<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission File Number: 0-21297
FOUNDATION BANCORP, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Ohio 31-1465239
- ---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Garfield Place, Cincinnati, Ohio 45202
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 721-0120
--------------
Securities registered pursuant to Section 12(b) of the Act:
None None
---------------- ----------------------
(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value per share
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the price of shares of the
Registrant in the most recent trade reported by the National Daily Quotation
Service, as of September 1, 1999, was approximately $4,772,000. (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, 1999, there were 462,875 of the Registrant's common
shares issued and outstanding.
The Registrant's revenues for the fiscal year ended June 30, 1999, were
$2,528,084.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of 1999 Annual Report to Shareholders
Part III of Form 10-KSB - Portions of Proxy Statement
for the 1999 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,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- ---------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 18,013 88.01% $ 19,278 88.25% $ 23,817 91.82%
Nonresidential 1,197 5.85 1,269 5.81 1,118 4.31
Multifamily 1,489 7.27 1,285 5.88 968 3.73
Consumer loans:
Passbook loans 22 .11 26 .12 27 0.10
Other consumer loans 198 .97 132 .60 389 1.50
-------- ------ -------- ------ -------- ------
Total loans 20,919 102.21 21,990 100.66 26,319 101.46
Less:
Loans in process 306 1.50 - - 237 0.91
Allowance for loan losses 150 .73 138 .63 126 0.49
Deferred loan fees (5) (.02) 6 .03 17 0.07
-------- ------ -------- ------ -------- ------
Net loans $ 20,468 100.00% $ 21,846 100.00% $ 25,939 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
June 30, 1999, 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 4-5 Due 6-10 Due 11-20 Due more
Due during the year ending years years years than 20
June 30, after after after years after
-------------------------------
2000 2001 2002 6/30/99 6/30/99 6/30/99 6/30/99 Total
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 520 $ 638 $ 673 $ 1,350 $ 3,400 $ 3,592 $ 7,840 $18,013
Multifamily 45 57 59 125 423 433 347 1,489
Nonresidential 47 50 53 115 370 383 179 1,197
Consumer loans 79 37 31 26 19 28 -- 220
------- ------- ------- ------- ------- ------- ------- -------
Total $ 691 $ 782 $ 816 $ 1,616 $ 4,212 $ 4,436 $ 8,366 $20,919
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth the dollar amount of all loans due after one
year from June 30, 1999, which have predetermined interest rates and loans which
have floating or adjustable interest rates:
Due more than one year after
June 30, 1999
----------------------------
(In thousands)
Fixed rates of interest $14,225
Adjustable rates of interest 6,001
-------
$20,226
=======
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<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, 1999, Foundation's one- to four-family residential real estate
loan portfolio was approximately $18.0 million, or 88.01% 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, 1999, loans secured by multifamily properties totaled
approximately $1.5 million, or 7.27% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At June 30, 1999,
approximately $1.2 million, or 5.85%, 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, 1999, 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, 1999, Foundation had approximately $220,000, or 1.08% 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 or have low
loan-to-value ratios 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.
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<PAGE> 6
The following table presents the loan origination activity of
Foundation for the periods indicated:
Year ended June 30,
-----------------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
Loans receivable-beginning of period $ 21,846 $ 25,939 $ 23,267
Loans originated:
One- to four-family residential 11,251 10,266 7,210
Nonresidential 188 166 58
Multifamily 326 609 120
Consumer 85 378 264
-------- -------- --------
Total loans originated 11,850 11,419 7,652
Reductions:
Principal repayments 6,030 8,051 3,748
Loans sold 6,491 7,643 1,077
Transferred to real estate owned -- 54 --
-------- -------- --------
Total reductions 12,521 15,748 4,825
Other items, net (1) (307) 236 (155)
-------- -------- --------
Loans receivable, end of period $ 20,868 $ 21,846 $ 25,939
======== ======== ========
- ------------------------------------
(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 $864,000 to one
borrower at June 30, 1999. The largest amount Foundation had outstanding to one
borrower and related persons or entities at June 30, 1999, was approximately
$670,000, consisting of seven loans, the largest of which was approximately
$299,000. 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
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,
-----------------------------------
1999 1998 1997
--------- ------- -------
(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 $ 150 $ 138 $ 126
========= ======= =======
Nonperforming assets as a percent of total assets 0.00% 0.15% 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, 1999, 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. At June 30, 1999, there was one loan that was almost 90 days
delinquent. Management estimated that there will be a loss of $8,000 and has
established a specific reserve for this purpose.
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.
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.
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<PAGE> 8
The aggregate amounts of Foundation's classified assets at the dates
indicated were as follows:
At June 30,
----------------------
1999 1998 1997
---- ---- ----
(In thousands)
Classified assets:
Special mention $ - $ 54 $216
Substandard 77 - -
Doubtful - - -
Loss 8 - -
---- ---- ----
Total classified assets $ 85 $ 54 $216
==== ==== ====
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:
Year ended June 30,
------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Balance at beginning of period $138 $126 $111
Charge-offs (1) - - -
Recoveries (1) - - -
---- ---- ----
Net (charge-offs) recoveries (1) - - -
Provision for loan losses 12 12 15
---- ---- ----
Balance at end of period $150 $138 $126
==== ==== ====
Ratio of net (charge-offs) recoveries
to average loans outstanding
during the period - - -
Ratio of allowance for loan losses
to total loans .73% 0.63% 0.47%
- -----------------------------
(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.
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<PAGE> 10
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,
----------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- --------------------------
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 $ 48 $ 48 $ 97 $ 97 $ 54 $ 54
Certificates of deposit 1,206 1,206 300 300 - -
Investment securities:
Federal funds 2,287 2,287 6,016 6,016 3,065 3,065
U.S. Government obligations 3,754 3,702 2,947 2,944 946 949
FHLB stock 344 344 321 321 299 299
Mortgage-backed securities 5,018 4,920 3,966 3,905 4,288 4,168
------- ------- ------- ------- ------- -------
Total investments $12,657 $12,507 $13,647 $13,583 $ 8,652 $ 8,535
======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 11
The maturities of Foundation's interest-bearing deposits and investment
securities at June 30, 1999, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------------------------------
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> <C> <C>
Interest-bearing deposits $ 48 5.25% $ - -% $ - -%
Investment securities:
Federal funds 2,287 5.73 - - - -
U.S. Government agency
obligations - - 750 6.42 2,704 6.85
Mortgage-backed
securities - - 378 6.51 431 5.95
FHLB stock - - - - - -
Certificates of deposit 1,206 5.59 - - - -
-------- -------- --------
Total $3,541 5.68% $ 1,128 6.45% $ 3,135 6.73%
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
----------------------------------------------------------
After ten
years Total
----------------------- --------------------------
Carrying Average Carrying Weighted
value yield value average yield
----- ----- ----- -------------
<S> <C> <C> <C> <C>
Interest-bearing deposits $ - -% $ 48 5.25%
Investment securities:
Federal funds - - 2,287 5.73
U.S. Government agency
obligations 300 7.54 3,754 6.82
Mortgage-backed
securities 4,209 6.37 5,018 6.34
FHLB stock 344 6.75 344 6.75
Certificates of deposit - 1,206 5.59
------ -------
Total $4,853 6.48% $12,657 6.31%
====== =======
</TABLE>
-10-
<PAGE> 12
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, 1999, Foundation's certificates of deposit totaled $23.8
million, or 92.25% of total deposits. Of such amount, approximately $16.1
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.
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,
1999:
Maturity Amount
-------- --------------
(In thousands)
Three months or less $ 944
Over 3 months to 6 months 961
Over 6 months to 12 months 420
Over 12 months 775
--------
Total $3,100
======
The following table sets forth Foundation's deposit account balance
activity for the fiscal years ended June 30, 1999, 1998 and 1997:
Year ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Beginning balance $ 28,022 $ 27,292 $ 26,951
Net decrease before interest
credited (3,686) (871) (1,146)
Interest credited 1,418 1,601 1,487
-------- -------- --------
Ending balance $ 25,754 $ 28,022 $ 27,292
======== ======== ========
Net increase (decrease) $ (2,268) $ 730 $ 341
======== ======== ========
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
-11-
<PAGE> 13
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, 1999, 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,
---------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding $638 $714 $790
Maximum amount outstanding at any month end during
the period 674 748 819
Balance outstanding at end of period 602 680 754
Weighted average interest rate during the period 5.59% 5.58% 5.59%
Weighted average interest rate at end of period 5.55% 5.53% 5.52%
</TABLE>
COMPETITION
Foundation competes for deposits with other savings associations,
savings banks, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Foundation competes with other
savings associations, savings banks, commercial banks, mortgage brokers,
consumer finance companies, credit unions, leasing companies and other lenders.
Foundation competes for loan originations primarily through the interest rates
and loan fees it charges and through the efficiency and quality of services it
provides to borrowers.
Competition in Hamilton County is intense due to the number of
financial institutions serving the area. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. Foundation does not offer all of the products and services offered
by some of its competitors, particularly commercial banks. Foundation monitors
the product offerings of its competitors and adds new products when it can do so
competitively and cost effectively. Foundation's deposit market share in
Hamilton County is negligible.
