise price of an Incentive Stock Option be less than 100%
of the Fair Market Value of the Common Shares on the date of the grant
of such Incentive Stock Option, and, in the case of a Participant who
owns Common Shares representing more than 10% of the outstanding Common
Shares at the time an Incentive Stock Option is granted, the option
exercise price shall in no event be less than 110% of the Fair Market
Value of the Common Shares at the time an Incentive Stock Option is
granted to such Participant.
(c) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition
or consolidation involving the Company, the term of each Stock Option
shall be fixed by the Committee; except that the term of Incentive
Stock Options will not exceed ten (10) years after the date the
Incentive Stock Option is granted; provided, however, that in the case
of a Participant who owns a number of Common Shares representing more
than 10% of the Common Shares outstanding at the time an Incentive
Stock Option is granted, the term of the Incentive Stock Option granted
to such Participant shall not exceed five (5) years.
(d) Exercisability. Except as set forth in Section 6(f) and
Section 7 of this Plan or as otherwise specified by the Committee,
Stock Options awarded under this Plan shall become exercisable on the
date of the grant of the Stock Option and shall be subject to such
other terms and conditions as shall be determined by the Committee at
the date of grant.
(e) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in cash
or, if acceptable to the Committee, in its sole discretion, in Common
Shares already owned by the Participant, or by surrendering outstanding
Stock Options. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Options
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and sell Common Shares thereby acquired, pursuant to a brokerage or
similar arrangement, approved in advance by the Committee, and use the
proceeds from such sale as payment of the purchase price of such
shares.
(f) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the number of shares with respect to which
Incentive Stock Options are exercisable under all plans of the Company
or a Subsidiary for the first time by a Participant during any calendar
year exceeds $100,000, or such other limit as may be required by the
Code, such Stock Options shall be Non-Qualified Stock Options to the
extent of such excess.
7. TERMINATION OR CHANGE IN CONTROL.
(a) Except in the event of the death, disability or retirement
at or after age 65 of a Participant, or as otherwise permitted by the
Committee, upon the resignation or removal from the board of directors
of any Participant who is a director of the Company or a Subsidiary or
upon the termination of Employment of a Participant who is not a
director of the Company or a Subsidiary, any Stock Option which has not
yet become exercisable shall thereupon terminate and be of no further
force or effect and, subject to extension by the Committee, any Stock
Option which has become exercisable shall terminate if it is not
exercised within twelve (12) months of such resignation, removal or
retirement.
(b) Unless the Committee shall specifically state otherwise at
the time a Stock Option is granted, all Stock Options granted under
this Plan shall become exercisable in full on the date of termination
of a Participant's employment or directorship with the Company or a
Subsidiary because of his death, disability or retirement at or after
age 65, and, subject to extension by the Committee, all Stock Options
shall terminate if not exercised within 12 months of the Participant's
death or disability.
(c) In the event the Employment or the directorship of a
Participant is Terminated for Cause, any Stock Option which has not
been exercised shall terminate as of the date of such termination for
cause.
(d) All outstanding Incentive Stock Options shall become
immediately exercisable in the event of a change in control or imminent
change in control of the Corporation or the Bank, as determined by the
Committee. For purposes of this Section 7, "change in control" shall
mean: (i) the execution of an agreement for the sale of all, or a
material portion, of the assets of the Corporation or the Bank; (ii)
the execution of an agreement for a merger or recapitalization of the
Corporation or the Bank or any merger or recapitalization whereby the
Corporation or the Bank is not the surviving entity; (iii) a change of
control of the Corporation or the Bank, as defined or determined by the
Office of Thrift Supervision (the "OTS"); or (iv) the acquisition,
directly or indirectly, of the beneficial ownership (within the meaning
of the term "beneficial ownership" as defined under Section 13(d) of
the Securities Exchange Act of 1934 and the rules promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding
voting securities of the Corporation or the Bank by any person, trust,
entity or group. For purposes of this Section 7, "imminent change in
control" shall refer to any offer or announcement, oral or written, by
any person or any persons acting as a group, to acquire control of the
Corporation or the Bank as to which an application or notice has been
filed with the OTS and such application has been approved or such
notice has not been disapproved.
8. NON-TRANSFERABILITY OF STOCK OPTIONS. No Stock Option under this
Plan and no rights or interests therein shall be assignable or transferable by a
Participant except by will or pursuant to the laws of descent and distribution.
