<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, 1998
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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
Issuer's telephone number: (513) 721-0120
---------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
<S> <C>
None None
---------------- ----------------------
(Title of Class) (Name of each exchange
on which registered)
</TABLE>
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, 1998, was $1,451,000. (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 1, 1998, there were 462,875 of the Registrant's common
shares issued and outstanding.
The Registrant's revenues for the fiscal year ended June 30, 1998, were
$2,814,241.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of 1998 Annual Report to Shareholders
Part III of Form 10-KSB - Portions of Proxy Statement for the 1998 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,
------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------------- -------------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $19,278 88.25% $23,817 91.82% $20,950 90.04%
Nonresidential 1,269 5.81 1,118 4.31 1,287 5.53
Multifamily 1,285 5.88 968 3.73 903 3.88
Consumer loans:
Passbook loans 26 .12 27 0.10 56 0.24
Other consumer loans 132 .60 389 1.50 296 1.27
------- ------ ------- ------ ------- ------
Total loans $21,990 100.66% $26,319 101.46% $23,492 100.97%
Less:
Loans in process - - 237 0.91 89 0.38
Allowance for loan losses 138 .63 126 0.49 111 0.48
Deferred loan fees 6 .03 17 0.07 25 0.11
------- ------ ------- ------ ------- ------
Net loans $21,846 100.00% $25,939 100.00% $23,267 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
June 30, 1998, 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
1999 2000 2001 6/30/98 6/30/98 6/30/98 6/30/98 Total
---- ---- ---- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $508 $688 $686 $1,465 $3,709 $3,776 $8,446 $19,278
Multifamily 30 40 44 91 297 329 454 1,285
Nonresidential 51 60 53 116 377 452 160 1,269
Consumer loans 39 58 28 33 - - - 158
---- ---- ---- ------ ------- ------ ------ -------
Total $628 $846 $811 $1,705 $4,383 $4,557 $9,060 $21,990
==== ==== ==== ====== ====== ====== ====== =======
</TABLE>
The table below sets forth the dollar amount of all loans due after one
year from June 30, 1998, which have predetermined interest rates and loans which
have floating or adjustable interest rates:
<TABLE>
<CAPTION>
Due more than one year after
June 30, 1998
--------------------------
(In thousands)
<S> <C>
Fixed rates of interest $14,155
Adjustable rates of interest 7,207
-------
$21,362
=======
</TABLE>
-2-
<PAGE> 4
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 estate and improvements thereon, if
any. At June 30, 1998, Foundation's one- to four-family residential real estate
loan portfolio was approximately $19.3 million, or 88.25% 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 with large
balances to submit rent rolls and financial statements annually to enable
Foundation to monitor loans secured by multifamily properties.
At June 30, 1998, loans secured by multifamily properties totaled
approximately $1.3 million, or 5.88% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At June 30, 1998,
approximately $1.3 million, or 5.81%, 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
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<PAGE> 5
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.
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, 1998, 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, 1998, Foundation had approximately $158,000 or .72% 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, an attorney's title opinion or 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 prior years. The volume of loan sales
increased significantly during the second half of 1998 fiscal year due to the
significant decline in market rates. 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.
-4-
<PAGE> 6
The following table presents the loan origination activity of
Foundation for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Loans receivable-beginning of period $25,939 $23,267 $20,511
Loans originated:
One- to four-family residential 10,266 7,210 7,954
Nonresidential 166 58 304
Multifamily 609 120 329
Consumer 378 264 119
------- ------- -------
Total loans originated 11,419 7,652 8,706
Reductions:
Principal repayments 8,051 3,748 5,194
Loans sold 7,171 1,077 692
Transferred to real estate owned 54 - -
------- ------- -------
Total reductions 15,276 4,825 5,886
Other items, net (1) (236) (155) (64)
------- ------- -------
Loans receivable, end of period $21,846 $25,939 $23,267
======= ======= =======
- -----------------------------
</TABLE>
(1) Other items consist of loans in process, deferred loan fees and
allowances for loan losses
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 $850,000 to one
borrower at June 30, 1998. The largest amount Foundation had outstanding to one
borrower and related persons or entities at June 30, 1998, was approximately
$630,800 consisting of six loans, the largest of which was approximately
$224,390. Each of such loans is secured by commercial or residential real
estate.
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,
----------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------------- --------------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 1 $70 0.32% 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 1 $70 0.32% 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,
--------------------------------------------------
1998 1997 1996
---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent 90+ days $ - $ - $ -
Nonperforming loans $ - $ - $ -
====== ======= =======
Real estate owned $ 54 - -
------ ------- -------
Total nonperforming assets $ 54 $ - $ -
====== ======= =======
Allowance for loan losses $ 138 $ 126 $ 111
====== ======= =======
Nonperforming assets as a percent of total assets 0.15% 0.00% 0.00%
Nonperforming loans as a percent of total loans 0.00% 0.00% 0.00%
Allowance for loan losses as a percent of
nonperforming loans 0.00% 0.00% 0.00%
</TABLE>
For the year ended June 30, 1998, Foundation had no interest income
which would have been recorded had nonaccruing loans been current in accordance
with their original terms. During such period, Foundation recorded no interest
on such loans.
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.
-6-
<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,
--------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Special mention $54 $216 $ -
Substandard - - 305
Doubtful - - -
Loss - - -
------ ------- ------
Total classified assets $54 $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,
------------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $126 $111 $ 98
Charge-offs (1) - - (31)
Recoveries (1) - - ( -)
---- ---- ----
Net (charge-offs) recoveries (1) - - (31)
Provision for loan losses 12 15 44
---- ---- ----
Balance at end of period $138 $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 0.63% 0.48% 0.47%
- -----------------------------
</TABLE>
(1) All charge-offs and recoveries relate to loans secured by one- to
four-family real estate.
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,
-------------------------------------------------------------------------------------------
1998 1997 1996
Carrying value Fair value Carrying value Fair value Carrying value Fair value
-------------- ---------- -------------- ---------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 97 $ 97 $ 54 $ 54 $ 80 $ 80
Certificates of deposit 300 300 - - - -
Investment securities:
Federal funds 6,016 6,016 3,065 3,065 1,032 1,032
U.S. Government obligations 2,947 2,944 946 949 900 901
FHLB stock 321 321 299 299 279 279
Mortgage-backed securities 3,966 3,905 4,288 4,168 4,641 4,554
---------- ---------- ------- --------- --------- ---------
Total investments $ 13,647 $ 13,583 $ 8,652 $ 8,535 $ 6,932 $ 6,846
========== ========== ======= ========= ========= =========
</TABLE>
-8-
<PAGE> 10
The maturities of Foundation's interest-bearing deposits and investment
securities at June 30, 1998, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------------------
After one through After five
One year or less five years through ten years
--------------------- --------------------- ---------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits $ 97 5.80% $ - -% $ - -%
Investment securities:
Federal funds 6,016 6.30
U.S. Government
obligations - - 2,947 6.05 - -
Mortgage-backed 32 7.44 24 8.62 279 6.02
securities
FHLB stock
Certificates of deposit - - 300 6.18 - -
-------- --------- -------
Total $ 6,145 6.30% $ 3,271 6.08% $ 279 6.02%
======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------------------
After one through After five
One year or less five years through ten years
--------------------- --------------------- ---------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits $ 54 6.10% $ - -% $ - -%
Investment securities:
Federal funds 3,065 5.63 - - - -
U.S. Government
obligations - - 946 6.76 - -
Mortgage-backed 134 7.16 58 7.31 83 7.02
securities
FHLB stock - - - - - -
-------- --------- -------
Total $ 3,253 5.70% $ 1,004 6.79% $ 83 7.02%
======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
After ten
years Total
--------------------- ----------------------
Carrying Average Carrying Weighted
value yield value average yield
-------- ------- -------- --------
<S> <C> <C> <C>
Interest-bearing deposits $ - -% $ 97 5.80%
Investment securities:
Federal funds 6,016 6.30
U.S. Government
obligations - - 2,947 6.05
Mortgage-backed 3,631 6.45 3,966 6.44
securities
FHLB stock 321 7.25 321 7.25
Certificates of deposit - - 300 6.18
--------- -----------
Total $ 3,952 6.52% $ 13,647 6.30%
========= ===========
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
After ten
years Total
--------------------- ----------------------
Carrying Average Carrying
value yield value average yield
-------- ------- -------- --------
<S> <C> <C> <C>
Interest-bearing deposits $ - -% $ 54 6.10%
Investment securities:
Federal funds - - 3,065 5.63
U.S. Government
obligations - - 946 6.76
Mortgage-backed 4,013 6.13 4,288 6.20
securities
FHLB stock 299 7.25 299 7.25
--------- -----------
Total $ 4,312 6.21% $ 8,652 6.09%
========= ===========
</TABLE>
-9-
<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. Although Foundation offers 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, certificates of deposit have historically been Foundation's
principal source of deposits. The Bank's single location in downtown Cincinnati
is not conducive to attracting lower-cost transaction accounts.