The size of financial institutions competing with Foundation is likely
to increase as a result of changes in statutes and regulations eliminating
various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon
Foundation.
EMPLOYEES
As of June 30, 1999, 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
-12-
<PAGE> 14
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.
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. 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. 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 that may change the range of
activities in which Foundation may engage. 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. At this time, the Company cannot predict
when or whether Congress may actually pass legislation regarding the Company's
and Foundation's regulatory requirements or charter. Although such legislation,
if enacted, may change the activities in which the Company or Foundation are
authorized to engage, it is not anticipated that the current activities of
either the Company or Foundation will be materially affected by those limits.
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
-13-
<PAGE> 15
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.
OFFICE OF THRIFT SUPERVISION
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.
Those associations that do not have the highest examination rating and exceed an
acceptable level of risk are required to maintain core capital of from 4% to 5%,
depending on the association's examination rating and overall risk. Foundation
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Foundation includes allowances for loan and lease losses at
June 30, 1999.
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. Foundation's capital at June 30, 1999, met the
standards for the highest category, a "well-capitalized" institution.
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, 1999,
was approximately $4.9 million, or 18.5%, and exceeded the applicable 4%
liquidity requirement by approximately $3.9 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
-14-
<PAGE> 16
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, 1999, 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, 1999, 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, 1999.
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, 1999.
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 associations 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.
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.
-15-
<PAGE> 17
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
Company. Except with the prior approval of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such holding company's stock may also acquire control
of any savings institution, other than a subsidiary institution, or any other
savings and loan holding company.
As a unitary savings and loan holding company, the Company generally
has no restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit the Company's ability to engage in these activities. It cannot
be predicted whether and in what form these proposals might become law. However,
such limits would not impact the Company's current activities, which consist
solely of holding stock of Foundation. 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, 1999,
Foundation met both those tests.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF THE COMPANY AND
FOUNDATION. In addition to the Ohio law limitations on the merger and
acquisition of Foundation and the Company, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent federal
law and regulations, no person, directly or indirectly, or acting in concert
with others, may acquire control of Foundation or the Company without 60 days'
prior notice to the OTS. "Control" is generally defined as having more than 25%
ownership or voting power; however, ownership or voting power of more than 10%
may be deemed "control" if certain factors are in place. If the acquisition of
control is by a company, the acquiror must obtain approval, rather than give
notice, of the acquisition as a savings and loan holding company.
In addition, any merger of Foundation must be approved by the OTS as
well as the Superintendent. Further, any merger of the Company in which the
Company is not the resulting company must also be approved by both the OTS and
the Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Foundation is a member of the SAIF and its deposit accounts are insured by the
FDIC up to the prescribed limits. The FDIC has examination authority over all
insured depository institutions, including Foundation, and has authority to
initiate enforcement actions against federally-insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
FEDERAL RESERVE BANK RESERVE REQUIREMENTS
Federal Reserve Bank regulations currently require savings associations
to maintain reserves of 3% of net transaction accounts (primarily NOW accounts)
up to $46.5 million (subject to an exemption of up to $4.9 million), and of 10%
of net transaction accounts in excess of $46.5 million. At June 30, 1999,
Foundation was in compliance with the new reserve requirements.
-16-
<PAGE> 18
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 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 $343,800 at June 30, 1999.
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, 1999, Foundation's
maximum limit on advances was approximately $6.9 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 specified categories.
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, 1999, is $2.7 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
-17-
<PAGE> 19
the close of the base year. A thrift institution could elect annually to compute
its allowable addition to bad debt reserves for qualifying loans either under
the experience method or the percentage of taxable income method. For tax years
1995, 1994, and 1993, Foundation used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely 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, 1999, 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, 1999, 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 1994. 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.
-18-
<PAGE> 20
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth. For tax years beginning after December 31,
1998, the rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess
of $50,000 or (ii) .400% times taxable net worth.
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
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Foundation is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.4% of the book net worth
of Foundation determined in accordance with generally accepted accounting
principles. For tax year 2000 and years thereafter, however, the franchise tax
on financial institutions 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 one and three-quarters 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 STOCKHOLDER MATTERS
The information contained in the 1999 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.
-19-
<PAGE> 21
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and the report of Clark, Schaefer,
Hackett & Co. dated August 23, 1999, appearing in the Annual Report are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 1999
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.
-20-
<PAGE> 22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
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 reference to the Form S-1, Exhibit 10.4
Foundation Bancorp, Inc. and Laird
L. Lazelle
10(b) Employment Agreement between Incorporated by reference to the Form S-1, Exhibit 10.5
Foundation Savings Bank and Laird L.
Lazelle
10(c) Lease Agreement Incorporated by reference to the Form S-1, Exhibit 10.6
13 1999 Annual Report to Shareholders
20 Proxy Statement for 1999 Annual
Meeting
21 Subsidiaries of the Registrant Incorporated by reference to the 1997 10-KSB, Exhibit 21
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1999.
-21-
<PAGE> 23
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 27, 1999 Date: September 27, 1999
/s/ Laird L. Lazelle /s/ Robert E. Levitch
- ------------------------ ---------------------------
Laird L. Lazelle Robert E. Levitch
Director Director
Date: September 27, 1999 Date: September 27, 1999
/s/ Michael S. Schwartz /s/ Paul L. Silverglade
- ------------------------ ---------------------------
Michael S. Schwartz Paul L. Silverglade
Director Director
Date: September 27, 1999 Date: September 27, 1999
/s/ Ivan J. Silverman /s/ Dianne K. Rabe
- ------------------------ ---------------------------
Ivan J. Silverman Dianne K. Rabe
Director Principal Financial Officer
Date: September 27, 1999 Date: September 27, 1999
-22-
<PAGE> 1
Exhibit 13
FOUNDATION BANCORP, INC.
Parent Company of Foundation Savings Bank
(Foundation Bancorp logo)
1999
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 third annual report.
September 25, 1998 will be the third anniversary of our initial public offering.
Foundation will be paying its third annual dividend to shareholders on September
28, 1999, to shareholders of record on September 20, 1999. This dividend, for
the fiscal year ended June 30, 1999, will be $.50 per share. Previous dividends
were $.40 for fiscal 1998 and $.25 for fiscal 1997.
Net income for the 1999 fiscal year ended June 30, 1999 was $169,227, down from
the $232,113 for the 1998 fiscal year. The fiscal 1999 economic environment
negatively impacted Foundation's earnings as borrowers refinanced to obtain
lower interest rates. This 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 viewed investing in the low yields available
on long-term mortgages to be undesirable and reinvested the proceeds from
payoffs in short-term liquid obligations, resulting in a decrease in net
interest income.
The 1999 fiscal year results included a charge to earnings in the amount of
$19,000, which relates to the market value of the 5,803 shares allocated in the
ESOP during the year. 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 $188,262 earned before the
ESOP accounting treatment.
Foundation is pleased to report that it is Year 2000 ready. This involved
replacing older computers with new ones as well as updating certain software.
The total cost of becoming Year 2000 compliant was approximately $30,000, which
included extensive testing. Contingency plans have been developed which will
enable Foundation to open for business on January 3, 2000.
Foundation continues to pursue strict collection policies, which has resulted in
low delinquency and excellent asset quality. Interest rates are again on the
rise, which should improve our interest income if higher rates prevail
throughout the year.
Thank you for being a shareholder of Foundation Bancorp. You may reach me
personally at 513-721-0120 with questions or comments.
<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, 1999,
and held of record by approximately 157 shareholders. Price information with
respect to the Company's common shares is published by the National Quotation
Bureau ("NQB"). The high and low bids for the common shares of the Company for
the periods indicated, as reported by NQB, were as follows:
<TABLE>
<CAPTION>
Fiscal 1998 Cash dividends
Quarter Ended High Low declared
- ------------------- --------- ---------- --------
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
Fiscal 1999
Quarter Ended
- -------------------
<S> <C> <C> <C>
September 30, 1998 $17.50 $13.00 $ .40
December 31, 1998 $14.00 $12.875 -
March 31, 1999 $17.00 $12.50 -
June 30, 1999 $13.625 $12.75 -
</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
1
<PAGE> 4
with the Conversion. In addition to certain federal income tax considerations,
OTS regulations impose limitations on the payment of dividends and other capital
distributions by savings associations. Under OTS regulations applicable to
converted savings associations, Foundation is not permitted to pay a cash
dividend on its common shares if its regulatory capital would, as a result of
the payment of such dividend, be reduced below the amount required for the
liquidation account (which was established for the purpose of granting a limited
priority claim on the assets of Foundation, in the event of a complete
liquidation, to those members of Foundation before the Conversion who maintain a
savings account at Foundation after the Conversion) or applicable regulatory
capital requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a savings
association which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital (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 tables set 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: 1999 1998 1997 1996 1995
--------- ------- ---------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $33,762 $36,189 $35,271 $30,835 $31,849
Cash and cash equivalents 2,414 6,196 3,289 1,172 3,943
Investment securities 5,304 3,568 1,245 1,179 1,310
Mortgage-backed securities 5,018 3,966 4,288 4,641 5,532
Loans receivable, net (1) 20,468 21,846 25,939 23,267 20,511
Deposits 25,754 28,023 27,292 26,951 27,737
FHLB advances 602 680 754 825 1,192
Shareholders' equity (2) 7,072 7,140 6,934 2,793 2,706
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------------------
SUMMARY OF EARNINGS: 1999 1998 1997 1996 1995
----- ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $2,402 $2,698 $2,558 $2,359 $2,162
Interest expense 1,454 1,641 1,530 1,592 1,368
------- -------- ------- -------- -------
Net interest income 948 1,057 1,028 767 794
Provision for loan losses 12 12 15 44 12
------- -------- ------- -------- -------
Net interest income after
provision for loan losses 936 1,045 1,013 723 782
Other income 126 116 63 64 70
General, administrative and other
expense 793 792 919 674 679
------- -------- ------- -------- -------
Earnings before income taxes 269 369 157 113 173
Federal income taxes 100 137 45 27 48
------- -------- ------- -------- -------
Net earnings $ 169 $ 232 $ 112 $ 86 $ 125
======= ======== ======= ======== =======
- --------------------------
</TABLE>
(1) Includes $475,000 of loans held for sale at June 30, 1998, and $89,200
in loans held for sale at June 30, 1997. There were no loans held for
sale at June 30, 1999, 1996 or 1995.