During the lifetime of a Participant, Stock Options are exercisable only by, and
payments in settlement of Stock Options will be payable only to, the Participant
or his or her legal representative.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize the
following: any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business; any merger,
acquisition or consolidation of the Company; any issuance of bonds,
debentures, preferred or prior
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preference stocks ahead of or affecting the Company's capital stock or
the rights thereof; the dissolution or liquidation of the Company or
any sale or transfer of all or any part of its assets or business; or
any other corporate act or proceeding, including any merger or
acquisition which would result in the exchange of cash, stock of
another company or options to purchase the stock of another company for
any Stock Option outstanding at the time of such corporate transaction
or which would involve the termination of all Stock Options outstanding
at the time of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, spin-off, split-up,
combination or exchange of shares or other form of reorganization, or
any other change affecting the Common Shares, such proportionate
adjustments, if any, as the Board in its discretion may deem
appropriate to reflect such change shall be made with respect to the
aggregate number of Common Shares for which Stock Options in respect
thereof may be granted under this Plan, the maximum number of Common
Shares which may be sold or awarded to any Participant, the number of
Common Shares covered by each outstanding Stock Option, and the
exercise price per share in respect of outstanding Stock Options.
10. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 9 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
11. MODIFICATION OF STOCK OPTIONS. The Board may authorize the
Committee to direct the execution of an instrument providing for the
modification of any outstanding Stock Option which the Board believes to be in
the best interests of the Company; provided, however, that no such modification,
extension or renewal shall reduce the exercise price or confer on the holder of
such Stock Option any right or benefit which could not be conferred on him by
the grant of a new Stock Option at such time and shall not materially decrease
the Participant's benefits under the Stock Option without the consent of the
holder of the Stock Option, except as otherwise permitted under this Plan.
12. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement made under this Plan, including the delivery
or vesting of Common Shares, any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Shares are used to satisfy tax withholding, such shares shall be
valued for such purpose based on the Fair Market Value when the tax
withholding is required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of
the Company or a Subsidiary any right to continued Employment with the
Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary to terminate the
Employment of any of its employees at any time, with or without cause.
(c) Annulment of Stock Options. The grant of any Stock Option
under this Plan payable in cash is provisional until cash is paid in
settlement thereof. The grant of any Stock Option payable in Common
Shares is provisional until the Participant becomes entitled to the
certificate in settlement thereof. In the event the Employment or the
directorship of a Participant is Terminated for Cause, any Stock Option
which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option
granted pursuant to this Plan shall not be deemed a part of a
Participant's regular, recurring compensation for purposes of the
termination indemnity or severance pay law of any country and shall not
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be included in, nor have any effect on, the determination of benefits
under any other employee benefit plan or similar arrangement provided
by the Company or a Subsidiary unless expressly so provided by such
other plan or arrangement, or except where the Committee expressly
determines that a Stock Option or portion of a Stock Option should be
included to accurately reflect competitive compensation practices or to
recognize that a Stock Option has been made in lieu of a portion of
competitive annual cash compensation. Stock Options under this Plan may
be made in combination with or in tandem with, or as alternatives to,
grants, stock options or payments under any other plans of the Company
or a Subsidiary. This Plan notwithstanding, the Company or any
Subsidiary may adopt such other compensation programs and additional
compensation arrangements as it deems necessary to attract, retain and
reward directors and employees for their service with the Company and
its Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable
federal and state securities laws. Certificates for Common Shares
delivered under this Plan may be subject to such stock-transfer orders
and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Common Shares
are then listed, and any applicable federal or state securities law.
The Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company
in a form specified by the Committee agreeing to the terms and
conditions of the Stock Option and such related matters as the
Committee shall, in its sole discretion, determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed
applicable.
(i) Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's
shareholders. This Plan shall be submitted to the shareholders of the
Company for approval at an annual or special meeting of shareholders to
be held no sooner than six months after the effective date of the
Conversion.
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FOUNDATION SAVINGS BANK
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below. Wherever
appropriate, the masculine pronoun shall include the feminine pronoun and the
singular shall include the plural:
1.01 "Agreement" means the Foundation Savings Bank Recognition and
Retention Plan and Trust Agreement.
1.02 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.03 "Bank" means Foundation Savings Bank, a savings and loan
association organized under the laws of the State of Ohio.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Bank.
1.06 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Bank from mutual to stock
form.
1.09 "Corporation" means Foundation Bancorp, Inc., a savings and loan
holding company incorporated under the laws of the State of Ohio for the purpose
of holding all of the common shares of the Bank issued in connection with the
Conversion.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary.
1.11 "Employee" means any person who is employed by the Corporation,
the Bank or a Subsidiary.
1.12 "Person" means an individual, corporation, partnership, trust,
bank, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.13 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.14 "Plan Shares" means the Common Shares held pursuant to the Trust
and which are awarded or issuable to a Recipient pursuant to the Plan.
1.15 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
1.16 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.17 "Subsidiaries" means subsidiaries of the Bank, if any, which, with
the consent of the Board, agree to participate in the Plan.
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1.18 "Trust" means the trust established by this Agreement.
