<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, 2000
[ ] 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 Exchange Act:
NONE NONE
-------------- ---------------------
(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Exchange 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 registrant 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 in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant'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]
As of September 1, 2000, there were 462,875 of the registrant's common
shares issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates,
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, 2000, was approximately $4,100,000. (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).
The registrant's revenues for the fiscal year ended June 30, 2000, were
$2,454,274.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of 2000 Annual Report to
Shareholders Part III of Form 10-KSB - Portions of Proxy Statement for
the 2000 Annual Meeting of Shareholders
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
<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 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, Boone, and Campbell.
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. 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.
-1-
<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,
--------------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- ------------------------
Percent Percent Percent
of total of total of total
Amount Loans Amount Loans Amount Loans
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 20,182 89.93% $ 18,013 88.01% $ 19,278 88.25%
Nonresidential 907 4.04 1,197 5.85 1,269 5.81
Multifamily 1,355 6.04 1,489 7.27 1,285 5.88
Consumer loans:
Passbook loans 26 .12 22 .11 26 .12
Other consumer loans 150 .67 198 .97 132 .60
-------- ------ -------- ------ -------- ------
Total loans 22,620 100.79 20,919 102.21 21,990 100.66
Less:
Loans in process 55 .25 306 1.50 -- --
Allowance for loan losses 143 .64 150 .73 138 .63
Deferred loan fees (20) (.09) (5) (.02) 6 .03
-------- ------ -------- ------ -------- ------
Net loans $ 22,442 100.00% $ 20,468 100.00% $ 21,846 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
June 30, 2000, 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 more
Due during the year ending Due 4-5 Due 6-10 Due 11-20 than 20
June 30, years years years years
------------------------------- after after after after
2001 2002 2003 6/30/00 6/30/00 6/30/00 6/30/00 Total
------- ------- ------- -------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 505 $ 645 $ 660 $ 1,341 $ 3,738 $ 4,077 $ 9,216 $20,182
Multifamily 30 38 43 116 280 279 121 907
Nonresidential 47 56 65 144 476 374 193 1,355
Consumer loans 27 37 21 27 41 23 -- 176
------- ------- ------- ------- ------- ------- ------- -------
Total $ 609 $ 776 $ 789 $ 1,628 $ 4,535 $ 4,753 $ 9,530 $22,620
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth the dollar amount of all loans due after one
year from June 30, 2000, which have predetermined interest rates and loans which
have floating or adjustable interest rates:
Due more than one year after
June 30, 2000
---------------------
(In thousands)
Fixed rates of interest $16,478
Adjustable rates of interest 5,533
--------
$22,011
========
-2-
<PAGE> 4
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of Foundation is the origination of permanent conventional loans
secured by mortgages on one- to four-family residences, primarily single-family
residences, located within Foundation's primary market area. At June 30, 2000,
Foundation's one- to four-family residential real estate loan portfolio was
approximately $20.2 million, or 89.93% of total loans.
OTS regulations and Ohio law limit the amount which Foundation may lend
in relationship to the appraised value 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 makes loans with higher
LTVs. Foundation requires that the principal amount of any loan which exceeds
80% LTV at the time of origination be covered by private mortgage insurance
("PMI") at the expense of the borrower. Foundation makes loans on
non-owner-occupied or investment properties with maximum LTVs of 75%, unless
insured by PMI.
Fixed-rate loans and adjustable-rate mortgage loans ("ARMs") are
offered by Foundation, currently 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 fully indexed rate.
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 submit rent rolls and financial statements annually to enable
Foundation to monitor loans secured by multifamily properties.
At June 30, 2000, loans secured by multifamily properties totaled
approximately $1.4 million, or 6.04% of total loans.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. At June 30, 2000,
approximately $907,000, or 4.04%, of Foundation's total loans were secured by
permanent mortgages on nonresidential real estate. Such loans have both fixed
and adjustable rates, terms of up to 20 years and LTVs of up to 70%. Among the
properties securing nonresidential real estate loans are office buildings and
other nonresidential properties located in Foundation's primary market area.
Although loans secured by nonresidential real estate typically have
higher interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Foundation has endeavored to reduce
such risk by limiting loan amounts and evaluating the credit history, past
performance, and financial condition of the borrower, the location of the real
estate securing the loan, the quality and characteristics of the income stream
generated by the property and appraisals supporting the property's valuation and
by obtaining personal guarantees from borrowers.