(2) Consisted solely of retained earnings at June 30, 1995 and 1996.
3
<PAGE> 6
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------
SELECTED FINANCIAL RATIOS: 1999 1998 1997 1996 1995
----- ------ ------ ----- ----
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 0.49% 0.63% 0.33% 0.27% 0.41%
Return on average equity 2.39 3.31 1.82 3.11 4.72
Interest rate spread 1.70 1.82 2.10 2.04 2.25
Net interest margin 2.79 2.92 3.06 2.48 2.66
Non-interest expense to average total assets 2.29 2.16 2.68 2.13 2.23
Average equity to average assets 20.43 19.12 17.89 8.72 8.71
Equity to assets, end of period 21.01 19.73 19.66 9.06 8.50
Asset quality ratios:
Nonperforming assets to average total assets - 0.15 - - 0.64
Nonperforming loans to total loans - - - - 0.95
Allowance for loan losses to total loans 0.73 0.63 0.48 0.47 0.47
Allowance for loan losses to nonperforming loans
- - - - 50.52
Net (charge-offs) recoveries to
average loans - - - (0.14) 0.07
Average interest-earning assets to average
interest-bearing liabilities 125.46 124.17 121.15 108.51 108.92
</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, 1999 assets totaled $33.8 million, a decrease of $2.4 million, or
6.7%, compared to June 30, 1998 totals. During fiscal 1999, interest rates
approached historic low levels. To reduce interest-rate risk, Foundation sold
the majority of its production of long-term, fixed-rate loans in the secondary
market. Existing borrowers also refinanced to obtain lower interest rates
resulting in a decrease in loans receivable of $1.4 million, or 6.3%.
Since liquidity was building and the strategy was to reduce interest rate risk
should rates begin to increase, the rates paid on deposits were reduced.
Deposits decreased $2.3 million, or 8.1%, and the cost of deposits
correspondingly decreased 49 basis points compared to the June 30, 1998 levels.
The Company sought higher returns on its cash equivalents, resulting in an
increase in short-term certificates of deposit in other institutions of $0.9
million, or 302.1%, and an increase in investment securities of $0.8 million, or
27.4%. These increases, combined with the decrease in interest-bearing deposits,
resulted in a decrease in cash and cash equivalents of $3.8 million, or 61.0%.
Mortgage-backed securities increased $1.1 million, or 26.5%, as a result of a
purchase made at a favorable rate relative to alternative investments.
Unallocated shares held by the Foundation Bancorp, Inc. Employee Stock Ownership
Plan (the "ESOP"), decreased $52,900, or 20.6%, resulting from the 1998 calendar
year allocation, and additional paid-in capital increased $19,035, or 0.4%,
resulting from the market adjustment of the 1998 ESOP allocation.
During fiscal 1999, 9,500 shares were purchased at a price of $13 per share, or
a total of $123,500, which will be used in funding the Company's Retention and
Recognition Plan (the "RRP"), which was approved by the shareholders at the 1997
Annual Meeting.
5
<PAGE> 8
COMPARISON OF RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Net earnings for the year ended June 30, 1999 totaled $169,227, a decrease of
$62,886, or 27.1%, from the $232,113 in net earnings for the year ended June 30,
1998. The decrease in earnings was comprised of a decrease in interest income of
$296,446, or 11.0%, and a slight increase of $1,062, or 0.1%, in general,
administrative and other expense. These changes were partially offset by a
decrease in interest expense of $187,133, or 11.4%, an increase in other income
of $10,289, or 8.9%, and a decrease in federal income tax of $37,200, or 27.1%.
Total interest income for the fiscal year ended June 30, 1999 decreased
$296,446, or 11.0% , as compared to fiscal 1998 totals. Interest rates reached
historic lows during fiscal 1999 and existing borrowers refinanced to obtain the
lower mortgage rates. Foundation followed a strategy of selling the low rate
loans in the secondary market rather than holding them in the loan portfolio.
The investment in mortgage loans was reduced and the average rate of return
decreased as the higher yielding loans were refinanced. This resulted in a
decrease in interest on loans of $409,479, or 20.0%. This decrease was partially
offset by increases in interest on mortgage-backed securities of $60,049, or
24.9%, interest on investments of $46,860, or 52.5%, and interest on
interest-bearing deposits and other of $6,124, or 1.9%, as the cash flow from
loan payoffs was re-invested in short-term, lower yielding instruments.
As the availability of attractive yields on investments decreased and liquidity
increased, Foundation lowered the rates paid on deposit which resulted in
outflows. Interest expense on deposits decreased $182,992, or 11.4%, as the
result of a lower weighted average cost of deposits on a smaller portfolio.
Interest expense on borrowings decreased $4,141, or 10.4%, resulting from
scheduled repayments.
Other operating income increased $10,289, or 8.9%, resulting from an increase in
gains on sales of loans of $5,693, or 9.9%, and an increase in other operating
income of $6,609, or 140.7%, partially offset by a decrease in investment
property income of $2,013, or 3.8%, due to higher real estate taxes. Other
income included a one-time gain on the sale of real estate owned in the amount
of $7,400.
The increase of $1,062, or 0.1%, in general, administrative and other expense
was principally the increase in franchise taxes of $18,594, or 31.5%, plus an
increase in occupancy and equipment of $2,411, or 3.1%, and an increase in data
processing of $2,810, or 8.4%, offset by a decrease in employee compensation and
benefits of $6,581, or 1.5%, and a decrease in other expense of $15,137, or
10.0%. The increases in data processing and occupancy and equipment were Year
2000 related and involved new computer equipment and testing. Federal income
taxes decreased $37,200, or 27.1%, due to the lower earnings
6
<PAGE> 9
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.
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,
-----------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
Weighted average Average Interest Average Average Interest Average
yield/rate outstanding earned/ yield/ outstanding earned/ yield/
at June 30, 1999 balance paid rate balance paid rate
---------------- ------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 5.72% $ 5,999 $ 325 5.42% $ 5,809 $ 319 5.49%
Investment securities 6.53 2,228 136 6.10 1,451 89 6.13
Mortgage-backed securities 6.35 5,068 301 5.94 4,020 241 6.00
Loans receivable 7.79 20,717 1,640 7.92 24,871 2,049 8.24
-------- ------- --------- ------
Total interest-earning assets 34,012 2,402 7.06 36,151 2,698 7.46
Non-interest-earning assets 554 517
-------- ---------
Total assets $ 34,566 $ 36,668
======== =========
Interest-bearing liabilities:
Deposits 5.15 $ 26,471 1,418 5.36 $ 28,400 1,606 5.65
Noninterest bearing demand
Interest-bearing demand
Savings
Time
FHLB advances 5.55 638 36 5.64 714 35 4.90
-------- --------- ------
Total interest-bearing
liabilities 27,109 1,454 5.36 29,114 1,641 5.64
------- ------
Non-interest-bearing liabilities 394 542
-------- ---------
Total liabilities 27,503 29,656
Stockholders' equity 7,063 7,012
-------- ---------
Total liabilities and
stockholders' equity $ 34,566 $ 36,668
======== =========
Net interest income $ 948 $1,057
======= ======
Interest rate spread 1.70% 1.82%
==== ====
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.79% 2.92%
==== ====
Average interest-earning assets to
average interest-bearing
liabilities 125.46% 124.17%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1997
------------------------------------
Average Interest Average
outstanding earned/ yield/
balance paid rate
------- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 3,511 $ 198 5.64%
Investment securities 949 77 8.11
Mortgage-backed securities 4,413 269 6.10
Loans receivable 24,710 2,014 8.15
--------- -------
Total interest-earning assets 33,583 2,558 7.62
Non-interest-earning assets 728
---------
Total assets $ 34,311
=========
Interest-bearing liabilities:
Deposits $ 26,935 1,486 5.52
Noninterest bearing demand
Interest-bearing demand
Savings
Time
FHLB advances 787 44 5.59
--------- -------
Total interest-bearing
liabilities 27,721 1,530 5.52
-------
Non-interest-bearing liabilities 453
---------
Total liabilities 28,174
Stockholders' equity 6,137
---------
Total liabilities and
stockholders' equity $ 34,311
==========
Net interest income $ 1,028
=======
Interest rate spread 2.10%
====
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.06%
====
Average interest-earning assets to
average interest-bearing
liabilities 121.14%
======
</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,
------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------- -----------------------------------
Increase Total Increase Total
(decrease) due to increase (decrease) due to increase
----------------- -----------------
Volume Rate (decrease) Volume Rate (decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 10 $ (4) $ 6 $ 127 $ (6) $121
Investments 48 (1) 47 35 (23) 12
Mortgage-backed securities 62 (2) 60 (24) (4) (28)
Loans receivable (332) (77) (409) 13 22 35
----- ---- ----- ----- ----- ----
Total interest income (212) (84) (296) 151 (11) 140
Interest-bearing liabilities
Deposits (106) (77) (183) 83 37 120
FHLB advances (4) - (4) (4) (5) (9)
----- ---- ----- ----- ----- ----
Total interest expense (110) (77) (187) 79 32 111
----- ---- ----- ----- ----- ----
Increase (decrease) in net
interest income $(102) $ (7) $(109) $ 72 $ (43) $ 29
===== ==== ===== ===== ===== ====
</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 guidance issued in Thrift Bulletin 13a
(TB 13a), published by the OTS December 1, 1998.