At June 30, 1998, Foundation's certificates of deposit totaled $25.8
million, or 92.23% of total deposits. Of such amount, approximately $19.0
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.
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.
-10-
<PAGE> 12
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,
------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook savings accounts (1) $ 714 2.55 $ 791 2.90% $ 996 3.70%
NOW and money market accounts (2) 1,464 5.22 1,733 6.35 1,947 7.22
Total transaction accounts 2,178 7.77 2,524 9.25 2,943 10.92
---------- ----- -------- ----- -------- -----
Certificates of deposit
3.00% or less 84 .30 50 0.18 102 0.38
3.01 - 5.00% 7,538 26.90 347 1.27 1,546 5.74
5.01 - 7.00% 18,223 65.03 24,371 89.30 22,221 82.45
7.01 - 9.00% - - - - 139 0.52
---------- ----- -------- ----- -------- -----
Total certificates of deposit (3) 25,845 92.23 24,768 90.75 24,008 89.08
---------- ----- -------- ----- -------- -----
Total deposits $ 28,023 100.00% $ 27,292 100.00% $ 26,951 100.00%
========== ====== ======== ====== ======== ======
- -----------------------------
</TABLE>
(1) The weighted average rate on passbook savings accounts was 2.56%, 2.56%
and 2.50% at June 30, 1998, 1997 and 1996, respectively.
(2) The weighted average rate on NOW and money market accounts was 2.28%,
2.45% and 2.49% at June 30, 1998, 1997 and 1996, respectively.
(3) The weighted average rate on all certificates of deposit was 5.92%,
5.94% and 5.82% at June 30, 1998, 1997 and 1996, respectively.
The following table shows rate and maturity information for
Foundation's certificates of deposit at June 30, 1998:
<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)
<S> <C> <C> <C> <C> <C>
3.00% or less $ 84 $ - $ - $ - $ 84
3.01% to 5.00% 671 4,718 786 1,363 7,538
Over 5.01% 18,223 - - - 18,223
---------- ---------- -------- --------- ----------
Total certificates of deposit $ 18,978 $ 4,718 $ 786 $ 1,363 $ 25,845
========== ========== ======== ========= ==========
</TABLE>
-11-
<PAGE> 13
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,
1998:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $ 660
Over 3 months to 6 months 425
Over 6 months to 12 months 1,099
Over 12 months 569
-------
Total $ 2,753
=======
</TABLE>
The following table sets forth Foundation's deposit account balance
activity for the fiscal years ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance $27,292 $26,951 $27,737
Net decrease before interest
credited (876) (1,146) (2,326)
Interest credited 1,606 1,487 1,540
------- ------- -------
Ending balance $28,022 $27,292 $26,951
======= ======= =======
Net increase (decrease) $ 730 $ 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, 1998, Foundation was in compliance with the QTL Test.
In prior years, Foundation had obtained advances from the FHLB of
Cincinnati as indicated in the following table:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding $ 714 $ 790 $ 906
Maximum amount outstanding at any month end during
the period 748 819 1,186
Balance outstanding at end of period 680 754 825
Weighted average interest rate during the period 4.93% 5.59% 5.63%
Weighted average interest rate at end of period 5.53% 5.52% 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
-12-
<PAGE> 14
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, 1998, Foundation had eight full-time employees and no
part-time employees.
YEAR 2000
Foundation's operations, like those of most financial institutions,
depend almost entirely on computer systems. Foundation is addressing the
potential problems associated with the possibility that the computers which
control or operate Foundation's operating systems, facilities and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. Foundation is working
with the companies that supply or service its computer-operated or
computer-dependent systems to identify and remedy any year-2000 related
problems.
At this time, no specific material expenses have been identified which
are reasonably likely to be incurred by Foundation in connection with year-2000
issues and Foundation does not expect to incur significant expense to implement
corrective measures. No assurance can be given at this time, however, that
significant expense will not be incurred in future periods. In the event that
Foundation is ultimately required to purchase replacement computer systems,
programs and equipment, or that substantial expense must be incurred to make
Foundation's current systems, programs and equipment year-2000 compliant, the
Company's net income and financial condition could be adversely affected. While
Foundation is endeavoring to ensure that its computer-dependent operations are
year-2000 compliant, no assurance can be given that some year-2000 problems will
not occur.
In addition to possible expense related to its own systems, the Company
could incur losses if year-2000 issues adversely affect Foundation's depositors
or borrowers. Such problems could include delayed loan payments due to year-2000
problems affecting any of Foundation's significant borrowers or impairing the
payroll systems of large employers in Foundation's primary market area. Because
Foundation's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and Foundation's primary market area is not
significantly dependent upon one employer or industry, Foundation does not
expect any significant or prolonged year-2000 related difficulties that will
affect net earnings or cash flow.
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.
-13-
<PAGE> 15
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").
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. 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 OSFS'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, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may
-14-
<PAGE> 16
suspend the continuation of the control bid if the Securities Division
determines that the offeror's filed information does not provide full disclosure
to the offerees of all material information concerning the control bid. The
statue also provides that an offeror may not acquire any equity security of a
target company within two years of the offeror's previous acquisition of any
equity security of the same target company pursuant to a control bid unless the
Ohio offerees may sell such security to the offeror on substantially the same
terms as provided by the previous control bid. The statute does not apply to a
transaction if either the offeror or the target company is a savings and loan
holding company and the proposed transaction requires federal regulatory
approval.
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.
-15-
<PAGE> 17
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 allowances for loan and lease losses at
June 30, 1998.
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. 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, 1998, met the standards
for the highest category, 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 4% of its net
withdrawable savings deposits plus 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, 1998,
was approximately $9.2 million, or 31.5%, and exceeded the applicable 4.0%
liquidity requirement by approximately $8.0 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 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
-16-
<PAGE> 18
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, 1998, 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, 1998, 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. Loans to executive officers are
subject to additional limitations. Foundation had no loans to directors,
officers or employees at June 30, 1998.
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 had no
loans to directors, officers or employees at June 30, 1998.
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.
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.
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<PAGE> 19
As a subsidiary of OSFS, 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.
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 OSFS.
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 OSFS'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, 1998, 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 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.
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.
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<PAGE> 20
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 OSFS, 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, institutions 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 $168,000.
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's activities and investments at June 30, 1998, were permissible for a
federal association.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8
million (subject to an exemption of up to $4.7 million), and of 10% of net
transaction accounts in excess of $47.8 million. At June 30, 1998, Foundation
was in compliance with the new reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs 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
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<PAGE> 21
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 $320,800 at June 30,
1998.
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, 1998, Foundation's
maximum limit on advances was approximately $7.0 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 each 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.
Foundation's average gross receipts for the three tax years ending on
June 30, 1998, is $2.6 million and as a result, Foundation does qualify as a
small corporation exempt from the alternative minimum tax.
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
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<PAGE> 22
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 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, 1998, the pre-1988 reserves of
Foundation for tax purposes totaled approximately $653,000. Foundation believes
it had approximately $2.4 million of accumulated earnings and profits for tax
purposes as of June 30, 1998, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. See Notes 6 and 15 to the financial statements. 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 OSFS, 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
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<PAGE> 23
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.
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock of Foundation , as reflected
on the balance sheet of the Company in computing its taxable net worth as long
as it owns at least 25% of the issued and outstanding capital stock of
Foundation . The calculation of the exclusion from net worth is based on the
ratio of the excludable investment (net of any appreciation or goodwill included
in such investment) to total assets multiplied by the net value of the stock. As
a holding company, the Company may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including
OSFS, 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 1998 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> 24
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and the report of Clark, Schaefer,
Hackett & Co. dated July 16, 1998, appearing in the Annual Report are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
INANCIAL 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 1998
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> 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
-------
3(i) 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
Amended Articles of Incorporation Incorporated by
reference to the Form
10-KSB for the fiscal
year ended June 30,
1997, filed with the
SEC on September 26,
1997 (the "1997
10-KSB"), Exhibit 3(b)
3(ii) Code of Regulations Incorporated by
reference to the Form
S-1, Exhibit 3.2
10(a) Employment Agreement between Incorporated by S-1,
Foundation Bancorp, Inc. and Laird reference to the Form
L. Lazelle Exhibit 10.4
10(b) Employment Agreement between Incorporated by
Foundation Savings Bank and Laird L. reference to the Form
Lazelle S-1, Exhibit 10.5
10(c) Lease Agreement Incorporated by
reference to the Form
S-1, Exhibit 10.6
13 1998 Annual Report to Shareholders
20 Proxy Statement for 1998 Annual
Meeting
21 Subsidiaries of the Registrant Incorporated by
reference to the 1997
10-KSB, Exhibit 21
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fiscal year
ended June 30, 1998.