-3-
<PAGE> 5
COMMERCIAL LOANS. In the past, Foundation has made commercial loans to
businesses in its primary market area. Such loans are typically secured by a
security interest in inventory, accounts receivable or other assets of the
borrower. At June 30, 2000, Foundation had no commercial loans in its portfolio.
CONSUMER LOANS. Foundation occasionally makes various types of consumer
loans, including loans secured by 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, 2000,
Foundation had approximately $176,000, or .79% 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 1998 and 1999 fiscal years 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 all of the loans it has sold.
-4-
<PAGE> 6
The following table presents the loan origination and sale activity of
Foundation for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans receivable-beginning of period $ 20,468 $ 21,846 $ 25,939
Loans originated:
One- to four-family residential 5,908 11,251 10,266
Nonresidential 25 188 166
Multifamily -- 326 609
Consumer 234 85 378
-------- -------- --------
Total loans originated 6,167 11,850 11,419
Reductions:
Principal repayments 4,176 6,430 8,051
Loans sold 291 6,491 7,643
Transferred to real estate owned -- -- 54
-------- -------- --------
Total reductions 4,467 12,921 15,748
Other items, net (1) 274 (307) 236
-------- -------- --------
Loans receivable, end of period $ 22,442 $ 20,468 $ 21,846
======== ======== ========
<FN>
-------------------------
(1) Other items consist of loans in process, deferred loan fees and
allowances for loan losses.
</TABLE>
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's (i) core capital and supplementary
capital, as defined in the regulations, plus (ii) any loan loss reserves not
already included in the calculation of supplementary capital, and (iii) the
amount of loans and advances to the association's subsidiaries not already
included in the calculation of core capital (collectively, "Lending Limit
Capital"). A savings association may lend to one borrower an additional amount
not to exceed 10% of the association's Lending Limit Capital, if the additional
amount is fully secured by certain forms of "readily marketable collateral."
Real estate is not considered "readily marketable collateral." In applying this
limit, the regulations require that loans to certain related or affiliated
borrowers be aggregated.
Based on such limits, Foundation was able to lend $869,000 to one
borrower at June 30, 2000. The largest amount Foundation had outstanding to one
borrower and related persons or entities at June 30, 2000, was approximately
$653,000, consisting of seven loans, the largest of which was approximately
$294,000. 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 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 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 of foreclosure, 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 regarding the accrual and
nonaccrual status of Foundation's loans and other nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent 90 days or more $ -- $ -- $ --
Other nonperforming loans $ 80 $ -- $ --
======= ======= =======
Real estate owned $ -- -- $ 54
------- ------- -------
Total nonperforming assets $ 80 $ -- $ 54
======= ======= =======
Allowance for loan losses $ 143 $ 150 $ 138
======= ======= =======
Nonperforming assets as a percent of total assets 0.24% 0.00% 0.15%
Nonperforming loans as a percent of total loans 0.36% 0.00% 0.00%
Allowance for loan losses as a percent of
nonperforming loans 178.75% 0.00% 0.00%
</TABLE>
For the year ended June 30, 2000, Foundation had $1,038 of interest
income which would have been recorded had nonaccruing loans been current in
accordance with their original terms. At June 30, 2000, there was one loan that
was over 90 days delinquent.
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 is not warranted.
-6-
<PAGE> 8
The aggregate amounts of Foundation's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Special mention $ -- $ -- $ 54
Substandard 80 77 --
Doubtful -- -- --
Loss -- 8 --
---- ---- ----
Total classified assets $ 80 $ 85 $ 54
==== ==== ====
</TABLE>
Foundation establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, Foundation must either establish a specific allowance for
loss in the amount of 100% of the portion of the asset classified loss or charge
off the amount of the loss classification. Generally, Foundation has elected to
charge off the portion of any real estate loan deemed to be uncollectible.
Foundation analyzes each classified asset on a quarterly basis to
determine whether changes in the classifications are appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the use
of the real estate securing the loan, the status of the borrower and the
appraised value of the real estate. As such factors change, the classification
of the asset will change accordingly.