Under previous guidance, the Board of Directors of Foundation was required to
review interest rate risk, as measured by changes in net portfolio value (NPV).
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 (rate shock). Under previous guidance, interest rate risk
was measured as a percentage change in NPV from the base, without taking into
account current levels of capital.
Under TB 13a, the Board of Directors looks at Foundation's actual
capital-to-assets ratio under various interest rate scenarios, rather than as a
percentage change from the base. In this way, current levels of
9
<PAGE> 12
capital are considered when risk is assessed. The guidance further compares NPV
before and after a 200 basis point rate shock to assess risk.
Presented below, as of June 30, 1999, is an analysis of Foundation's interest
rate risk as measured by 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 advisable in the event of
various changes in interest rates.
June 30, 1999
-------------
Change in interest rate Board limit Projected
(basis points) (Minimum NPV Ratio) Ratio
-------------- ------------------- -----
+300 6% 11.51%
+200 7% 13.74%
+100 8% 15.79%
0 9% 17.51%
-100 9% 18.54%
-200 9% 18.72%
-300 9% 19.01%
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 selling fixed-rate loans originated at low interest rates.
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income $ 169 $ 232 $ 112
Adjustments to reconcile net income to
net cash from operating activities 15 36 103
------ ------ ------
Net cash from operating activities 184 268 215
Net cash provided by (used in)
investment activities (1,310) 2,098 (2,386)
Net cash provided by (used in)
financing activities (2,656) 541 4,288
------- ------ ------
Net change in cash and cash equivalents (3,782) 2,907 2,117
Cash and cash equivalents at
beginning of period 6,196 3,289 1,172
------ ------ ------
Cash and cash equivalents at
end of period $2,414 $6,196 $3,289
====== ====== ======
</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 in an
amount equal to 4% of the sum of Foundation's 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, 1999,
Foundation's liquid assets totaled approximately $4.9 million, which exceeded
the OTS minimum requirements by $3.9 million. At such date, Foundation had
commitments to originate loans and loans in process totaling $1.0 million.
Foundation considers its liquidity and capital reserves sufficient to meet its
outstanding short-term and long-term needs.
OTHER MATTERS
- --------------------------------------------------------------------------------
As with most providers of financial services, Foundation's operations are
heavily dependent on information technology systems. The Company's primary data
processing applications are handled by a
11
<PAGE> 14
third-party service bureau which has transferred to a fully year 2000-compliant
processing system and has completed extensive testing. To operate on this new
system, the Company had to replace its old personal computers ("PCs") and
purchased a new year-2000 compliant computer network consisting of a server and
PCs. New year-2000 compliant software for internal systems has been purchased,
installed and tested and is fully operational. The total cost of the hardware
and software upgrade was approximately $30,000.
Foundation has developed and adopted a contingency plan to operate on January 3,
2000 should systems fail. Since the company has one office and the majority of
the deposit accounts are term deposits, it will be possible to operate for a
period of ninety days utilizing manual posting procedures. It is the Company's
intention to open for business on January 3, 2000, barring civil unrest or
danger to the staff.
The Company has not identified any other material specific expenses that are
reasonably likely to be incurred by Foundation in connection with this issue. 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 additional 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 has taken the necessary
steps 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
CLARK, SCHAEFER, HACKETT & CO.
CERTIFIED PUBLIC ACCOUNTANTS
BUSINESS CONSULTANTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Foundation Bancorp, Inc.:
We have audited the consolidated statements of financial condition of Foundation
Bancorp, Inc. and its subsidiary as of June 30, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
/s/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
August 23, 1999
13
<PAGE> 16
FOUNDATION BANCORP, INC.
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
<TABLE>
<CAPTION>
Assets
------
June 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash $ 79,041 83,517
Interest-bearing deposits in other financial institutions 2,335,212 6,112,853
------------ ------------
2,414,253 6,196,370
Certificates of deposit 1,206,398 300,000
Investment securities - at amortized cost (fair value of $3,701,563 and
$2,943,614 at June 30, 1999 and 1998, respectively) 3,753,920 2,947,033
Mortgage-backed securities - at amortized cost (fair value of $4,920,386
and $3,905,172 at June 30, 1999 and 1998, respectively) 5,017,882 3,966,396
Loans receivable, net 20,468,039 21,370,702
Loans held for sale -- 474,850
Accrued interest receivable:
Loans 96,078 98,084
Investments and interest-bearing deposits 21,866 37,406
Mortgage-backed securities 33,591 29,644
Real estate owned -- 54,231
Federal Home Loan Bank stock - at cost 343,800 320,800
Property and equipment, net 299,787 285,391
Prepaid expenses and other assets 105,966 108,699
------------ ------------
Total assets $ 33,761,580 36,189,606
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 25,754,436 28,022,914
Advances from Federal Home Loan Bank 601,530 680,037
Advances by borrowers for taxes, insurance and other 59,551 61,033
Accrued expenses 183,241 145,057
Accrued federal income tax 16,378 69,533
Deferred federal income tax 74,300 71,400
------------ ------------
Total liabilities 26,689,436 29,049,974
Common stock, no par value; 2,000,000 shares authorized; 462,875 shares
issued and outstanding as of June 30, 1999 and 1998 -- --
Additional paid in capital 4,394,429 4,375,394
Retained earnings, substantially restricted 3,004,988 3,020,911
Shares acquired for restricted stock plan (123,500) --
Less unallocated ESOP shares (203,773) (256,673)
------------ ------------
Total stockholders' equity 7,072,144 7,139,632
------------ ------------
Total liabilities and stockholders' equity $ 33,761,580 36,189,606
============ ============
</TABLE>
See accompanying notes to financial statements.
14
<PAGE> 17
FOUNDATION BANCORP, INC.