1.19 "Trustee" means the person or persons or entity approved by the
Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets
for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Bank hereby establishes a Recognition and Retention Plan and
Trust upon the terms and subject to the conditions set forth in this Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Bank and the Subsidiaries who are in key
positions of responsibility by providing such Directors and Employees with an
equity interest in the Corporation as reasonable compensation for their
contributions to the Corporation, the Bank and the Subsidiaries.
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ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board. The Committee shall have all of the powers set forth in this Plan.
The interpretation and construction by the Committee of any provisions of this
Agreement or of any Award granted hereunder shall be final, conclusive and
binding. The Committee shall act by the vote, or the written consent, of a
majority of its members. The Committee shall report actions and decisions with
respect to the Plan to the Board upon request by the Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by and shall serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add one or more Trustees.
The Board, in its absolute discretion, may take any action under or with respect
to the Plan which the Committee is authorized to take and may reverse or
override any action taken or decision made by the Committee under or with
respect to the Plan or take any other action reserved to the Board under this
Agreement; provided, however, that the Board may not revoke any Award already
granted under this Agreement. All decisions, determinations and interpretations
of the Board shall be final, conclusive and binding upon all parties having an
interest in the Plan.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Bank shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such member in connection with such action,
suit or proceeding if such member acted in good faith and in a manner such
member reasonably believed to be in or not opposed to the best interests of the
Corporation, the Bank and the Subsidiaries and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such member's conduct
was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the Bank
to the Trust. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Directors or Employees shall be
permitted.
5.02 INVESTMENT OF TRUST ASSETS. Except as otherwise permitted by
Section 8.02 of this Agreement, the Trustee shall invest all of the Trust's
assets, after providing for any required withholding as needed for tax purposes,
exclusively in Common Shares; provided, however, that the Trust shall not
purchase a number of Common Shares equal to more than 3% of the number of Common
Shares issued in connection with the Conversion, except that if the Bank's
tangible capital exceeds 10%, the Trust may purchase a number of Common Shares
equal to up to 4% of the Common Shares issued in connection with the Conversion.
After such investment, the Common Shares shall be held by the Trustee in the
Plan Share Reserve until such Common Shares are subject to one or more Awards.
Any funds held by the Trust before purchasing Common Shares shall be invested by
the Trustee in such interest-bearing account or accounts at the Bank as the
Trustee shall determine to be appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards under Section 6.02 of this Agreement, or
the decision of the Committee to return Plan Shares to the Corporation, the Plan
Share Reserve shall be reduced by the number of Plan Shares so allocated or
returned. Any Plan Shares subject to an Award which is subject to forfeiture by
the Recipient pursuant to Section 7.01 of this Agreement shall be retained in
the Plan Share Reserve.
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ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine which of the Directors
and Employees will be granted Awards and the number of Plan Shares covered by
each Award; provided, however, that: (a) the aggregate number of Plan Shares
covered by Awards to any one Employee shall not exceed 25% of the total number
of Plan Shares, (b) no more than 5% of the Plan Shares shall be awarded to any
Director who is not an Employee, and (c) no more than 30% of the Plan Shares
shall be awarded in the aggregate to Directors who are not Employees. In the
event Plan Shares are forfeited for any reason or additional Plan Shares are
purchased by the Trustee, the Committee may, from time to time, determine which
of the Employees will be granted additional Awards to be awarded from forfeited
or additional Plan Shares.
In selecting the Directors and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the Corporation, the Bank and the
Subsidiaries and any other factors the Committee may deem relevant. All
allocations by the Committee shall be subject to review and approval or
rejection by the Board.
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6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of Plan Shares covered by the Award and the terms upon
which the Plan Shares subject to the Award may be earned. The date on which the
Committee determines that an Award is to be made or a later date designated by
the Committee shall be considered the date of grant of the Awards. The Committee
shall maintain records as to all grants of Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award under the Plan. The Committee may, with the approval of the
Board, and shall, if so directed by the Board, return all Common Shares and
other assets in the Plan Share Reserve to the Corporation at any time and
thereafter cease issuing Awards.
6.05 SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of the Corporation at an annual or special meeting to be held no
sooner than six months after the effective date of the Conversion.
Notwithstanding anything to the contrary in this Agreement, no Awards shall be
granted hereunder until the shareholders of the Corporation approve this
Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a shorter period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares covered by each
Award shall be earned and non-forfeitable by a Recipient over a period of up to
ten years at the rate of one-tenth per year commencing on the date which is one
year after the date of the grant of such Award. As Plan Shares become earned and
non-forfeitable, any cash dividends, returned capital and earnings thereon shall
also be earned and non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by the Committee,
any Plan Shares and any cash dividends, returned capital and earnings thereon
that have not been earned and are not non-forfeitable in accordance with Section
7.01(a) of this Agreement shall be forfeited in the event that (i) a Recipient
who is a Director ceases to serve on the Board or (ii) a Recipient who is not a
Director of the Bank ceases to be an Employee of the Bank, except as otherwise
provided in subsection (c) or subsection (d) of this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH, DISABILITY OR
RETIREMENT. All Plan Shares and cash dividends, returned capital and earnings
thereon subject to an Award held by a Recipient whose service as a Director or
Employee of the Corporation, the Bank or a Subsidiary terminates due to (i)
death, (ii) disability (as determined by the Committee) or (iii) retirement at
or after age 65 shall be deemed fully earned and non-forfeitable as of the later
of the Recipient's last day of service as a Director or as an Employee and shall
be distributed as soon as practicable thereafter.