ALLOWANCE FOR LOAN LOSSES. Management, with oversight by the Board of
Directors, reviews on a quarterly basis the allowance for loan losses as it
relates to a number of relevant factors, including but not limited to, trends in
the level of delinquent and nonperforming assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience and possible losses arising from specific problem assets. To a lesser
extent, management also considers loan concentrations to single borrowers and
changes in the composition of the loan portfolio. While management believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments and net income
could be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
The foregoing statement regarding the adequacy of the allowance for
loan losses is a "forward-looking" statement within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Factors that could affect the adequacy of the
loan loss allowance include, but are not limited to, the following: (1) changes
in the national and local economy which may negatively impact the ability of
borrowers to repay their loans and which may cause the value of real estate and
other properties that secure outstanding loans to decline; (2) unforeseen
adverse changes in circumstances with respect to certain large loans; (3)
decreases in the value of collateral securing consumer loans to amounts less
than the outstanding balances of the consumer loans; and (4) determinations by
various regulatory agencies that Foundation must recognize additions to its loan
loss allowance based on such regulators' judgment of information available to
them at the time of their examinations.
-7-
<PAGE> 9
The following table sets forth an analysis of Foundation's allowance
for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
2000 1999 1998
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 150 $ 138 $ 126
Charge-offs (1) (7) -- --
Recoveries (1) -- -- --
----- ----- -----
Net charge-offs (1) (7) -- --
Provision for loan losses -- 12 12
----- ----- -----
Balance at end of period $ 143 $ 150 $ 138
===== ===== =====
Ratio of net charge-offs
to average loans outstanding
during the period (.03)% -- --
Ratio of allowance for loan losses
to total loans .64% .73% 0.63%
<FN>
-----------------------------
(1) All charge-offs and recoveries relate to loans secured by one- to
four-family real estate.
</TABLE>
Management does not allocate portions of the allowance for loan losses
to particular types of loans.
INVESTMENT ACTIVITIES
Federal regulations and Ohio law permit Foundation to invest in
interest-bearing deposits in other financial institutions, U.S. Treasury and
agency obligations, mortgage-backed securities and certain other specified
investments. The Board of Directors of Foundation has adopted an investment
policy which authorizes management, under the supervision of the Investment
Committee of the Board, to make investments in U.S. Government and agency
securities, deposits in the FHLB, certificates of deposit in federally-insured
financial institutions, banker's acceptances issued by major U.S. banks,
corporate debt securities rated by a major statistical rating firm as at least
"AA," or equivalent, and municipal or other tax free obligations. Laird L.
Lazelle, Foundation's President, Michael S. Schwartz, Foundation's Chairman of
the Board and Dianne K. Rabe, Foundation's 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.
-8-
<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,
------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- -----------------------------
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 $ 360 $ 360 $ 48 $ 48 $ 97 $ 97
Certificates of deposit -- -- 1,206 1,206 300 300
Investment securities:
Federal funds -- -- 2,287 2,287 6,016 6,016
U.S. Government obligations 5,250 5,098 3,754 3,702 2,947 2,944
FHLB stock 369 369 344 344 321 321
Mortgage-backed securities 4,355 4,152 5,018 4,920 3,966 3,905
------- ------- ------- ------- ------- -------
Total investments $10,334 $ 9,979 $12,657 $12,507 $13,647 $13,583
======= ======= ======= ======= ======= =======
</TABLE>
-9-
<PAGE> 11
The maturities of Foundation's interest-bearing deposits and investment
securities at June 30, 2000, are indicated in the following table:
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------------------------------------------------------------------------------
After one through After five After ten
One Year or Less five years through ten years years Total
----------------- ----------------- ----------------- -------------------- ------------------
Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- ------ ------- ------- --------- ------- --------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 360 6.85% $ -- --% $ -- --% $ -- --% 360 6.85%
Investment securities:
Federal funds -- -- -- -- -- -- -- -- -- --
U.S. Government agency
obligations -- -- 1,650 6.49 3,300 7.21 300 7.54 5,250 7.00
Mortgage-backed securities 153 6.02 342 6.06 139 6.05 3,721 6.35 4,355 6.30
FHLB stock -- -- -- -- -- -- 369 7.38 369 7.38
Certificates of deposit -- -- -- -- -- -- -- -- -- --
------- ------ ------- -------
Total $ 513 6.60% $ 1,992 6.42% $ 3,439 7.16% $ 4,390 6.51% $10,334 6.71%
======= ======= ======= ======= =======
</TABLE>
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<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, 2000, Foundation's certificates of deposit totaled $23.3
million, or 91.46% of total deposits. Of such amount, approximately $15.4
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,
2000:
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 758
Over 3 months to 6 months 625
Over 6 months to 12 months 676
Over 12 months 911
--------
Total $2,970
======
The following table sets forth Foundation's deposit account balance
activity for the fiscal years ended June 30, 2000, 1999 and 1998:
Year ended June 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Beginning balance $ 25,754 $ 28,022 $ 27,292
Net decrease before interest
credited (1,568) (3,686) (871)
Interest credited 1,319 1,418 1,601
-------- -------- --------
Ending balance $ 25,505 $ 25,754 $ 28,022
======== ======== ========
Net increase (decrease) $ (249) $ (2,268) $ 730
======== ======== ========
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
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<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, 2000, Foundation was in
compliance with the QTL Test.