Consolidated Statements of Income
Three Years Ended June 30, 1999
<TABLE>
<CAPTION>
June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans $1,639,558 2,049,037 2,013,915
Mortgage-backed securities 301,244 241,195 269,075
Investment securities 136,115 89,255 77,192
Interest-bearing deposits 325,031 318,907 197,721
---------- ---------- ----------
Total interest income 2,401,948 2,698,394 2,557,903
---------- ---------- ----------
Interest expense:
Deposits 1,418,388 1,601,380 1,486,534
Borrowings 35,693 39,834 43,756
---------- ---------- ----------
Total interest expense 1,454,081 1,641,214 1,530,290
---------- ---------- ----------
Net interest income 947,867 1,057,180 1,027,613
Provision for loan losses 12,000 12,000 15,000
---------- ---------- ----------
Net interest income after provision for loan losses 935,867 1,045,180 1,012,613
---------- ---------- ----------
Other income:
Gain on sale of loans 63,205 57,512 5,121
Net investment property income 51,626 53,639 53,935
Other operating income 11,305 4,696 4,232
---------- ---------- ----------
Total other income 126,136 115,847 63,288
---------- ---------- ----------
General, administrative and other expense:
Employee compensation and benefits 445,502 452,083 451,558
Occupancy and equipment 80,950 78,539 80,868
Deposit insurance 16,506 17,541 204,792
Franchise tax 77,626 59,032 36,745
Computer processing costs 36,428 33,618 32,956
Other operating expense 135,864 151,001 111,969
---------- ---------- ----------
Total general, administrative and other operating expenses 792,876 791,814 918,888
---------- ---------- ----------
Income before income taxes 269,127 369,213 157,013
---------- ---------- ----------
Federal income taxes (credits):
Current 97,000 119,600 51,957
Deferred 2,900 17,500 (6,900)
---------- ---------- ----------
99,900 137,100 45,057
---------- ---------- ----------
Net income $ 169,227 232,113 111,956
========== ========== ==========
Basic and diluted earnings per share $ 0.38 0.53 0.49
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE> 18
FOUNDATION BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Three Years Ended June 30, 1999
<TABLE>
<CAPTION>
Additional Restricted Unallocated
Common Paid-In Retained Stock ESOP
Stock Capital Earnings Plan Shares Total
----- ------- -------- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ -- -- 2,792,560 -- -- 2,792,560
Reorganization to a stock
company with the
issuance of common
stock -- 4,341,126 -- -- (370,300) 3,970,826
ESOP shares to be
allocated at average
market price -- -- -- -- 58,519 58,519
Net income for the
year ended
June 30, 1997 -- -- 111,956 -- -- 111,956
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 -- 4,341,126 2,904,516 -- (311,781) 6,933,861
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
ESOP shares to be
allocated at average
market price -- 19,035 -- -- 52,900 71,935
Dividends paid -- -- (185,150) -- -- (185,150)
Shares acquired for restricted
stock plan -- -- -- (123,500) -- (123,500)
Net income for the
year ended
June 30, 1999 -- -- 169,227 -- -- 169,227
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999 $ -- 4,394,429 3,004,988 (123,500) (203,773) 7,072,144
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE> 19
FOUNDATION BANCORP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 2,397,761 2,665,353 2,548,220
Interest paid (1,455,203) (1,642,190) (1,530,345)
Cash paid to suppliers and employees (648,355) (756,657) (857,817)
Fees and commissions received 3,829 4,696 4,232
Income taxes paid (187,357) (76,521) (22,981)
Rental income received 73,200 73,200 73,200
------------ ------------ ------------
Net cash provided by operating
activities 183,875 267,881 214,509
------------ ------------ ------------
Cash flows from investing activities:
Purchase of mortgage-backed securities (1,951,453) (454,477) (236,237)
Repayments of mortgage-backed securities 885,347 758,290 573,592
Purchase of certificates of deposit (906,398) (300,000) --
Purchase of investment securities (4,459,514) (2,801,193) (446,153)
Maturities of investment securities 3,650,000 800,000 400,000
Loan disbursements (11,849,619) (11,418,611) (7,503,939)
Loan principal repayments 6,736,060 8,285,610 3,748,061
Proceeds from sale of loans 6,554,310 7,228,530 1,081,556
Proceeds from sale of other real estate owned 61,707 -- --
Purchase of property and equipment (30,797) -- (3,227)
------------ ------------ ------------
Net cash provided by (used in)
investing activities (1,310,357) 2,098,149 (2,386,347)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits (2,268,478) 731,149 340,981
Repayment of Federal Home Loan Bank
advances (78,507) (74,366) (70,444)
Purchase of shares acquired for
restricted stock plan (123,500)
Proceeds from conversion to stock
company -- -- 4,018,087
Dividends paid (185,150) (115,718) --
------------ ------------ ------------
Net cash provided by (used in)
financing activities (2,655,635) 541,065 4,288,624
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (3,782,117) 2,907,095 2,116,786
Cash and cash equivalents at beginning
of period 6,196,370 3,289,275 1,172,489
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,414,253 6,196,370 3,289,275
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE> 20
FOUNDATION BANCORP, INC.
Consolidated Statement of Cash Flows
Three Years Ended June 30, 1999
Reconciliation of Net Income to Net Cash
Provided By Operating Activities
--------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 169,227 232,113 111,956
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of loans (63,205) (57,512) (5,121)
Gain on sale of other real estate owned (7,476) -- --
Depreciation 16,401 13,545 17,574
Amortization of premiums and discounts
on investments and mortgage-backed securities 17,247 18,027 14,918
Federal Home Loan Bank stock dividends (23,000) (22,000) (20,000)
Provision for loan losses 12,000 12,000 15,000
Amortization of deferred loan fees (12,033) (10,302) (8,393)
Deferred federal income tax 2,900 17,500 (6,900)
ESOP expense 71,935 89,376 58,519
Effects of change in operating assets and liabilities:
Accrued interest receivable 13,599 (18,761) 3,792
Refundable federal income tax -- -- 2,522
Prepaid expenses and other assets 2,733 (44,221) (701)
Advances by borrowers for taxes,
insurance and other (1,482) (4,238) (4,908)
Accrued expenses 38,184 (725) 9,797
Accrued federal income tax (53,155) 43,079 26,454
--------- --------- ---------
Net cash provided by operating
activities $ 183,875 267,881 214,509
========= ========= =========
</TABLE>
Supplemental disclosure of non-cash investing activities
- --------------------------------------------------------
The Company acquired real estate in settlement of a loan receivable of $54,231
during the year ended June 30, 1998.
See accompanying notes to financial statements.
18
<PAGE> 21
FOUNDATION BANCORP, INC.
Notes to Financial Statements
Three Years Ended June 30, 1999, 1998 and 1997
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
19
<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.
20
<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, 1999 and 1998, 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 real estate through
foreclosure at June 30, 1998 for $54,231. The real estate acquired
through foreclosure was sold in 1999.
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
21
<PAGE> 24
when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax
expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Accounting estimates
--------------------
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentrations of credit risk
-----------------------------
The Savings Bank grants first mortgage and other loans to customers
located primarily in the metropolitan Cincinnati area. Accordingly, a
substantial portion of its debtors' ability to honor their contracts
is dependent upon the financial health of the local economy and
market.
Management may at times, maintain deposit accounts with financial
institutions in excess of federal deposit insurance limits.
Employee stock ownership plan
-----------------------------
Shares committed to be allocated to the Employee Stock Ownership Plan
(ESOP) are charged to expense at the average market price for the
year. The excess of average market value over cost is added to
additional paid-in capital.
Recent accounting pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
22
<PAGE> 25
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. The Company has no items of
comprehensive income, therefore SFAS No. 130 does not presently
affect the Company.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued by the FASB which established standards for
derivative instruments, including derivative instruments imbedded in
other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at
fair value. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters beginning after June 15, 2000. Management
does not believe that the adoption of this standard will impact the
Company because at the current time the Company does not hold any
instruments covered by this standard.
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.
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, 1999
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies $ 3,753,920 - 52,357 3,701,563
========= ============ ======= =========
</TABLE>
23
<PAGE> 26
<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
========= ===== ===== =========
</TABLE>
The amortized cost and fair value of investment securities at June 30,
1999 and 1998 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.
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due or callable in one year or less $ 3,453,920 3,401,563
Due or callable in three years 300,000 300,000
---------- ----------
$ 3,753,920 3,701,563
========= =========
</TABLE>
Included in investments at June 30, 1999, are $500,000 of callable notes
with a final maturity in 2003, $2,950,000 of callable notes with a final
maturity between of 2004 and 2009 and $300,000 of callable notes with
final maturity of 2014.
<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.
3. Mortgage-Backed Securities:
---------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of mortgage-backed securities are as follows:
24
<PAGE> 27
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp. $ 1,744,966 256 29,602 1,715,620
Federal National Mortgage Association 2,132,527 294 45,979 2,086,842
Government National Mortgage
Association 101,389 815 - 102,204
Collateralized Mortgage Obligations 1,039,000 - 23,280 1,015,720
--------- ------ ------ ---------
$ 5,017,882 1,365 98,861 4,920,386
========= ====== ====== =========
</TABLE>
<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>
The maturity of the mortgage-backed securities is based on the repayment
terms of the underlying mortgages.
4. Loans Receivable:
-----------------
Loans receivable, including loans held for sale, consists of the
following:
<TABLE>
<CAPTION>
June 30
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Residential one-to-four family real estate $ 18,013,796 19,278,199
Multi-family residential real estate 1,489,085 1,285,385
Commercial real estate 1,196,702 1,268,962
Consumer 198,467 132,035
Passbook 22,019 25,732
------------ -----------
20,920,069 21,990,313
Less:
Loans in process (307,302) -
Allowance for loan losses (150,147) (138,147)
Deferred loan (fees) costs 5,419 ( 6,614)
------------ -----------
$ 20,468,039 21,845,552
============ ===========
</TABLE>
25
<PAGE> 28
At June 30, 1999 and 1998, adjustable rate loans approximated $6,001,000
and $7,207,000.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 138,147 126,147 111,147
Provision for loan losses 12,000 12,000 15,000
Write-offs net of recoveries - - -
--------- -------- --------
Ending balance $ 150,147 138,147 126,147
======= ======= =======
</TABLE>
Gross proceeds on sales of loans were $6,554,310, $7,228,530 and
$1,081,556 for the years ended June 30, 1999, 1998 and 1997,
respectively. Net realized gains on sales of loans were $63,205, $57,512
and $5,121 for the years ended June 30, 1999, 1998 and 1997. Loans
serviced for others as of June 30, 1999, 1998 and 1997, were $-0-, $-0-,
and $249,270, respectively.