(d) EXCEPTION FOR A CHANGE IN CONTROL. Notwithstanding any
other provision of this Agreement, all Plan Shares subject to an Award held by a
Recipient shall be deemed to be immediately 100% earned and non-forfeitable in
the event of a change in control or imminent change in control of the
Corporation or the Bank and shall be distributed as soon as practicable
thereafter. For purposes of this Section 7.01(d), "change in control" shall
mean: (i) the execution of an agreement for the sale of all, or a material
portion, of the assets of the Corporation or the Bank; (ii) the execution of an
agreement for a merger or recapitalization of the Corporation or the Bank or any
merger or recapitalization whereby the Corporation or the Bank is not the
surviving entity; (iii) a change of control of the Corporation or the Bank, as
defined or determined by the Office of Thrift Supervision (the "OTS"); or (iv)
the acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of the term "beneficial ownership" as defined under Section 13(d) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder) of
twenty-five percent (25%) or more of the outstanding voting securities of the
Corporation or the Bank by any person, trust, entity or group. For purposes of
this Section 7.01(d), "imminent change in control" shall refer to any offer or
announcement, oral or written, by any person or any persons acting as a group,
to acquire control of the Corporation or the Bank as to which an application or
notice has been filed with the OTS and such application has been approved or
such notice has not been disapproved.
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7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Agreement, Plan Shares shall be distributed to the
Recipient or his or her Beneficiary, as the case may be, as soon as practicable
after they have been earned, together with any cash distributions, returned
capital and earnings thereon with respect to such Plan Shares that have been
earned.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares. The Trustee shall pay over to the Bank or the Subsidiary which employs
or employed such Recipient or which the Recipient serves or served as a
Director, any such amount withheld from or paid by the Recipient or Beneficiary.
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming fully earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management, control and investment of the Trust,
and the Trustee shall invest all assets of the Trust, except those attributable
to cash dividends paid with respect to Plan Shares not held in the Plan Share
Reserve, in Common Shares to the fullest extent practicable, and except to the
extent that the Trustee determines that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. The Trustee shall
have the power to do all things and execute such instruments as may be deemed
necessary or proper with respect to the duties of the Trustee hereunder,
including the following powers:
(a) To invest up to 100% of all Trust assets in Common
Shares without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and,
in making such investment, the Trustee is authorized to purchase Common
Shares from the Corporation or from any other source. Such Common
Shares so purchased may be outstanding, newly issued or treasury
shares;
(b) To invest any Trust assets not otherwise invested in
accordance with Section 8.02(a) of this Agreement in such deposit
accounts and certificates of deposit (including those issued by the
Bank), obligations of the United States government or its agencies or
such other investments as shall be considered the equivalent of cash;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
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(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
rights, duties and obligations of the Trustee hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether in a
segregated account or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends or returned capital received with
respect to Plan Shares shall be allocated (a) to accounts for Recipients, if
such shares which are the subject of outstanding Awards, and shall become earned
and distributed as specified in Article VII of this Agreement or (b) otherwise
to the Plan Share Reserve if such Plan Shares are not the subject of outstanding
awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Bank.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
or the Bank all or any part of the assets of the Trust, including Common Shares
held in the Plan Share Reserve, as well as Common Shares and other assets
subject to Awards which are not yet earned by the Directors or Employees to whom
they are allocated; provided, however, that the termination of the Trust shall
not affect a Recipient's right to earn Awards and to the distribution of Common
Shares relating thereto, including earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Bank or any Subsidiary be subject to any claim for benefits
hereunder.
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9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the Bank or a
Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Bank or a Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this
Agreement shall be effective as of the 26th day of August, 1997.
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Bank under the provisions of Section
671, et seq., of the Internal Revenue Code of 1986, as amended (26 U.S.C. ss.
671 et seq.).
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the ___ day of _________________, 1997.
By: (Trustee)
---------------------------
By: (Trustee)
---------------------------
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed
by its duly authorized officer and duly attested, all as of the ___ day of
_________________, 1997.
FOUNDATION SAVINGS BANK
By:
--------------------------------------
Laird L. Lazelle
its President
ATTEST:
- ---------------------------------
Dianne K. Rabe
its Vice President
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