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<PAGE> 26
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 23, 1998 Date: September 23, 1998
/s/ Laird L. Lazelle /s/ Robert E. Levitch
- ----------------------------------- --------------------------------
Laird L. Lazelle Robert E. Levitch
Director Director
Date: September 23, 1998 Date: September 23, 1998
/s/ Michael S. Schwartz /s/ Paul L. Silverglade
- ----------------------------------- --------------------------------
Michael S. Schwartz Paul L. Silverglade
Director Director
Date: September 23, 1998 Date: September 23, 1998
/s/ Ivan J. Silverman /s/ Dianne K. Rabe
- ----------------------------------- --------------------------------
Ivan J. Silverman Dianne K. Rabe
Director Principal Financial Officer
Date: September 23, 1998 Date: September 23, 1998
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<PAGE> 1
Exhibit 13
FOUNDATION BANCORP, INC.
Parent Company of Foundation Savings Bank
(Foundation Bancorp logo)
1998
ANNUAL REPORT
<PAGE> 2
TO OUR SHAREHOLDERS:
On behalf of the Board of Directors of Foundation Bancorp, Inc.
("Foundation"), I am pleased to present Foundation's second annual report.
September 25, 1998 was the second anniversary of our initial public
offering.
Foundation paid its second annual dividend to shareholders on August 25,
1998. This dividend, for the fiscal year ended June 30, 1998, was $.40 per
share. Last fiscal year's dividend was $.25 per share.
Net income for the 1998 fiscal year ended June 30, 1998 was $232,113, up
from the $111,956 for the 1997 fiscal year. The 1998 fiscal year results
included a charge to earnings in the amount of $34,268. This charge relates
to the market value of the 6,232 shares allocated in the ESOP during the
year. The shares were originally purchased at $10 per share, but the
average market price was $15.50 per share at allocation, resulting in a
compensation expense charge of $5.50 per share. The effect of this charge
is to reduce earnings and earnings per share, with no tax benefit, and
increase paid-in capital and book value per share. This is not a true cash
expense, but the effect of an accounting pronouncement designed to reflect
the market cost of the ESOP. Shareholders' equity was still enhanced by the
full $266,381 earned before the ESOP accounting treatment.
The current economy has resulted in what is known as a "flat yield curve",
whereby short term interest rates are trading within 30 basis points of the
long bond. This economic environment has begun to impact Foundation's
earnings as borrowers refinance to obtain lower interest rates. This has
resulted in a decline in the yield on long-term interest-earning assets
with little corresponding decrease in the short-term rates paid on
deposits. Foundation views investing in the current low yields on long-term
mortgages to be undesirable and has reinvested the proceeds from payoffs in
short-term liquid obligations, resulting in a decrease in net interest
income. Foundation, however, is experiencing its best lending year ever,
resulting in a substantial increase in gains on sales of loans.
Foundation intends to continue to originate fixed-term mortgages primarily
for sale in the secondary market, rather than for its portfolio in the
current interest rate environment. Loans held for investment decreased $4.5
million during the 1998 fiscal year as a result of this strategy.
Short-term liquidity has more than doubled, which has reduced
interest-rate-risk and positioned Foundation to benefit from an increase in
long-term interest rates. In the short run, we expect net earnings to be
negatively impacted, the extent of which is dependent on the duration and
extent of the current rate environment in which interest rates are
continuing to decline to historic levels.
Thank you for being a shareholder of Foundation Bancorp.
<PAGE> 3
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") and the Federal Deposit
Insurance Corporation. 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, 1998,
and held of record by approximately 152 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>
Fiscal 1997 Cash dividends
Quarter Ended High Low declared
- ----------------- ------ ------ --------------
<S> <C> <C> <C>
December 31, 1996 $11.00 $10.50 $ -
March 30, 1997 $12.50 $11.00 -
June 30, 1997 $12.75 $12.50 -
Fiscal 1998
Quarter Ended
- -----------------
September 30, 1997 $15.00 $13.00 $ .25
December 31, 1997 $15.50 $14.50 -
March 31, 1998 $19.00 $15.00 -
June 30, 1998 $18.25 $15.50 -
</TABLE>
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 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
1
<PAGE> 4
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 (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> 5
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: 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $36,189 $35,271 $30,835 $31,849 $31,056
Cash and cash equivalents 6,196 3,289 1,172 3,943 2,462
Investment securities 3,568 1,245 1,179 1,310 2,691
Mortgage-backed securities 3,966 4,288 4,641 5,532 6,593
Loans receivable, net (1) 21,846 25,939 23,267 20,511 18,794
Deposits 28,023 27,292 26,951 27,737 27,348
FHLB advances 680 754 825 1,192 955
Shareholders' equity (2) 7,140 6,934 2,793 2,706 2,581
Year ended June 30,
--------------------------------------------------------------------
SUMMARY OF EARNINGS: 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands)
Interest income $ 2,698 $ 2,558 $ 2,359 $ 2,162 $ 2,069
Interest expense 1,641 1,530 1,592 1,368 1,339
------- ------- ------- ------- -------
Net interest income 1,057 1,028 767 794 730
Provision for loan losses 12 15 44 12 33
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 1,045 1,013 723 782 697
Other income 116 63 64 70 204
General, administrative and other
expense 792 919 674 679 627
------- ------- ------- ------- -------
Earnings before income taxes 369 157 113 173 274
Federal income taxes 137 45 27 48 79
------- ------- ------- ------- -------
Net earnings $ 232 $ 112 $ 86 $ 125 $ 195
======= ======= ======= ======= =======
</TABLE>
- -----
(1) Includes $475,000 of loans held for sale at June 30, 1998.
(2) Consisted solely of retained earnings at June 30, 1994, 1995 and 1996.
3
<PAGE> 6
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
SELECTED FINANCIAL RATIOS: 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 0.63% 0.33% 0.27% 0.41% 0.62%
Return on average equity 3.31 1.82 3.11 4.72 7.92
Interest rate spread 1.82 2.10 2.04 2.25 2.02
Net interest margin 2.92 3.06 2.48 2.66 2.35
Non-interest expense to average total assets 2.16 2.68 2.13 2.23 1.99
Average equity to average assets 19.12 17.89 8.72 8.71 7.80
Equity to assets, end of period 19.73 19.66 9.06 8.50 8.32
Asset quality ratios:
Nonperforming assets to average total assets 0.15 - - 0.64 0.29
Nonperforming loans to total loans - - - 0.95 0.49
Allowance for loan losses to total loans 0.63 0.48 0.47 0.47 0.38
Allowance for loan losses to nonperforming
loans - - - 50.52 77.42
Net (charge-offs) recoveries to
average loans - - (0.14) .07 (.32)
Average interest-earning assets to average
interest-bearing liabilities 124.17 121.15 108.51 108.92 107.70
</TABLE>
4
<PAGE> 7
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 and results of operations of Foundation.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
At June 30, 1998, assets totaled $36.2 million, an increase of $0.9 million, or
2.6%, compared to June 30, 1997 totals. Cash and cash equivalents increased $2.9
million, or 88.4%, investment securities increased $2.0 million, and
certificates of deposit in other financial institutions increased $300,000.
These increases were offset somewhat by decreases in mortgage-backed securities
and loans resulting from borrowers refinancing for lower-rate, fixed-term
instruments. The increase in total assets was funded by an increase in deposits
of $731,149, or 2.7%, plus an increase in shareholders' equity of $205,771, or
3.0%, primarily as a result of net earnings for the fiscal year.
Mortgage-backed securities decreased $321,840, or 7.5%, as a result of
repayments, and loans receivable decreased $4.1 million, or 15.8%. Although
Foundation originated $11.4 million in new loans during the 1998 fiscal year,
borrowers repaid $8.3 million due to refinances for lower rates, sales of
property or scheduled monthly payments, and Foundation sold $7.2 million of
lower-rate, fixed-term current period loan production in the secondary market.
Retained earnings increased $116,395, or 4.0%, as a result of fiscal 1998 net
earnings of $232,113 less the August 1997 dividend to shareholders of $115,718.