At June 30, 1999 and 1998, the Company had no non-accrual loans.
The Company had no loans to officers, directors and employees at June 30,
1999 and 1998. An analysis of loan activity to such persons for the
fiscal year ended June 30, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
June 30
-------------------
1999 1998
---- ----
<S> <C> <C>
Outstanding balance, beginning $ -- 5,038
New loans issued -- --
Repayments -- 5,038
-------- --------
Outstanding balance, ending $ -- --
======== ========
</TABLE>
5. Property and Equipment:
-----------------------
<TABLE>
<CAPTION>
Property and equipment are summarized as follows:
1999 1998
---- ----
<S> <C> <C>
Real estate owned - investment property $251,847 251,847
Furniture and equipment 172,184 141,387
Leasehold improvements 34,246 34,246
-------- --------
458,277 427,480
Less accumulated depreciation 158,490 142,089
-------- --------
$299,787 285,391
======== ========
</TABLE>
26
<PAGE> 29
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, 1999, 1998 and 1997, was
$53,356.
Minimum commitments under the term of the lease are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
<S> <C>
2000 $ 51,628
2001 38,722
--------
$ 90,350
========
</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, 1999, 1998 and 1997, was $73,200, $73,200 and $73,200,
respectively.
7. Deposits:
---------
Deposits consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Passbook 2.54% $ 706,509 2.56% $ 713,897
NOW and money market accounts 2.30 1,290,500 2.28 1,464,449
----------- -----------
2.38 1,997,009 2.37 2,178,346
----------- -----------
Certificates of deposit:
3 months 4.41 151,565 4.65 167,294
6 months 4.64 1,121,367 5.24 1,046,989
12 months 5.05 9,974,359 5.76 9,945,849
18 months 2.45 21,023 2.45 34,470
2 years 5.64 8,043,601 6.13 11,090,406
3 years 5.84 1,679,207 6.10 1,392,242
4 years 5.78 291,498 5.86 203,170
5 years 5.99 2,474,807 6.00 1,964,148
----------- -----------
5.38 23,757,427 5.92 25,844,568
---------- ----------
5.15% $ 25,754,436 5.64% $ 28,022,914
========== ==========
</TABLE>
27
<PAGE> 30
Maturities of outstanding certificates of deposit are summarized as
follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
One year or less $ 16,164 18,978
1 - 2 years 4,723 4,718
2 - 3 years 1,482 786
Over 3 years 1,388 1,363
------- -------
$ 23,757 25,845
======= ======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Passbook $ 16,163 18,300 26,805
NOW and money market account 36,931 43,819 48,140
Certificates of deposit 1,365,294 1,539,261 1,411,589
--------- --------- ---------
$ 1,418,388 1,601,380 1,486,534
========= ========= =========
</TABLE>
The aggregate amount of certificates of deposits in denominations of
$100,000 or more was $3,100,010 and $2,752,562 at June 30, 1999 and 1998,
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>
2000 $ 82,877
2001 87,494
2002 92,368
2003 97,512
2004 53,809
2005 and subsequent 187,470
-------
$ 601,530
=======
</TABLE>
28
<PAGE> 31
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 $902,000 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
nonperforming loans is based on recent internal or external
appraisals.
29
<PAGE> 32
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, 1999
---------------------------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and due from banks, interest bearing
deposits with banks and federal funds sold $ 3,620,651 3,620,651
Investment securities 3,753,920 3,701,563
Mortgage-backed securities 5,017,882 4,920,386
Loans receivable 20,468,039 20,431,000
Accrued interest receivable 151,535 151,535
Financial liabilities:
Deposit liabilities 25,754,436 25,722,000
Federal Home Loan Bank advance 601,530 581,000
Off balance sheet items - -
</TABLE>
30
<PAGE> 33
<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 $ 6,496,370 6,496,370
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>
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,
1999, the core capital requirement provides for minimum core capital
equal to 4.0% of adjusted total assets. The risk-based capital
requirement at June 30, 1999 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%.
The Savings Bank's regulatory capital exceeds all minimum capital
requirements as shown in the following table:
31
<PAGE> 34
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------
Regulatory Capital
Risk-
Core based
Capital % Capital %
------- - ------- -
(in Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $ 5,784 5,784
General valuation allowances - 141
------ ------
Regulatory capital computed 5,784 17.1 5,925 39.9
Minimum capital requirements 1,350 4.0 1,186 8.0
------ ------ ------ ------
Regulatory capital-excess $ 4,434 13.1 4,739 31.9
===== ====== ====== ======
</TABLE>
Capital ratios for June 30, 1998 are 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>
11. Commitments:
------------
At June 30, 1999, the Savings Bank had commitments to originate loans
totaling $825,000. The entire amount was for fixed rate loans. No portion
of these loans was disbursed prior to June 30, 1999, 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, 1998 were
$711,300.
32
<PAGE> 35
12. Retirement Plans:
-----------------
Employee Stock Ownership Plan
-----------------------------
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 1999, 1998 and 1997 was
$71,935, $89,376 and $58,519, respectively. Remaining unearned shares at
June 30, 1999 and 1998 was 19,660 and 25,453.
1997 Recognition and Retention Plan
-----------------------------------
During 1997, the shareholders approved the 1997 Recognition and Retention
Plan. Under provisions of the Plan, 18,515 shares of common stock can be
reserved for awards. The Company awarded the maximum number of shares in
January 1999. A recipient earns plan share awards over a ten year period
commencing July 1, 1999.
1997 Stock Option and Incentive Plan
------------------------------------
The shareholders approved the 1997 Stock Option and Incentive Plan in
1997. The Plan allows for 46,288 shares to be reserved for incentive and
non-incentive stock options. Grantees are awarded 10 year options to
acquire shares at the market price on the date the option is granted. The
Company granted 46,288 options on January 25, 1999 at an option price of
$12.50. As of June 30, 1999 all options remain outstanding and no options
have been exercised or forfeited.
The Company applies Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees", and related Interpretations in accounting
for its option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair market value at the
grant date for awards under the plan consistent with the method of SFAS
No. 123 "Accounting for Stock-Based Compensation", the effect on net
income and earning per share would have been reduced to pro-forma amounts
indicated below:
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
Net income:
As reported $ 169,227
Additional compensation expense 89,512
Pro forma 79,715
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
Basic earning per share:
<S> <C>
As reported $ .38
Pro forma .18
</TABLE>
The estimated fair value of options granted was calculated by the
Black-Scholes method. Assumptions used in the calculation are as follows:
<TABLE>
<S> <C>
Risk-free interest rate U.S. Treasury Strips rate on the date of grant
which was 4.91%
Expected life Life of the options which is ten years
Expected volatility 0.17% based on the 33 month history of prices
Expected dividends $.40 per share
</TABLE>
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.
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.
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.
Appropriated and unappropriated retained income at June 30, 1999 included
earnings of approximately $653,000, representing such pre-1988 bad debt
deductions for which no provision for federal income taxes has been made.
If the amounts that qualify as deductions
34
<PAGE> 37
for federal income tax purposes are later used for purposes other than
bad debt losses, including distributions in liquidation, such
distributions will be subject to federal income taxes at the then current
corporate income tax rate. Management does not contemplate any action
which would cause such pre-1988 cumulative bad debt deduction to be
subject to federal income taxes, although it is possible that changes in
legislation could, at a future date require recapture of all or part of
this bad debt deduction.
An analysis of income tax expense, setting forth the reasons for the
variations from the statutory rate is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income taxes at the statutory
rate of 34% $ 91,503 125,532 53,385
Employee stock ownership plan 8,397 11,568 -
Other, primarily surtax exemptions - - ( 8,328)
------------ ------------ -------
Federal income taxes per consolidated
financial statements $ 99,900 137,100 45,057
======= ======= ======
Effective tax rate 37.1% 37.2% 28.7%
======= ======= ======
</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
-------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets arising from:
Allowance for loan losses $ 40,000 35,900 31,800
Deferred loan fees and costs 3,700 5,300 8,000
Basis of investments 2,000 2,000 2,000
------- ------- ----------
Total deferred tax assets 45,700 43,200 41,800
------ ------ ---------
Deferred tax liabilities arising from:
Accrual to cash conversion 34,500 38,800 23,700
Depreciation 15,200 13,300 17,000
FHLB stock 70,300 62,500 55,000
------- ------ ---------
Total deferred tax liabilities (120,000) (114,600) (95,700)
--------- ------- ------
Net deferred tax liability $ 74,300 71,400 53,900
======== ====== =========
</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.
35
<PAGE> 38
The components of deferred income tax expense (credit) are as follows:
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Loan origination fees $ 1,700 2,600 3,100
FHLB stock dividend 7,800 7,500 6,800
Depreciation 1,900 (3,700) (3,300)
Accrual to cash conversion (4,400) 15,200 (8,300)
Bad debt reserves and other (4,100) (4,100) (5,200)
-------- ------ -------
$ 2,900 17,500 (6,900)
====== ====== ========
</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 then 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.
15. 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.
36
<PAGE> 39
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 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.
37
<PAGE> 40
16. Summarized Financial Information of the Parent Company:
-------------------------------------------------------
FOUNDATION BANCORP, INC.