Foundation's advances from the FHLB of Cincinnati are indicated in the
following table:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
2000 1999 1998
------- ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding $ 619 $ 638 $ 714
Maximum amount outstanding at any month end during
the period $1,074 $ 674 $ 748
Balance outstanding at end of period $ 519 $ 602 $ 680
Weighted average interest rate during the period 5.49% 5.59% 5.58%
Weighted average interest rate at end of period 5.56% 5.55% 5.53%
</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.
EMPLOYEES
As of June 30, 2000, Foundation had eight full-time employees.
REGULATION
GENERAL
The Company is a savings and loan holding company within the meaning of
the Home Owners Loan Act, as amended (the "HOLA"). 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, the Company is subject to provisions of the Ohio Revised Code
applicable to corporations generally.
Foundation is subject to regulation, examination and oversight by the
OTS, the FDIC and the Superintendent of the Division (the "Ohio
Superintendent"). Foundation must file periodic reports with the OTS, the FDIC
and the Division concerning its activities and financial condition.
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
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<PAGE> 14
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").
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
OFFICE OF THRIFT SUPERVISION
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.
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 4% of their adjusted total
assets, except for associations with the highest examination rating and
acceptable levels of risk.
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,
including the allowances for loan losses.
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, 2000, 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 (such as cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) of not less than 4% of its net withdrawable savings deposits
plus borrowings payable in one year or less computed as of the end of the prior
quarter or based on the average daily balance during the prior quarter. Monetary
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<PAGE> 15
penalties may be imposed upon associations failing to meet these liquidity
requirements. The eligible liquidity of Foundation at June 30, 2000, was
approximately $8.9 million, or 34.1%, and exceeded the applicable 4% liquidity
requirement by approximately $7.9 million.
QUALIFIED THRIFT LENDER TEST. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs
are assets related to domestic residential real estate and manufactured housing,
although they also include credit card, student and small business loans and
stock issued by any FHLB, the Federal Home Loan Mortgage Corporation or the
Federal National Mortgage Association. Under the QTL 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. The
second test permits a savings association to 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 its 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 tests under certain circumstances. If a savings
association fails to meet one of the QTL tests, the association and its holding
company become subject to certain operating and regulatory restrictions and the
savings association will not be eligible for new FHLB advances. At June 30,
2000, Foundation qualified as a QTL.
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, 2000.
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, 2000.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions include, without limitation, payments of
cash dividends, repurchases and certain other acquisitions by an association of
its shares and payments to stockholders of another association in an acquisition
of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for that year to date plus the retained net income for the preceding
two years; (ii) if the savings association will not be at least adequately
capitalized following the capital distribution; (iii) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the savings association and the OTS (or the
FDIC), or violate a condition imposed on the savings association in an
OTS-approved application or notice. If a savings association subsidiary of a
holding company is not required to file an application, it must file a 30-day
notice of the proposed capital distribution with the OTS.
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<PAGE> 16
HOLDING COMPANY REGULATION. The Company is a savings and loan holding
company within the meaning of the HOLA and is subject to OTS regulations,
examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
Company. Except with the prior approval of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such holding company's stock may also acquire control
of any savings institution, other than a subsidiary institution, or any other
savings and loan holding company.
As a unitary savings and loan holding company, the Company generally
has no restrictions on its activities. If the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association, the OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of the
savings and loan holding company and its affiliates may be imposed on the
savings association. Notwithstanding the foregoing rules as to permissible
business activities of a unitary savings and loan holding company, if the
savings association subsidiary of a holding company fails to meet the QTL test,
then its holding company would become subject to the activities restrictions
applicable to multiple holding companies. At June 30, 2000, Foundation met both
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.
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
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 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.
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<PAGE> 17
FEDERAL RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $44.3
million (subject to an exemption of up to $5.0 million), and of 10% of net
transaction accounts in excess of $44.3 million. At June 30, 2000, Foundation
was in compliance with the new reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances.
