<PAGE> 1
PROSPECTUS HOME CITY FINANCIAL CORPORATION
(HOLDING COMPANY FOR HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD)
UP TO 828,000 COMMON SHARES
$10 PURCHASE PRICE PER SHARE
Home City Financial Corporation, an Ohio corporation ("HCFC"), is hereby
offering for sale up to 828,000 common shares, without par value (the "Common
Shares"), in connection with its acquisition of all of the capital stock to be
issued by Home City Federal Savings Bank of Springfield, a federal savings bank
("Home City"), upon the conversion of Home City from a mutual savings bank to a
permanent capital stock savings bank chartered under the laws of the United
States (the "Conversion"). The consummation of the Conversion and the sale of
the Common Shares are subject to the approval of Home City's Plan of Conversion
(the "Plan") and the adoption of the Federal Stock Charter and Federal Stock
Bylaws of Home City at a Special Meeting of the members of Home City to be held
at 10:00 a.m., Eastern Time, on December 19, 1996, at the office of Home City at
63 West Main Street, Springfield, Ohio (the "Special Meeting").
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION OF THE DEPARTMENT OF THE TREASURY (THE "OTS"), THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), OR THE SECURITIES COMMISSION OF ANY STATE,
NOR HAS THE SEC, THE OTS, THE FDIC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Based on an independent appraisal of the pro forma market value of Home
City, as converted, as of September 6, 1996, the aggregate purchase price of the
Common Shares offered in connection with the Conversion ranges from a minimum of
$6,120,000 to a maximum of $8,280,000 (the "Valuation Range"), resulting in a
range of 612,000 to 828,000 Common Shares at $10.00 per share. The actual number
of Common Shares sold in connection with the Conversion will be determined in
the sole discretion of HCFC's Board of Directors and will be based upon the
final valuation of Home City, as converted. The final valuation will be
determined by the independent appraiser upon the completion of this offering. If
the final valuation is within the Valuation Range, or does not exceed the
maximum of the Valuation Range by more than 15%, the number of Common Shares to
be issued in connection with the Conversion will not be less than 612,000, nor
more than 952,200. If, due to changing market or regulatory conditions, the
final valuation is not between the minimum of the Valuation Range and 15% above
the maximum of the Valuation Range, subscribers will be given notice of such
final valuation and the right to affirm, increase, decrease or rescind their
subscriptions. Any such subscriber who does not affirmatively elect to continue
his subscription or elects to rescind his subscription before the date specified
in the notice will have all of his funds promptly refunded with interest. Any
person who elects to decrease his subscription will have the appropriate portion
of his funds promptly refunded with interest. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold." Any upward or downward adjustment in the
number of Common Shares sold will have a corresponding effect on the estimated
net proceeds of the Conversion and the pro forma capitalization and book value
per share of HCFC. See "USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA."
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE
"FDIC") OR ANY OTHER GOVERNMENT AGENCY.
FOR A DISCUSSION OF CERTAIN RISKS AND OTHER FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES, SEE "RISK FACTORS"
BEGINNING AT PAGE 9 OF THIS PROSPECTUS.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE CONVERSION INFORMATION CENTER
AT (513) 324-3830.
<TABLE>
<CAPTION>
==================================================================================================
Estimated Underwriting
Subscription Commissions Estimated Net
Price And Other Expenses(1) Proceeds
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share Minimum $10.00 $0.58 $9.42
Per share Mid-Point $10.00 $0.52 $9.48
Per share Maximum $10.00 $0.47 $9.53
Per share Maximum, as adjusted (2) $10.00 $0.42 $9.58
Total Minimum $6,120,000 $357,000 $5,763,000
Total Mid-point $7,200,000 $372,000 $6,828,000
Total Maximum $8,280,000 $387,000 $7,893,000
Total Maximum, as adjusted (2) $9,522,000 $404,000 $9,118,000
==================================================================================================
<FN>
(1) Consists of estimated printing, postage, legal, accounting, filing fee,
appraisal and miscellaneous costs to Home City and HCFC in connection with
the Conversion, including estimated fees, sales commissions and reimbursable
expenses to be paid to Charles Webb & Company, a division of Keefe, Bruyette
& Woods, Inc. ("Webb"), a company which has been engaged by Home City to
consult, advise and assist in the sale of the Common Shares on a best
efforts basis. Actual Conversion expenses may be more or less than estimated
amounts. See "THE CONVERSION - Plan of Distribution."