Statements of Financial Condition
---------------------------------
June 30, 1999
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash $ 11,034 11,007
Certificate of deposit 96,297 137,666
Accrued interest receivable 3 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 955 3,591
----------- -----------
$ 4,079,115 4,123,100
=========== ===========
Liabilities and stockholders' equity:
Liabilities:
Accrued expenses $ 11,020 10,150
Accrued federal income taxes 16,378 15,100
Deferred federal income taxes (3,400) (2,200)
Stockholders' equity:
Common stock - -
Additional paid in capital 4,341,126 4,341,126
Retained earnings 41,264 15,597
Less unearned ESOP shares (203,773) (256,673)
Shares acquired for restricted stock plan (123,500) -
----------- -----------
4,055,117 4,100,050
----------- -----------
$ 4,079,115 4,123,100
=========== ===========
</TABLE>
Statements of Income
--------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Interest income $ 71,562 75,925
Dividend income 185,000 75,000
Other income 29 -
Professional fees (29,586) (36,284)
Other expenses (2,888) (1,633)
Income taxes (13,300) (12,900)
----------- ----------
Net income $ 210,817 100,108
=========== ==========
</TABLE>
38
<PAGE> 41
17. Earnings Per Share
------------------
Earnings per share for the years ended June 30, 1999 and 1998 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
----------- ------------- ------
June 30, 1999
<S> <C> <C> <C>
Basic $169,227 440,729 $ .38
Diluted $169,227 446,155 $ .38
</TABLE>
The only item with a dilutive effect is stock options which were granted
in January 1999.
<TABLE>
<S> <C> <C> <C>
June 30, 1998
Basic and diluted $232,113 438,547 $ .53
June 30, 1997
Basic and diluted $210,926 432,456 $ .49
</TABLE>
39
<PAGE> 42
18. Quarterly Financial Information (Unaudited):
--------------------------------------------
Summarized quarterly financial information for the year ended June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1999
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $633 615 578 576
Interest expense 393 380 339 342
---- ---- ---- ----
Net interest income 240 235 239 234
Other income 25 59 27 15
Other expenses 201 203 202 199
---- ---- ---- ----
Income before
provision for income taxes 64 91 64 50
Provision for income taxes 23 32 23 22
---- ---- ---- ----
Net income $ 41 59 41 28
==== ==== ==== ====
Basic and diluted earnings
per share $.09 .14 .09 .06
==== ==== ==== ====
</TABLE>
<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>
40
<PAGE> 43
================================================================================
DIRECTORS OF
FOUNDATION BANCORP, INC.
AND
FOUNDATION SAVINGS BANK
<TABLE>
<S> <C>
LAIRD L. LAZELLE MARDELLE DICKHAUT
President, Foundation Bancorp, Inc. Retired from Foundation Savings Bank.
and Foundation Savings Bank.
RUTH C. EMDEN ROBERT E. LEVITCH
Retired. Currently active in community work. Corrections Officer with the Hamilton County
Sheriff's Office.
MICHAEL S. SCHWARTZ PAUL L. SILVERGLADE
Attorney at law practicing in Cincinnati Retired Corporate Office Personnel
and operating a title insurance agency. Director for Federated Department Stores.
IVAN J. SILVERMAN
Investment Consultant and Vice President
with Gradison McDonald Investments, a Division
of McDonald Invests, Inc., a Key Corp. Company.
Mr. Silverman is a former Mayor of the City
of Montgomery.
</TABLE>
EXECUTIVE OFFICERS OF
FOUNDATION BANCORP, INC.
<TABLE>
<S> <C>
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President and Chief Executive Officer Secretary and Treasurer
</TABLE>
EXECUTIVE OFFICERS OF
FOUNDATION SAVINGS BANK
<TABLE>
<S> <C>
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>
================================================================================
41
<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
-------------
Friedman, Billings, Ramsey & Co.
Keefe, Bruyette & Woods, Inc.
Monroe Securities
Sweney Cartwright & Co.
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, 1999, 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.
42
<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 1999 Annual Meeting of Shareholders of
Foundation Bancorp, Inc. (the "Company") will be held at The Cincinnati Club
Building, 30 Garfield Place, Cincinnati, Ohio, 45202, on October 19, 1999, at
1:00 p.m., local time (the "Annual Meeting"), for the following purposes, all of
which are more completely set forth in the accompanying Proxy Statement:
1. To elect four directors of the Company for terms
expiring in 2001;
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, 1999, 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 7, 1999
<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 1999 Annual
Meeting of Shareholders of the Company to be held at The Cincinnati Club
Building, 30 Garfield Place, Cincinnati, Ohio 45202, on October 19, 1999, at
1:00 p.m., local time, and at any adjournments thereof (the "Annual Meeting").
Without affecting any vote previously taken, the Proxy may be revoked by
executing a later dated proxy which is received by the Company before the Proxy
is exercised or by giving notice of revocation to the Company in writing or in
open meeting before the Proxy is exercised. Attendance at the Annual Meeting
will not, of itself, revoke the Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of Mardelle Dickhaut, Laird L. Lazelle,
Robert E. Levitch and Michael S. Schwartz as directors of the
Company for terms expiring in 2001; 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,
1999 (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 20, 1999.
<PAGE> 3
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and the Company's Code of Regulations, the four nominees
receiving the greatest number of votes will be elected as directors. Shares held
by a nominee for a beneficial owner which are represented in person or by proxy
but not voted with respect to the election of directors and shares as to which
the authority to vote is withheld are not counted toward the election of
directors or toward the election of the individual nominees specified on the
Proxy.
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 represented by
the Proxy 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, 1999:
Amount and Nature of Percent of
Name and Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- ------------------
Foundation Bancorp, Inc.
Employee Stock Ownership Plan
1201 Broadway 37,030 (1) 8.00%
Quincy, Illinois 62301
Laird L. Lazelle
25 Garfield Place 36,978 (2) 7.85%
Cincinnati, Ohio 45202
- ---------------------------
(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 5,511 common shares allocated to Mr. Lazelle's ESOP account,
with respect to which Mr. Lazelle has voting power; 8,000 shares that
may be acquired upon the exercise of an option; and 11,517 shares owned
by Mr. Lazelle's spouse.
-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, 1999:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address (1) Beneficial Ownership Shares Outstanding
- -------------------- --------------------- ------------------
<S> <C> <C>
Mardelle Dickhaut 6,887 (3) 1.48%
Ruth C. Emden 7,407 (3) 1.59
Laird L. Lazelle 36,978 (4) 7.85
Robert E. Levitch 2,432 (3) 0.52
Michael S. Schwartz 18,978 (5) 4.08
Paul L. Silverglade 11,157 (3) 2.40
Ivan J. Silverman 13,998 (6) 3.01
All directors and executive officers
of the Company as a group (8
people) 110,945 (7) 22.83%
</TABLE>
- ----------------------------
(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 and investment power unless
otherwise indicated by footnote.
(3) Includes 2,314 shares that may be acquired upon the exercise of an option.
(4) Includes 5,511 common shares allocated to Mr. Lazelle's ESOP account, with
respect to which Mr. Lazelle has voting power; 8,000 shares that may be
acquired upon the exercise of an option; and 11,517 shares owned by Mr.
Lazelle's spouse.
(5) Includes 5,000 shares held by Mr. Schwartz as trustee, with respect to
which Mr. Schwartz shares voting power, and 2,314 shares that may be
acquired upon the exercise of an option.
(6) Includes 6,571 shares owned by Mr. Silverman's spouse, with respect to
which Mr. Silverman disclaims beneficial ownership, and 2,314 shares that
may be acquired upon the exercise of an option.
(7) Includes, in the aggregate, 28,788 shares that may be acquired upon the
exercise of options and 23,088 shares with respect to which voting and
investment power is shared.
-3-
<PAGE> 5
PROPOSAL ONE - ELECTION OF DIRECTORS
ELECTION OF DIRECTORS
The Company's Code of 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 the nominee and the length of time such shares have been so owned.
The Board of Directors proposes the reelection at the Annual Meeting of
the following persons to terms which will expire in 2001:
<TABLE>
<CAPTION>
Director of Director of
the Company Foundation
Name Age (1) Position(s) Held Since (2) Since
- ---- ------- ---------------- --------- -----
<S> <C> <C> <C> <C>
Mardelle Dickhaut 66 Director 1996 1989
Laird L. Lazelle 60 Director, President and 1996 1994
Chief Executive Officer
Robert E. Levitch 65 Director 1996 1964
Michael S. Schwartz 55 Director 1996 1967
</TABLE>
- -----------------------------
(1) As of September 1, 1999.
(2) Each director 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.
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.
-4-
<PAGE> 6
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Director of Director of
the Company Foundation
Name Age (1) Positions Held Since (2) Since Term Expires
- ---- ------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Ruth C. Emden 72 Director 1996 1994 2000
Paul L. Silverglade 74 Director 1996 1988 2000
Ivan J. Silverman 58 Director 1996 1992 2000
</TABLE>
- -----------------------------
(1) As of September 1, 1999.