Unallocated shares held by the Foundation Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP") decreased $55,108, or 17.7%, resulting from the 1997 calendar
year allocation, and additional paid-in capital increased $34,268, or 0.8%,
resulting from the market adjustment of the 1997 ESOP allocation.
Nonperforming assets at June 30, 1998, consisted of one loan, totaling $347,
over sixty days delinquent and one piece of real estate owned acquired through
foreclosure, which had a book value of $54,231. The foreclosures proceeding was
Foundation's first foreclosure in the last four years. The allowance for loan
losses totaled $138,147 at June 30, 1998, an increase of $12,000, or 9.5%, as a
result of the provision for the year.
5
<PAGE> 8
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
Net earnings for the year ended June 30, 1998, totaled $232,113, an increase of
$120,157, or 107.3%, from the $111,956 in net earnings for the year ended June
30, 1997. The increase in net earnings was comprised of an increase in net
interest income of $29,567, or 2.9%, an increase in total other income of
$52,559, or 83.0%, a decrease in the provision for loan losses of $3,000, or
20%, and a decrease in general, administrative and other expense of $127,074, or
13.8%. These amounts were partially offset by an increase in total interest
expense of $110,924, or 7.2%, and an increase in federal income taxes of
$92,043, or 204.3%.
Total interest income increased $140,491, or 5.5%. The increase was attributable
to an increase in interest on loans of $35,122, or 1.7%, an increase in interest
on investment securities of $12,063, or 15.6%, and an increase in interest on
interest-bearing deposits and other of $121,186, or 61.3%, all of which were due
to higher weighted average balances. These increases were partially offset by a
decrease in interest on mortgage-backed securities of $27,880, or 10.4%, the
result of a smaller portfolio.
The increase in total interest expense was the result of an increase in interest
expense on deposits of $114,846, or 7.7%, due to a higher weighted average
balance during fiscal 1998, partially offset by a decrease in interest expense
on borrowings of $3,922, or 9.0%, resulting from scheduled repayments. The
provision for loan losses decreased $3,000, or 20.0%, due to continued asset
quality.
Other operating income increased $52,559, or 83.0%, the result of an increase in
gains on sales of loans of $52,391, or 1,023.1%, as fixed-rate loans originated
in the prevailing low interest rate environment were sold in the secondary
market.
The decrease in general, administrative and other expense was the result of a
decrease in occupancy and equipment of $2,329, or 2.9%, and a decrease in
federal deposit insurance premiums of $187,251, or 91.4%. The expense for 1997
included the one-time charge of $170,000 related to the Savings Association
Insurance Fund (the "SAIF") recapitalization in September 1996. The further
reduction in insurance premiums from 1997 to 1998 was due to the lower regular
deposit insurance premiums that were established following the SAIF
recapitalization. These reductions were partially offset by an increase in
franchise taxes of $22,287, or 60.7%, the result of franchise taxes doubling for
the second half of fiscal 1998 due to higher capital levels, and an increase in
other operating expenses of $39,032, or 34.9%, primarily the result of expenses
related to the operation of a public stock company. Employee compensation and
benefits expense experienced only a slight increase from year to year. Federal
income taxes increased $92,043, or 204.3%, the result of higher earnings.
6
<PAGE> 9
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 losses 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 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
losses 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 sales of loans of $2,768, or 35.1%, as loan production was utilized to
invest the funds from the 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.
7
<PAGE> 10
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,
----------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Weighted average Average Interest Average Average Interest Average
yield/rate outstanding earned/ yield/ outstanding earned/ yield/
at June 30, 1998 balance paid rate balance paid rate
---------------- ----------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 6.29% $ 5,809 $ 319 5.49% $ 3,511 $ 198 5.64%
Investment securities 6.17 1,451 89 6.13 949 77 8.11
Mortgage-backed securities 6.44 4,020 241 6.00 4,413 269 6.10
Loans receivable 8.07 24,871 2,049 8.24 24,710 2,014 8.15
----------- -------- ----------- --------
Total interest-earning assets 7.39 36,151 2,698 7.46 33,583 2,558 7.62
Non-interest-earning assets 517 728
----------- -----------
Total assets $ 36,668 $ 34,311
=========== ==========
Interest-bearing liabilities:
Deposits 5.64 $ 28,400 1,606 5.65 $26,935 1,486 5.52
FHLB advances 5.53 714 35 4.90 787 44 5.59
----------- -------- ----------- --------
Total interest-bearing 5.64 29,114 1,641 5.64 27,721 1,530 5.52
liabilities -------- --------
Non-interest-bearing liabilities 542 453
----------- -----------
Total liabilities 29,656 28,174
Stockholders' equity 7,012 6,137
----------- -----------
Total liabilities and
stockholders' equity $36,668 $34,311
=========== =======
Net interest income $1,057 $ 1,028
======== ========
Interest rate spread 1.75% 1.82% 2.10%
====== ====== =======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.92% 3.06%
====== ======
Average interest-earning assets to
average interest-bearing 124.16% 124.17% 121.14%
liabilities ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1996
-----------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
----------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 2,979 $ 178 5.97%
Investment securities 987 70 7.10
Mortgage-backed securities 5,109 304 5.95
Loans receivable 21,833 1,807 8.28
----------- --------
Total interest-earning assets 30,908 2,359 7.63
Non-interest-earning assets 761
-----------
Total assets $ 31,670
===========
Interest-bearing liabilities:
Deposits $27,580 1,541 5.59
FHLB advances 906 51 5.63
----------- --------
Total interest-bearing 28,485 1,592 5.59
liabilities --------
Non-interest-bearing liabilities 423
----------
Total liabilities 28,909
Stockholders' equity 2,766
----------
Total liabilities and
stockholders' equity $ 31,670
=========
Net interest income $ 767
========
Interest rate spread 2.04%
======
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.48%
======
Average interest-earning assets to
average interest-bearing 108.51%
liabilities ======
</TABLE>
8
<PAGE> 11
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,
-------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------- ----------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
----------------- increase ----------------- increase
Volume Rate (decrease) Volume Rate (decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $127 $ (6) $121 $ 32 $(12) $ 20
Investments 35 (23) 12 (3) 10 7
Mortgage-backed securities (24) (4) (28) (41) 6 (35)
Loans receivable 13 22 35 238 (31) 207
------ ------ ---------- ------ ------ ----------
Total interest income 151 (11) 140 226 (27) 199
Interest-bearing liabilities
Deposits 83 37 120 (36) (19) (55)
FHLB advances (4) (5) (9) (7) - (7)
------ ------ ---------- ------ ------ ----------
Total interest expense 79 32 111 (43) (19) (62)
------ ------ ---------- ------ ------ ----------
Increase (decrease) in net
interest income $ 72 $(43) $ 29 $ 269 $ (8) $ 261
====== ====== ========== ====== ====== ==========
</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 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.
9
<PAGE> 12
Presented below, as of June 30, 1998, 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, 1998
---------------------------
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
----------------------- ----------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 (70)% $(2,323) (37)%
+300 (55) (1,675) (27)
+200 (35) (1,035) (17)
+100 (20) (447) (7)
0 0 0 0
-100 (20) 221 4
-200 (35) 326 5
-300 (55) 492 8
-400 (70) 730 12
</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.
10
<PAGE> 13
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net income $ 232 $ 112 $ 86
Adjustments to reconcile net income to
net cash from operating activities 36 103 60
-------- -------- --------
Net cash from operating activities 268 215 146
Net cash provided by (used in)
investment activities 2,098 (2,386) (1,764)
Net cash provided by (used in)
financing activities 541 4,288 (1,153)
-------- -------- --------
Net change in cash and cash equivalents 2,907 2,117 (2,771)
Cash and cash equivalents at
beginning of period 3,289 1,172 3,943
-------- -------- --------
Cash and cash equivalents at
end of period $ 6,196 $ 3,289 $ 1,172
======== ======== ========
</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, 1998, Foundation liquid assets totaled approximately $9.2
million, which exceeded the OTS minimum requirements by $8.0 million. At such
date, Foundation had commitments to originate loans and loans in process
totaling $711,300 and a commitment to sell one loan, with a balance of
approximately $215,200. Foundation considers its liquidity and capital reserves
sufficient to meet its outstanding short-term and long-term needs.
11
<PAGE> 14
OTHER MATTERS
- --------------------------------------------------------------------------------
As with most providers of financial services, Foundation's operations are
heavily dependent on information technology systems. Foundation is addressing
the potential problems associated with the possibility that the computers that
control or operate Foundation's information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. Foundation is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
The Company's primary data processing applications are handled by a third-party
service bureau which has advised the Company that it has transferred to a fully
year 2000-compliant processing system that will be fully tested by January 1,
1999.