(2) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be offered without the resolicitation of
persons who subscribe for Common Shares. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold."
</TABLE>
The date of this Prospectus is November 12, 1996.
CHARLES WEBB & COMPANY
A Division of
Keefe, Bruyette & Woods, Inc.
<PAGE> 2
In accordance with the Plan, nontransferable subscription rights to purchase
Common Shares are offered hereby in a subscription offering to (a) each account
holder who, as of June 30, 1995 (the "Eligibility Record Date"), had deposit
accounts with deposit balances, in the aggregate, of $50 or more (a "Qualifying
Deposit") with Home City; (b) the Home City Financial Corporation Employee Stock
Ownership Plan (the "ESOP"); (c) each account holder who, as of September 30,
1996 (the "Supplemental Eligibility Record Date"), had a Qualifying Deposit with
Home City; and (d) each depositor of Home City having a savings deposit of
record on October 31, 1996 (the "Voting Record Date"), and each borrower of Home
City of record on the Voting Record Date whose loan was outstanding on May 1,
1996 (the "Subscription Offering"). All subscription rights to purchase Common
Shares in the Subscription Offering are nontransferable and will expire at 4:00
p.m., Eastern Time, on December 16, 1996 (the "Subscription Expiration Date"),
unless extended. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER PENALTIES IMPOSED BY
THE OTS. See "THE CONVERSION - Subscription Offering."
To the extent that all of the Common Shares are not subscribed for in the
Subscription Offering, the remaining Common Shares are hereby concurrently being
offered to the general public in a direct community offering in which preference
will be given to natural persons residing in Clark County, Ohio (the "Community
Offering"). See "THE CONVERSION - Community Offering." If the Community Offering
extends beyond January 30, 1997, 45 days after the Subscription Expiration Date,
persons who have subscribed for Common Shares in the Subscription Offering or in
the Community Offering will receive a notice that, until a date specified in
such notice, they have the right to affirm, increase, decrease or rescind their
subscriptions for Common Shares. Any person who does not affirmatively elect to
continue his subscription or elects to rescind his subscription during any such
extension will have all of his funds promptly refunded with interest. Any person
who elects to decrease his subscription will have the appropriate portion of his
funds promptly refunded with interest. See "THE CONVERSION - Effect of Extension
of Community Offering." The Community Offering may end at any time after orders
for at least 952,200 Common Shares have been received, but in no event later
than 45 days after the Subscription Expiration Date or January 30, 1997, unless
extended by HCFC and Home City with the approval of the OTS, if necessary. In
accordance with the Plan, the Subscription Offering and the Community Offering
may not be extended beyond December 19, 1998. See "THE CONVERSION - Subscription
Offering; and - Plan of Distribution."
Home City has engaged Webb to consult, advise and assist in the sale of the
Common Shares on a best efforts basis in the Subscription Offering and the
Community Offering (together, the "Offering"). See "THE CONVERSION - Plan of
Distribution."
The Plan and federal regulations limit the number of Common Shares which may
be purchased by various categories of persons, including the limitation that no
person may purchase fewer than 25 shares, nor more than 1%, in the Subscription
Offering or the Community Offering, of the total number of Common Shares sold in
connection with the Conversion (9,522 Common Shares at the maximum of the
Valuation Range, as adjusted). In addition, no person, together with such
person's Associates (hereinafter defined) and persons Acting in Concert
(hereinafter defined) with such person, may purchase more than 2% of the total
number of Common Shares sold in connection with the Conversion (19,044 Common
Shares at the maximum of the Valuation Range, as adjusted). Such limitations do
not apply to the ESOP. SUBJECT TO APPLICABLE OTS REGULATIONS, THE LIMITATIONS
SET FORTH IN THE PLAN MAY BE CHANGED AT ANY TIME IN THE SOLE DISCRETION OF THE
BOARDS OF DIRECTORS OF HOME CITY AND HCFC. See "THE CONVERSION - Limitations on
Purchases of Common Shares."