Foundation is a member of the FHLB of Cincinnati and must maintain an investment
in the capital stock of the FHLB of Cincinnati in an amount equal to the greater
of 1.0% of the aggregate outstanding principal amount of Foundation's
residential mortgage loans, home purchase contracts 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 $368,800 at June 30, 2000.
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.
Each 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, 2000, is $2,598,866 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
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<PAGE> 18
for losses in the current and five preceding taxable years, or (ii) an amount
necessary to restore the reserve to its balance as of the close of the base
year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994, and
1993, Foundation used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely 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, 2000, 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, 2000, 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 1996. 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.
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<PAGE> 19
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.
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 taxable book
net worth, and for tax year 2000 and years thereafter, the tax will be 1.3% of
the taxable 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 is approximately three-quarters of a year remaining in the term
of the lease. The lease is renewable for two five-year terms.
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 2000 Annual Report to Shareholders (the
"Annual Report"), a copy of which is attached as Exhibit 13 hereto, under the
caption "Common Stock and Related Information" is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 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.
-18-
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and the report of Clark,
Schaefer, Hackett & Co. dated July 17, 2000, 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 2000
Annual Meeting of Shareholders of the Company (the "Proxy Statement"), a copy of
which is attached as Exhibit 20 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.
-19-
<PAGE> 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
-------
3(i) Articles of Incorporation Incorporated by reference to the
Registration Statement on Form
S-1 filed by the Company on June
18, 1996, and amended on August
2, 1996 (the "Form S-1"),
Exhibit 3.1
Amended Articles of Incorporation Incorporated by reference to the
Form 10-KSB for the fiscal year
ended June 30, 1997, filed with
the SEC on September 26, 1997
(the "1997 10-KSB"), Exhibit
3(b)
3(ii) Code of Regulations Incorporated by reference to the
Form S-1, Exhibit 3.2
10(a) Employment Agreement between Incorporated by reference to the
Foundation Bancorp, Inc. and Form S-1, Exhibit 10.4
Laird L. Lazelle
10(b) Employment Agreement between Incorporated by reference to the
Foundation Savings Bank and Form S-1, Exhibit 10.5
Laird L. Lazelle
10(c) Lease Agreement Incorporated by reference to the
Form S-1, Exhibit 10.6
13 2000 Annual Report to Shareholders
20 Proxy Statement for 2000 Annual
Meeting
21 Subsidiaries of the Registrant Incorporated by reference to the
1997 10-KSB, Exhibit 21
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2000.
-20-
<PAGE> 22
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 26, 2000 Date: September 26, 2000
/s/ Laird L. Lazelle /s/ Robert E. Levitch
----------------------------- -----------------------------
Laird L. Lazelle Robert E. Levitch
Director Director
Date: September 26, 2000 Date: September 26, 2000
/s/ Michael S. Schwartz /s/ Paul L. Silverglade
----------------------------- -----------------------------
Michael S. Schwartz Paul L. Silverglade
Director Director
Date: September 26, 2000 Date: September 26, 2000
/s/ Ivan J. Silverman /s/ Dianne K. Rabe
----------------------------- -----------------------------
Ivan J. Silverman Dianne K. Rabe
Director Principal Financial Officer
Date: September 26, 2000 Date: September 26, 2000
-21-
<PAGE> 23
================================================================================
<TABLE>
<CAPTION>
DIRECTORS OF
FOUNDATION BANCORP, INC.
AND
FOUNDATION SAVINGS BANK
<S> <C> <C> <C> <C> <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. Retired 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.
Mr. Schwartz is a former Mayor of the Village
of Golf Manor.
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.
EXECUTIVE OFFICERS OF
FOUNDATION BANCORP, INC.
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President and Chief Executive Officer Secretary and Treasurer
EXECUTIVE OFFICERS OF
FOUNDATION SAVINGS BANK
LAIRD L. LAZELLE DIANNE K. RABE, CPA
President and Chief Executive Officer Vice President
MICHAEL S. SCHWARTZ MARDELLE DICKHAUT
Chairman of the Board Secretary
MARGO A. LIEBERT MICHELLE BARTH
Treasurer Assistant Secretary
</TABLE>
================================================================================
34
<PAGE> 24
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 45202
INDEPENDENT AUDITORS
--------------------
Clark, Schaefer, Hackett & Company
16th Floor
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, 2000, 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.
35