The Company has not identified any material specific expenses that are
reasonably likely to be incurred by Foundation in connection with this issue and
does not expect to incur significant expense to implement the necessary
corrective measures. No assurance can be given, however, that significant
expense will not be incurred in future periods. In the event that Foundation is
ultimately required to purchase replacement computer systems, programs and
equipment, or incur substantial expense to make Foundation's current systems,
programs and equipment year 2000 compliant, the Company's net earnings and
financial condition could be adversely affected. While Foundation is endeavoring
to ensure that its computer-dependent operations are year 2000 compliant, no
assurance can be given that some year 2000 problems will not occur.
In addition to possible expense related to its own systems, the Company could
incur losses if year 2000 issues adversely affect Foundation's depositors or
borrowers. Such problems could include delayed loan payments due to year 2000
problems affecting any significant borrowers or impairing the payroll systems of
large employers in Foundation's primary market area. Because Foundation's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and Foundation's primary market area is not significantly dependent
upon one employer or industry, Foundation does not expect any significant or
prolonged difficulties that will affect net earnings or cash flow.
12
<PAGE> 15
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, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
July 16, 1998
<PAGE> 16
FOUNDATION BANCORP, INC.
Statements of Financial Condition
June 30, 1998 and 1997
Assets
------
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
<S> <C> <C>
Cash $ 83,517 $ 170,153
Interest-bearing deposits in other financial institutions 6,112,853 3,119,122
----------- -----------
6,196,370 3,289,275
Certificates of deposit 300,000 -
Investment securities - at amortized cost (fair value of $2,943,614 and
$948,715 at June 30, 1998 and 1997, respectively) 2,947,033 945,840
Mortgage-backed securities - at amortized cost (fair value of $3,905,172
and $4,167,556 at June 30, 1998 and 1997, respectively) 3,966,396 4,288,236
Loans receivable, net 21,370,702 25,850,300
Loans held for sale 474,850 89,200
Accrued interest receivab1e:
Loans 98,084 104,415
Investments and interest bearing deposits 37,406 8,732
Mortgage-backed securities 29,644 33,226
Real estate owned 54,231 -
Federal Home Loan Bank stock - at cost 320,800 298,800
Property and equipment, net 285,391 298,934
Prepaid expenses and other assets 108,699 64,478
------------ -----------
Total assets $36,189,606 $35,271,436
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $28,022,914 $27,291,765
Advances from Federal Home Loan Bank 680,037 754,403
Advances by borrowers for taxes, insurance and other 61,033 65,271
Accrued expenses 145,057 145,782
Accrued federal income tax 69,533 26,454
Deferred federal income tax 71,400 53,900
------------ -----------
Total liabilities 29,049,974 28,337,575
Common stock, no par value, 2,000,000 shares authorized, 462,875 shares
issued and outstanding as of June 30, 1998 - -
Paid in capital 4,375,394 4,341,126
Retained earnings, substantially restricted 3,020,911 2,904,516
Less unallocated ESOP shares (256,673) (311,781)
------------- -------------
Total stockholders' equity 7,139,632 6,933,861
------------- -------------
Total liabilities and stockholders' equity $36,189,606 $35,271,436
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 17
FOUNDATION BANCORP, INC.
Statements of Income
Three Years Ended June 30, 1998
<TABLE>
<CAPTION>
June 30,
------------------------------------
1998 1997 1996
---- ---- ----
Interest income:
<S> <C> <C> <C>
Loans $2,049,037 $2,013,915 $1,807,332
Mortgage-backed securities 241,195 269,075 303,835
Investment securities 89,255 77,192 69,453
Interest-bearing deposits 318,907 197,721 178,338
------------ ----------- -----------
Total interest income 2,698,394 2,557,903 2,358,958
----------- ----------- -----------
Interest expense:
Deposits 1,601,380 1,486,534 1,540,535
Borrowings 39,834 43,756 51,017
------------ ------------ ------------
Total interest expense 1,641,214 1,530,290 1,591,552
---------- ---------- ----------
Net interest income 1,057,180 1,027,613 767,406
Provision for loan losses 12,000 15,000 43,990
------------ ------------ ------------
Net interest income after provision for loan losses 1,045,180 1,012,613 723,416
---------- ---------- ---------
Other income:
Gain on sale of loans 57,512 5,121 7,889
Net investment property income 53,639 53,935 49,495
Other operating income 4,696 4,232 7,066
---------- ---------- ---------
Total other income 115,847 63,288 64,450
---------- ----------- ----------
General, administrative and other expense:
Employee compensation and benefits 452,083 451,558 362,233
Occupancy and equipment 78,539 80,868 78,565
Deposit insurance 17,541 204,792 62,353
Franchise tax 59,032 36,745 34,173
Computer processing costs 33,618 32,956 32,347
Other operating expense 151,001 111,969 104,905
----------- ---------- ----------
Total general, administrative and other operating expenses 791,814 918,888 674,576
----------- ---------- ----------
Income before income taxes 369,213 157,013 113,290
----------- ---------- ----------
Federal income taxes (credits):
Current 119,600 51,957 26,642
De1erred 17,500 (6,900) 200
----------- --------------------------
137,100 45,057 26,842
---------- ------------ -----------
Net income $ 232,113 $ 111,956 $ 86,448
========= ========== ==========
Basic and diluted eamings per share (since conversion) $0.53 $0.49 N/A
===== ===== ===
</TABLE>
See accompanying notes to financial statements.
<PAGE> 18
FOUNDATION BANCORP, INC.
Statements of Stockholders' Equity
Three Years Ended June 30, 1998
<TABLE>
<CAPTION>
Additional Unallocated
Common Paid-In Retained ESOP
Stock Capital Earnings Shares Total
------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
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
compariy 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
ESOP shares to be
allocated at average
market price - 34,268 - 55,108 89,376
Dividends paid - - (115,718) - (115,718)
Net income for the
year ended
June 30, 1998 - - 232,113 - 232,113
------- ----------- ------- ---------- ----------
Balance at June 30, 1998 $ - $4,375,394 $3,020,911 $(256,673) $7,139,632
======== ========== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 19
FOUNDATION BANCORP, INC.
Statements of Cash Flows
Three Years Ended June 30, 1998
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
interest received $2,665,353 $2,548,220 $2,335,168
interest paid (1,642,190) (1,530,345) (1,589,414)
Cash paid to suppliers and employees (756,657) (857,817) (677,971)
Fees and commissions received 4,696 4,232 7,066
income taxes (paid) refunded (76,521) (22,981) 2,763
Rental income received 73,200 73,200 68,400
------------ ----------- -------------
Net cash provided by operating
activities 267,881 214,509 146,012
----------- ---------- ------------
Cash flows from investing activities:
Purchase of mortgage-backed securities (454,477) (236,237) (82,714)
Repayments of mortgage-backed secunties 758,290 573,592 944,043
Purchase of certificates of deposit (300,000) - -
Purchase of investment securities (2,801,193) (446,153) (499,687)
Maturities of investment securities 800,000 400,000 650,000
Loan disbursements (11,418,611) (7,503,939) (8,706,053)
Loan principal repayments 8,285,610 3,748,061 5,235,414
Proceeds from sale of loans 7,228,530 1,081,556 701,447
Purchase of property and equipment - (3,227) (5,803)
------------ ------------- -------------
Net cash provided by (used in)
investing activities 2,098,149 (2,386,347) (1,763,353)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 731,149 340,981 (786,420)
Repayment of Federal Home Loan Bank
advances (74,366) (70,444) (366,730)
Proceeds from conversion to stock
company - 4,018,087 -
Dividends paid (115,718) - -
--------- ---------- ----------
Net cash provided by (used in)
financing activities 541,065 4,288,624 (1,153,150)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,907,095 2,116,786 (2,770,491)
Cash and cash equivalents at beginning
of period 3,289,275 1,172,489 3,942,980
----------- ----------- -----------
Cash and cash equivalents at end ofperiod $6,196,370 $3,289,275 $1,172,489
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 20
FOUNDATION BANCORP, INC.