(2) Each director became a director of the Company in connection with the
Conversion.
MARDELLE DICKHAUT has served as the 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.
LAIRD L. LAZELLE is the President and the Chief Executive Officer of
both the Company and Foundation and is the designated Managing Officer of
Foundation. Mr. Lazelle served as the President and the Chief Executive Officer
of The TriState Bancorp from February 1988 until joining Foundation in January
1994.
ROBERT E. LEVITCH has served as a director of Foundation since 1964.
Mr. Levitch has been a corrections officer with the Hamilton County Sheriff's
Department since 1980.
MICHAEL S. SCHWARTZ has been an attorney at law practicing in
Cincinnati, Ohio, since 1971 and has been the President of a title insurance
agency since 1996. Mr. Schwartz is legal counsel to Foundation and also provides
title services for some loans made by Foundation. Mr. Schwartz has served as a
director of Foundation since 1967 and succeeded his father as the Chairman of
the Board in 1993.
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 the President,
the Managing Officer and a director for over 46 years. Mrs. Emden is active in
community service.
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 the
Chairman of the Compensation Committee.
IVAN J. SILVERMAN is an Investment Consultant and Vice President with
Gradison McDonald Investments, a Division of McDonald Investments, Inc., a Key
Corp Company. Mr. Silverman is a former Mayor of the City of Montgomery. Mr.
Silverman has served as a director of Foundation since 1992 and serves as the
Chairman of the Audit Committee.
MEETINGS OF DIRECTORS
The Board of Directors of the Company met seven times for regularly
scheduled and special meetings during the fiscal year ended June 30, 1999.
-5-
<PAGE> 7
COMMITTEES OF DIRECTORS
The Board of Directors of the Company has an Audit Committee. The
Company has no Compensation Committee and the entire Board of Directors 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 once during the
fiscal year ended June 30, 1999.
Mr. Silverglade serves as the 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
once during the fiscal year ended June 30, 1999.
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.
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 last three fiscal years. No executive officer of the Company
earned salary and bonus in excess of $100,000 during fiscal 1999.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Annual Compensation (1) Long-Term Compensation All Other
- --------------------------------------------------------------------------------------------- Compensation
Awards
----------------------------------------
Name and Principal Year Salary ($) Bonus ($) Restricted Stock Securities Underlying
Position Awards Options/SARS
($) (#)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Laird L. Lazelle 1999 $85,000 $15,000 $56,250 (2) 11,500 $24,620(3)
President and Chief 1998 85,000 15,000 -0- -0- 27,770(3)
Executive Officer 1997 80,000 15,000 -0- -0- 24,998(4)
- ----------------------------------------------------------------------------------------------------------------
</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.
-6-
<PAGE> 8
(2) On January 25, 1999, Mr. Lazelle was awarded 4,500 common shares
pursuant to the RRP. The award will be earned and non-forfeitable at
the rate of one-tenth per year, with the first tenth earned on July 1,
1999, and the remainder earned on July 1 of the next nine years,
assuming continued employment with, or service on the Board of
Directors of, the Company or Foundation. On January 25, 1999, the
market price of the shares awarded to Mr. Lazelle, determined by
reference to the National Quotation Bureau, was $12.50 per share, and
the aggregate market value of such shares was $56,250. At June 30,
1999, the market price of a Company share was $13.625, the National
Quotation Bureau, and the aggregate market value of the shares awarded
to Mr. Lazelle was $61,313. In addition, dividends and other
distributions on such shares and earnings thereon will be distributed
to Mr. Lazelle according to the vesting schedule.
(3) Consists of the value of the allocation to Mr. Lazelle's account
pursuant to the ESOP.
(4) Consists of director's fees of $1,500 and the $23,498 value of the
allocation to Mr. Lazelle's account pursuant to the ESOP.
DIRECTOR COMPENSATION
Each Foundation 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 or to directors of
the Company.
EMPLOYMENT AGREEMENT
Foundation has entered into an employment agreement with Mr. Lazelle
(the "Employment Agreement"), effective September 25, 1996. The Employment
Agreement provides for a term of three years and salary and performance review
by the Board of Directors not less often than annually. The Employment Agreement
provides for inclusion of Mr. Lazelle in any formally established employee
benefit, bonus, pension and profit-sharing plans for which senior management
personnel are eligible. The Employment Agreement also provides for vacation and
sick leave in accordance with Foundation's prevailing policies.
The Employment Agreement is terminable by Foundation at any time. In
the event of termination by Foundation for "just cause," as defined in the
Employment Agreement, Mr. Lazelle will have no right to receive any compensation
or other benefits for any period after such termination. In the event of
termination by Foundation other than (i) for just cause, (ii) at the end of the
term of the Employment Agreement or (iii) in connection with a "change of
control," as defined in the Employment Agreement, the Employment Agreement
entitles Mr. Lazelle to a continuation of salary payments for the remainder of
the term of the Employment Agreement and a continuation of benefits
substantially equal to those being provided at the date of termination of
employment until the earliest to occur of the end of the term of the Employment
Agreement or the date Mr. Lazelle becomes employed full-time by another
employer.
The Employment Agreement also contains provisions with respect to the
occurrence within six months prior to or one year following a "change of
control" of (i) the termination of employment of Mr. Lazelle for any reason
other than just cause, retirement or termination at the end of the term of the
agreement, or (ii) a constructive termination resulting from change in the
capacity or circumstances in which Mr. Lazelle is employed or a material
reduction in his responsibilities, authority, compensation or other benefits
provided under the Employment Agreement without his written consent. In the
event of any
-7-
<PAGE> 9
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. 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 Employment Agreement was reviewed by the Board of Directors at a
meeting held on December 15, 1998, pursuant to OTS regulations. The term of the
Employment Agreement was extended to expire December 31, 2001. There was no
change to the amount of compensation or any other provision of the Employment
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.
The following table sets forth information regarding all grants of
options to purchase common shares of the Company made to Mr. Lazelle during the
fiscal year ended June 30, 1999:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------------------------------------------
% of Total Options/
Number of Securities SARs Granted to
Underlying Options/ Employees in Fiscal Exercise or Base
Name SARs Granted (#) Year Ended 6/30/99 Price ($/Share) Expiration Date
- ---- ------------------ ------------------ ------------------- ---------------
<S> <C> <C> <C> <C>
Laird L. Lazelle 11,500 35.5% $12.50 January 25, 2008
</TABLE>
-8-
<PAGE> 10
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Lazelle at June 30, 1999:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Values
--------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options/SARs at In-the-Money Options/SARs at
Acquired on Value 6/30/99 6/30/99 ($)(1)
Name Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Laird L. Lazelle -0- N/A 8,000/3,500 $9,000/$3,938
</TABLE>
- ------------------
(1) For purposes of this table, the value of the option was determined by
multiplying the number of shares subject to unexercised options by the
difference between the $12.50 exercise price and the fair market value
of the Company's common shares, which was $13.625 on June 30, 1999,
based on the last trade price reported by the National Quotation
Bureau.
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"). The RRP provides for awards of up to 18,515 common shares be made
to directors, officers and employees of Foundation. During the 1999 fiscal year,
awards were made covering all of the 18,515 shares. The awards have a ten year
vesting schedule, commencing July 1, 1999.
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. As of June 30, 1999, 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 2000 Annual Meeting of Shareholders must submit
such proposal to the Company not later than May
-9-
<PAGE> 11
29, 2000, 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 2000 Annual Meeting of Shareholders but has
not sought the inclusion of such proposal in the Company's Proxy Materials, and
if such proposal is not received by the Company prior to August 11, 2000, the
Company's management proxies for the 2000 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 the 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, WE URGE YOU 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 7, 1999
-10-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 79,041
<INT-BEARING-DEPOSITS> 3,541,610
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,771,802
<INVESTMENTS-CARRYING> 8,771,802
<INVESTMENTS-MARKET> 8,621,949
<LOANS> 20,468,039
<ALLOWANCE> 150,147
<TOTAL-ASSETS> 33,761,580
<DEPOSITS> 25,754,436
<SHORT-TERM> 0
<LIABILITIES-OTHER> 333,470
<LONG-TERM> 601,530
0
0
<COMMON> 4,394,429
<OTHER-SE> 2,677,715
<TOTAL-LIABILITIES-AND-EQUITY> 7,072,144
<INTEREST-LOAN> 1,639,558
<INTEREST-INVEST> 437,359
<INTEREST-OTHER> 325,031
<INTEREST-TOTAL> 2,401,948
<INTEREST-DEPOSIT> 1,418,388
<INTEREST-EXPENSE> 1,454,081
<INTEREST-INCOME-NET> 947,867
<LOAN-LOSSES> 12,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 792,876
<INCOME-PRETAX> 269,127
<INCOME-PRE-EXTRAORDINARY> 169,227
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,227
<EPS-BASIC> .38
<EPS-DILUTED> .38
<YIELD-ACTUAL> 7.19
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 81,735
<ALLOWANCE-OPEN> 138,147
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 150,147
<ALLOWANCE-DOMESTIC> 150,147
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 141,447
</TABLE>