Statement of Cash Flows
Three Years Ended June 30, 1998
Reconciliation of Net income to Net Cash
Provided Bv Operating Activities
--------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $232,113 $111,956 $ 86,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of loans (57,512) (5,121) (7,889)
Depreciation 13,545 17,574 16,295
Amortization of premiums and discounts
on mortgage-backed securities 18,027 14,918 30,561
Federal Home Loan Bank stock dividends (22,000) (20,000) (18,400)
Provision for loan losses 12,000 15,000 43,990
Amortization of deferred loan fees (10,302) (8,393) (23,032)
Deferred federal income tax 17,500 (6,900) 200
ESOP expense 89,376 58,519 -
Effects of change in operating assets and liabilities:
Accrued interest receivable (18,761) 3,792 (12,919)
Refundable federal income tax 2,522 29,405
Prepaid expenses and other assets (44,221) (701) (50,988)
Advances by borrowers for taxes,
insurance and other (4,238) (4,908) 31,103
Accrued expenses (725) 9,797 21,238
Accrued federal income tax 43,079 26,454 -
--------- --------- --------
Net cash provided by operating
activities $267,881 $214,509 $146,012
======== ======== ========
</TABLE>
Supplemental disclosure of non-cash investing activities
- --------------------------------------------------------
The Company acquired real estate in settlement of above receivable of $54,231
during the year ended June 30, 1998.
See accompanying notes to financial statements.
<PAGE> 21
FOUNDATION BANCORP, INC.
Notes to Financial Statements
Three Years Ended June 30, 1998, 1997 and 1996
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
Investments and mortgage backed securities are classified upon
acquisition into one of 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
<PAGE> 22
cost. Presently, the Savings Bank classified all investments
and mortgage backed securities as held to maturity.
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.
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.
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.
<PAGE> 23
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 years ended June 30, 1998 and 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 acquired $54,231 through
foreclosure at June 30, 1998 and $0 in 1997.
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
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
<PAGE> 24
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 March 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which is effective for periods ending after December 15, 1997,
including interim periods. SFAS No. 128 simplifies the calculation of
earnings per share ("EPS") by replacing primary EPS with basic EPS.
It also requires dual presentation of basic EPS and diluted EPS for
entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for
the period. Diluted EPS reflects the potential dilution of securities
that could share in earnings such as stock options, warrants or other
common stock equivalents. All prior period EPS have been restated to
conform with the new presentation.
<PAGE> 25
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS No. 129 consolidates
existing accounting guidance relating to disclosure about a company's
capital structure. Public companies generally have always been
required to make disclosures now required by SFAS No. 129 and,
therefore, SFAS No. 129 had no impact on the Company. SFAS No. 129 is
effective for financial statements for periods ending after December
15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive
income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (1) classify items of other
comprehensive income by their nature in a financial statement and (2)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purpose is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
significantly changes the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and
descriptive information about an enterprise's reportable operating
segments which is based on reporting information the way that
management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises,
the management approach will likely to result in more segments being
reported. In addition, SFAS No. 131 requires significantly more
information to be disclosed for each reportable segment than is
presently being reported in annual financial statements and requires
that selected information be reported in interim financial
statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Because the Company has no
non-banking subsidiaries, SFAS No. 131 will not affect the Company.
<PAGE> 26
EARNINGS PER SHARE
Earnings per common share have been computed on the basis of weighted
average number of common shares outstanding, and when applicable,
those stock options that are dilutive. 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 weighted average shares
outstanding. Weighted-average shares outstanding do not include
unallocated shares purchased by the ESOP. Disclosure of earnings per
share for 1996 is not applicable, as the Company 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, 1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $ 2,947,033 3,450 6,869 2,943,614
============= ========== ========== =========
June 30, 1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- ---------
Obligations of U.S.
Government agencies $ 945,840 2,875 - 948,715
============= ========== ========== =========
</TABLE>
The amortized cost and fair value of investment securities at June 30,
1998 and 1997 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.
<PAGE> 27
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------
Amortized Fair
Cost Value
------------ ---------
<S> <C> <C>
Due or callable in one year or less $ 2,947,033 2,943,614
</TABLE>
Included in investments at June 30, 1998, are $500,000 of callable notes
with a final maturity in 2003, $1,000,000 of callable notes with a final
maturity of 2001 and $1,450,000 of callable notes with final maturity of
2000.
<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
========= ========
</TABLE>
Included in investments at June 30, 1997, are $150,000 of callable notes
with final maturity in the year 2002, $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, 1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp. $ 1,848,860 3,615 31,638 1,820,837
Federal National Mortgage Association 1,969,424 6,823 43,978 1,932,269
Government National Mortgage
Association 148,112 3,954 - 152,066
------------- ---------- ---------- -----------
$ 3,966,396 14,392 75,616 3,905,172
============= ========== ========== ===========
</TABLE>
<PAGE> 28
<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
============ ========== ========== ==========
</TABLE>
The maturity of the mortgage-backed securities is based on the repayment
terms of the underlying mortgages.
4. LOANS RECEIVABLE:
Loans receivable consists of the following:
<TABLE>
<CAPTION>
June 30
-----------------------------------
1998 1997
--------------- ----------
<S> <C> <C>
Residential one-to-four family real estate $ 19,278,199 23,816,788
Multi-family residential real estate 1,285,385 967,949
Commercial real estate 1,268,962 1,118,283
Consumer 132,035 389,459
Passbook 25,732 26,933
--------------- ----------
21,990,313 26,319,412
Less:
Loans in process - (237,042)
Allowance for loan losses (138,147) (126,147)
Deferred loan fees (6,614) (16,723)
--------------- ----------
$ 21,845,552 25,939,500
=============== ==========
</TABLE>
At June 30, 1998 and 1997, adjustable rate loans approximated $7,207,000
and $9,175,000.
<PAGE> 29
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
<S> <S> <C> <C>
1998 1997 1996
---------- ---------- ----------
Beginning balance $ 126,147 111,147 98,138
Provision for loan losses 12,000 15,000 43,990
Write-offs net of recoveries - - (30,981)
---------- ---------- ----------
Ending balance $ 138,147 126,147 111,147
========== ========== =========
</TABLE>
Gross proceeds on sales of loans were $7,228,530, $1,081,556 and $701,447
for the years ended June 30, 1998, 1997 and 1996, respectively. Net
realized gains on sales of loans were $57,512, $5,121 and $7,889 for the
years ended June 30, 1998, 1997 and 1996. Loans serviced for others as of
June 30, 1998, 1997 and 1996, were $-0-, $249,270, and $251,280,
respectively.
At June 30, 1998 and 1997, the Company had no non-accrual loans.
Loans to officers, directors and employees totaled $ -0- and $5,038 at
June 30, 1998 and 1997, respectively. An analysis of loan activity to
such persons for the fiscal year ended June 30, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
June 30
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Outstanding balance, beginning $ 5,038 93,521
New loans issued - -
Repayments 5,038 88,483
------- ------
Outstanding balance, ending $ - 5,038
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate owned - investment property $ 251,847 251,847
Furniture and equipment 141,387 141,387
Leasehold improvements 34,246 34,246
-------- --------
427,480 427,480
Less accumulated depreciation 142,089 128,546
------- -------
$ 285,391 298,934
========= =======
</TABLE>
<PAGE> 30
The Company leases its office facility under a ten year non-cancelable
lease which expires in March, 2001 with additional renewal options. Rent
expense for each of the years ended June 30, 1998, 1997 and 1996, was
$53,355.
Minimum commitments under the term of the lease are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
<S> <C> <C>
1999 $ 51,628
2000 51,628
2001 38,722
--------
$ 141,978
=========
</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,
1997. The lease payments are $6,100 per month. Rent income for the years
ended June 30, 1998, 1997 and 1996, was $73,200, $73,200 and $68,400,
respectively.
7. DEPOSITS:
Deposits consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
--------- ------------- --------- --------------
<S> <C> <C> <C> <C>
Passbook 2.56% $ 713,897 2.56% $ 791,290
NOW and money market accounts 2.28 1,464,449 2.45 1,732,157
------------ --------------
2.37 2,178,346 2.48 2,523,447
------------ --------------
Certificates of deposit:
3 months 4.65 167,294 5.03 59,765
6 months 5.24 1,046,989 5.58 1,361,002
10/11 months - 2.81 23,618
12 months 5.76 9,945,849 5.87 10,272,679
18 months 2.45 34,470 2.47 33,624
2 years 6.13 11,090,406 6.07 9,844,447
3 years 6.10 1,392,242 6.11 1,364,492
4 years 5.86 203,170 5.41 221,198
5 years 6.00 1,964,148 5.92 1,587,493
------------ --------------
5.92 25,844,568 5.94 24,768,318
------------ --------------
5.64 $ 28,022,914 5.60% $ 27,291,765
============ ==============
</TABLE>
<PAGE> 31
Maturities of outstanding certificates of deposit are summarized as
follows:
<TABLE>
<CAPTION>
June 30,
--------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
One year or less $ 18,978 15,201
1 - 2 years 4,718 7,740
2 - 3 years 786 727
Over 3 years 1,363 1,100
-------- -------
$ 25,845 24,768
======== =======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Passbook $ 18,300 26,805 33,469
NOW and money market accounts 43,819 48,140 54,233
Certificates of deposit 1,539,261 1,411,589 1,452,833
--------- --------- ---------
$ 1,601,380 1,486,534 1,540,535
========= ========= =========
</TABLE>
The aggregate amount of certificates of deposits in denominations of
$100,000 or more was $2,752,562 and $2,541,599 at June 30, 1998 and
1997, 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.
Future maturities on the advance are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
<S> <C> <C>
1999 $ 78,506
2000 82,878
2001 87,494
2002 92,368
2003 97,512
2004 and subsequent 241,279
-------
$ 680,037
</TABLE>
<PAGE> 32
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 $1,020,000 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.
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
<PAGE> 33
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.
The estimated fair values of the Company's financial instruments were as
follows at :
<TABLE>
<CAPTION>
June 30, 1998
-------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and due from banks, interest bearing
deposits with banks and federal funds sold $ 6,196,370 6,196,370
Investment securities 2,947,033 2,943,614
Mortgage-backed securities 3,966,396 3,905,172
Loans receivable 21,845,552 22,217,000
Accrued interest receivable 165,134 165,134
Financial liabilities:
Deposit liabilities 28,022,914 28,148,000
Federal Home Loan Bank advances 680,037 668,000
Off balance sheet items - -
</TABLE>
<PAGE> 34
<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 - -
</TABLE>
10. CAPITAL REQUIREMENTS:
In connection with the insurance of savings deposits by SAIF, the Savings
Bank is subject to minimum regulatory capital requirements promulgated by
the Office of Thrift Supervision (OTS).
In general, the capital standards established for savings institutions
must be no less stringent than capital standards applicable to national
banks set by the Office of the Comptroller of the Currency. At June 30,
1998, the core capital requirement provides for minimum core capital
(tangible capital plus certain forms of supervisory goodwill and other
qualifying intangible assets) equal to 4.0% of adjusted total assets. The
risk-based capital requirement at June 30, 1998 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%.
<PAGE> 35
The Savings Bank's regulatory capital exceed all minimum capital
requirements as shown in the following table:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------
Regulatory Capital
Risk-
Core based
Capital % Capital %
------- ------ ------- ------
(in Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $ 5,754 5,754
General valuation allowances - 138
------- -------
Regulatory capital computed 5,754 15.9 5,892 37.8
Minimum capital requirements 1,447 4.0 1,247 8.0
------- ------ ------- ------
Regulatory capital-excess $ 4,307 11.9 4,645 29.8
======= ====== ======= ======
</TABLE>
Capital ratios for June 30, 1997 are shown in the following table. The
ratios for 1997 included a tangible capital ratio is currently not
required.
<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 15.7 5,532 15.7 5,658 34.1
Minimum capital requirements 529 1.5 1,058 3.0 1,325 8.0
-------- ----- ----- ---- ----- -----
Regulatory capital-excess $ 5,003 14.2 4,474 12.7 4,333 26.1
======== ===== ===== ==== ===== =====
</TABLE>
<PAGE> 36
11. COMMITMENTS:
At June 30, 1998, the Savings Bank had commitments to originate loans
totaling $711,300. The entire amount was for fixed rate loans. No portion
of these loans were disbursed prior to June 30, 1998, 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, 1997 were
$654,450.
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 the
year ended June 30, 1996, retirement expense amounted to $ 12,700. 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 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 1998 and 1997 was $89,376 and
$53,451, respectively. Remaining unearned shares at June 30, 1998 and
1997 was 25,453 and 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, 1998 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
<PAGE> 37
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
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income taxes at the statutory
rate of 34% $ 125,532 53,385 38,519
Employee stock ownership plan 11,568 - -
Other, primarily surtax exemptions - (8,328) (11,677)
--------- ------ -------
Federal income taxes per consolidated
financial statements $ 137,100 45,057 26,842
========= ====== ======
Effective tax rate 37.2% 28.7% 23.7%
========= ======= =======
</TABLE>
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
--------------------------------------------
1998 1997 1996
----------- ------- ----------
<S> <C> <C> <C>
Deferred tax assets arising from:
Allowance for loan losses $ 35,900 31,800 26,800
Deferred loan fees and costs 5,300 8,000 11,100
Basis of investments 2,000 2,000 2,000
----------- ------- ----------
Total deferred tax assets 43,200 41,800 39,900
----------- ------- ----------
Deferred tax liabilities arising from:
Accrual to cash conversion 38,800 23,700 32,300
Depreciation 13,300 17,000 20,200
FHLB stock 62,500 55,000 48,200
----------- ------- ----------
Total deferred tax liabilities (114,600) (95,700) (100,700)
----------- ------- ----------
Net deferred tax liability $ 71,400 53,900 60,800
=========== ======= ==========
</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.
<PAGE> 38
The components of deferred income tax expense (credit) are as follows:
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Loan origination fees $ 2,600 3,100 4,400
FHLB stock dividend 7,500 6,800 6,200
Depreciation (3,700) (3,300) (600)
Accrual to cash conversion 15,200 (8,300) 2,000
Bad debt reserves and other (4,100) (5,200) (11,800)
--------- ------- --------
$ 17,500 (6,900) 200
========= ======= ========
</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, 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 was signed into law and is
effective for taxable years beginning after December 31, 1995. All
savings banks and thrifts are 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.
<PAGE> 39
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.
<PAGE> 40
17. SUMMARIZED FINANCIAL INFORMATION OF THE PARENT COMPANY:
FOUNDATION BANCORP, INC.
Statements of Financial Condition
---------------------------------
<TABLE>
<CAPTION>
June 30, 1998
1998 1997
------------ ---------
<S> <C> <C>
Assets:
Cash $ 11,007 109,679
Certificate of deposit 137,666 -
Accrued interest receivable 10 -
Investment in Foundation Savings Bank 2,970,826 2,970,826
Note receivable-Foundation Savings Bank 1,000,000 1,000,000
Prepaid expenses 3,591 -
------------ ---------
$ 4,123,100 4,080,505
============ =========
Liabilities and stockholders' equity:
Liabilities:
Accrued expenses $ 10,150 -
Federal income taxes payable - current 15,100 19,952
Federal income taxes payable - deferred (2,200) -
Stockholders' equity:
Common stock - -
Additional paid in capital 4,341,126 4,341,126
Retained earnings 15,597 31,208
Less unearned ESOP shares (256,673) (311,781)
------------ ---------
4,100,050 4,060,553
------------ ---------
$ 4,123,100 4,080,505
============ =========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
--------------------
Year Ended Year Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Interest income $ 75,925 57,350
Dividend income 75,000 -
Professional fees (36,284) (6,140)
Other expenses (1,633) (50)
Income taxes (12,900) (19,952)
------------ ----------
$ 100,108 31,208
============ ==========
</TABLE>
<PAGE> 41
18. EARNINGS PER SHARE
Earnings per share for the years ended June 30, 1998 and 1997 is
calculated as follows. Earning 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.
Basic and diluted earnings per share
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
June 30, 1998 $232,113 438,547 $ .53
June 30, 1997 $210,926 432,456 $ .49
</TABLE>
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial information for the year ended June 30,
1998 is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1998
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $682 691 671 654
Interest expense 407 414 409 411
------- ------- ------- -------
Net interest income 275 277 262 243
Other income 18 25 36 36
Other expenses 185 185 199 234
------- ------- ------- -------
Income before
provision for income taxes 108 117 99 45
Provision for income taxes 37 40 34 26
------- ------- ------- -------
Net income $ 71 77 65 19
======= ======= ======= =======
Basic and diluted earnings
per share $ 0.16 0.17 0.16 0.04
======= ======= ======= =======
</TABLE>
<PAGE> 42
Summarized 1997 quarterly financial information for the periods ending
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 before
provision for income taxes 99 98 106
Provision for income taxes 32 31 29
----------------- -------------- -------------
Net income $ 67 67 77
================= ============== =============
Basic and diluted earnings
per share $ 0.16 0.16 0.17
================= ============== =============
</TABLE>
<PAGE> 43
================================================================================
DIRECTORS OF
FOUNDATION BANCORP, INC.
AND
FOUNDATION SAVINGS BANK
<TABLE>
<CAPTION>
<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 operating 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
a former Mayor of the City of Montgomery.
EXECUTIVE OFFICERS OF
FOUNDATION BANCORP, INC.
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President and Chief Executive Officer Secretary and Treasurer
EXECUTIVE OFFICERS OF
FOUNDATION SAVINGS BANK
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President and Chief Executive Officer Vice President
MICHAEL S. SCHWARTZ MARDELLE DICKHAUT
Chairman of the Board Secretary
MARGO A. LIEBERT MICHELLE BARTH
Treasurer Assistant Secretary
================================================================================
</TABLE>
<PAGE> 44
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 AND 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 and Pease LLP
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.
Keefe, Bruyette & Woods, Inc.
Monroe Securities
The Ohio Company
TRADING SYMBOL
--------------
Price quotations for the common shares of Foundation Bancorp, Inc.,
are available on the National Daily Quotation Service
"Pink Sheets"
under the symbol "FOUN".
A COPY OF THE FORM 10-KSB OF FOUNDATION BANCORP, INC. FOR THE FISCAL YEAR ENDED
JUNE 30, 1998, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE
FURNISHED WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST TO LAIRD L.
LAZELLE, PRESIDENT, FOUNDATION BANCORP, INC., 25 GARFIELD PLACE, CINCINNATI,
OHIO 45202.
<PAGE> 1
Exhibit 20
FOUNDATION BANCORP, INC.
25 GARFIELD PLACE
CINCINNATI, OHIO 45202
(513) 721-0120
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1998 Annual Meeting of Shareholders of
Foundation Bancorp, Inc. (the "Company") will be held at the Pompador Room, The
Cincinnati Club Building, 30 Garfield Place, Cincinnati, Ohio, 45202, on October
20, 1998, 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 three directors of the Company for terms expiring
in 2000;
2. To ratify the selection of Clark, Schaefer, Hackett & Co.
as the auditors of the Company for the current fiscal
year; and
3. 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 31, 1998, 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 18, 1998
<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 1998 Annual
Meeting of Shareholders of the Company to be held at the Pompador Room, The
Cincinnati Club Building, 30 Garfield Place, Cincinnati, Ohio 45202, on October
20, 1998, 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 Ruth C. Emden, Paul L. Silverglade
and Ivan J. Silverman as directors of the Company for
terms expiring in 2000; and
FOR the ratification of the selection of Clark, Schaefer,
Hackett & Co. ("Clark, Schaefer") 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 31,
1998 (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 25, 1998.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and the Company's Code of Regulations (the
"Regulations"), the three 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
-1-
<PAGE> 3
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.
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 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 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 August 31, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- ------------------
<S> <C> <C>
Foundation Bancorp, Inc.
Employee Stock Ownership Plan
1201 Broadway 37,030 (1) 8.00%
Quincy, Illinois 62301
Laird L. Lazelle
25 Garfield Place 26,721 (2) 5.77%
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 3,704 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 August
31, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership(2) Shares Outstanding
- -------------------- --------------------- ------------------
<S> <C> <C>
Mardelle Dickhaut 4,480 0.97%
Ruth C. Emden 5,000 1.08
Laird L. Lazelle 26,721 (3) 5.77
Robert E. Levitch 25 0.01
Michael S. Schwartz 16,571 (4) 3.58
Paul L. Silverglade 8,750 1.89
Ivan J. Silverman 11,571 (5) 2.50
All directors and executive officers of
the Company as a group (8 people)
78,213 16.90%
<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 11,571 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 2000:
<TABLE>
<CAPTION>
Director of Director of
the Company Foundation
Name Age (1) Position(s) Held Since (2) Since
- ---- ------- ---------------- ---------- ---------
<S> <C> <C> <C> <C>
Ruth C. Emden 71 Director 1996 1994
Paul L. Silverglade 73 Director 1996 1988
Ivan J. Silverman 57 Director 1996 1992
<FN>
- -----------------------------
(1) As of September 1, 1998.
(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>
Mardelle Dickhaut 65 Director 1996 1989 1999
Laird L. Lazelle 59 Director, President and 1996 1994 1999
Chief Executive Officer
Robert E. Levitch 64 Director 1996 1964 1999
Michael S. Schwartz 54 Director 1996 1967 1999
<FN>
- -----------------------------
(1) As of September 1, 1998.
(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 a 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.
-4-
<PAGE> 6
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 some 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.
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 Associate Vice President with Gradison,
Division of McDonald & Company Securities, Inc. Mr. Silverman is a former 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 five times for regularly
scheduled and special meetings during the fiscal year ended June 30, 1998.
COMMITTEES OF DIRECTORS
The Board of Directors of the Company has an Audit Committee. The
Company has no Compensation 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, 1998.
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
twice during the fiscal year ended June 30, 1998.
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, 1998, 1997 and 1996. No
executive officer of the Company earned salary and bonus in excess of $100,000
during fiscal 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
---------------------------------------------------------------------------
Annual Compensation All Other Compensation (1)(2)
- --------------------------------------------------------------------------------------
Name and Principal Year Salary ($) Bonus ($)
Position
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Laird L. Lazelle 1998 $85,000 $15,000 $27,770
President and Chief 1997 80,000 15,000 24,998
Executive Officer 1996 65,000 9,800 6,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include amounts attributable to other miscellaneous benefits,
the cost of which was less than 10% of Mr. Lazelle's cash compensation.
(2) Consists of director's fees and for 1997 also includes 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. For 1998, consists
of the $28,770 aggregate value of the 2,055 shares of the Company
allocated to Mr. Lazelle's account pursuant to the fiscal 1998 ESOP
allocation, based on the price of shares in the most recent trade as of
September 1, 1998.
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. No fees are paid for committee meetings.
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.
-6-
<PAGE> 8
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, 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 Office of Thrift
Supervision (the "OTS"), of Foundation or the Company.
The Employee Agreement was reviewed by the Board of Directors at a
meeting held on December 16, 1997 pursuant to OTS regulations. The term of the
Employment Agreement was extended to expire December 31, 2000. There was no
change to the amount of compensation or any other provision of the agreement.
STOCK OPTION PLAN
At the 1997 Annual Meeting of Shareholders of the Company, the
shareholders approved the Foundation Bancorp, Inc. 1997 Stock Option and
Incentive Plan (the "Stock Option Plan"). 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. No
options have been granted as of June 30, 1998.
RECOGNITION AND RETENTION PLAN
At the 1997 Annual Meeting of Shareholders, the shareholders approved
the Foundation Savings Bank Recognition and Retention Plan and Trust Agreement
(the "RRP"). With funds contributed by
-7-
<PAGE> 9
Foundation, the RRP purchased 18,515 common shares of the Company during the
1998 fiscal year. No awards have been made under the RRP as of June 30, 1998.
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. At June 30, 1998, there were no loans outstanding to
the Company's or Foundation's directors, officers, or employees.
PROPOSAL TWO- RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected Clark, Schaefer 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 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.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any qualified shareholder of the Company who intends to submit a
proposal to the Company at the 1999 Annual Meeting of Shareholders (the "1999
Annual Meeting") must submit such proposal to the Company not later than May 29,
1999, to be considered for inclusion in the Company's Proxy Statement and form
of Proxy (the "Proxy Materials") relating to that meeting. If a shareholder
intends to present a proposal at the 1999 Annual Meeting of Shareholders but has
not sought the inclusion of such proposal in the Company's Proxy Materials, such
proposal must be received by the Company prior to August 11, 1999, the Company's
management proxies for the 1999 Annual Meeting will be entitled to use their
discretionary voting authority should such proposal then be raised, without any
discussion of the matter in the Company's Proxy Materials.
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 18, 1998
-8-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FISCAL YEAR
END AUDITED FINANCIALS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 83,517
<INT-BEARING-DEPOSITS> 6,112,853
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,913,429
<INVESTMENTS-MARKET> 6,848,786
<LOANS> 21,370,702
<ALLOWANCE> 138,147
<TOTAL-ASSETS> 36,189,606
<DEPOSITS> 28,022,914
<SHORT-TERM> 0
<LIABILITIES-OTHER> 347,023
<LONG-TERM> 680,037
462,875
0
<COMMON> 0
<OTHER-SE> 7,139,632
<TOTAL-LIABILITIES-AND-EQUITY> 36,189,606
<INTEREST-LOAN> 2,049,037
<INTEREST-INVEST> 330,450
<INTEREST-OTHER> 318,907
<INTEREST-TOTAL> 2,698,394
<INTEREST-DEPOSIT> 1,601,380
<INTEREST-EXPENSE> 1,641,214
<INTEREST-INCOME-NET> 1,045,180
<LOAN-LOSSES> 12,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 791,814
<INCOME-PRETAX> 369,213
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232,113
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 7.192
<LOANS-NON> 0
<LOANS-PAST> 412
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 126,147
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 138,147
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 138,147
</TABLE>