Common Shares may be subscribed for in the Subscription Offering or ordered
in the Community Offering only by returning the accompanying Stock Order Form
and Certification Form (the "Stock Order Form"), along with full payment of the
subscription or order price per share for all shares for which subscription is
made or order is submitted, no later than 4:00 p.m., Eastern Time, December 16,
1996. See "THE CONVERSION - Use of Stock Order Forms." Payment may be made in
cash or by check or money order and will be held in a segregated account at Home
City, insured by the FDIC up to the applicable limit and earning interest at
Home City's passbook rate, currently 2.5% annual percentage yield, from the date
of receipt until the completion of the Conversion. Payment may also be made by
authorized withdrawal from an existing savings account at Home City, the amount
in which will continue to earn interest until completion of the Conversion at
the rate normally in effect from time to time for such account. Neither payments
made in cash or by check or money order, nor payments made by authorized
withdrawal from an account at Home City will be available during the
Subscription Offering and the Community Offering. See "THE CONVERSION - Payment
for Common Shares." Payment by wire will not be accepted. AN EXECUTED STOCK
ORDER FORM, ONCE RECEIVED BY HCFC, MAY NOT BE MODIFIED, AMENDED OR RESCINDED
WITHOUT THE CONSENT OF HCFC UNLESS THE COMMUNITY OFFERING IS NOT COMPLETED
WITHIN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE.
There is presently no market for the Common Shares and no assurance can be
given that an active and liquid trading market will develop following the
Conversion. The aggregate offering price for the Common Shares is based upon an
independent appraisal of Home City performed by Keller & Company, Inc.
("Keller"). The appraisal is not a recommendation as to the advisability of
purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common
Shares to be Sold." No assurance can be given that persons purchasing Common
Shares will thereafter be able to sell such shares at a price at or above the
offering price. See "RISK FACTORS - Limited Market for the Common Shares."
In connection with the completion of the Conversion, HCFC will register the
Common Shares with the SEC under the Securities Exchange Act of 1934 (the
"Exchange Act"). Pursuant to the Exchange Act, HCFC will be required to file an
Annual Report on Form 10-KSB with the SEC containing audited consolidated
financial statements and other information concerning the consolidated financial
condition and operations of HCFC and its subsidiaries. HCFC will also be subject
to the proxy solicitation rules of the SEC, including the requirement that HCFC
provide its shareholders with an Annual Report containing audited consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations. OTS regulations require that the Common
Shares remain registered for at least three years after the completion of the
Conversion. In the unlikely event that HCFC has fewer than 300 shareholders of
record at the expiration of such three-year period, HCFC may deregister the
Common Shares.
THE CONVERSION OF HOME CITY FROM A MUTUAL SAVINGS BANK TO A PERMANENT
CAPITAL STOCK SAVINGS BANK IS CONTINGENT UPON (I) THE APPROVAL OF THE PLAN AND
THE ADOPTION OF THE FEDERAL STOCK CHARTER AND FEDERAL STOCK BYLAWS BY HOME
CITY'S VOTING MEMBERS, (II) THE SALE OF THE REQUISITE NUMBER OF COMMON SHARES,
AND (III) THE SATISFACTION OR WAIVER OF CERTAIN OTHER CONDITIONS. SEE "THE
CONVERSION."
ii
<PAGE> 3
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
SPRINGFIELD, OHIO
[MAP OF CLARK COUNTY, OHIO]
<PAGE> 4
PROSPECTUS SUMMARY
The following information is not complete and is qualified in its entirety
by the detailed information and the financial statements and accompanying notes
appearing elsewhere in this Prospectus.
HOME CITY FINANCIAL CORPORATION
HCFC was incorporated under Ohio law in August 1996 at the direction of Home
City for the purpose of purchasing all of the capital stock of Home City to be
issued in connection with the Conversion. HCFC has not conducted and will not
conduct any business before the completion of the Conversion other than business
related to the Conversion. Upon the consummation of the Conversion, HCFC will be
a unitary savings and loan holding company, the principal assets of which
initially will be the capital stock of Home City, a loan made to the ESOP for
the purchase of Common Shares and the investments made with 50% of the net
proceeds retained from the sale of HCFC shares in connection with the
Conversion. See "USE OF PROCEEDS."
The main office of HCFC is located at 63 West Main Street, Springfield, Ohio
45502-1309, and its telephone number is (513) 324-5736.
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
Home City is a federal mutual savings bank which has served the Springfield,
Ohio, area since 1925. Originally formed under the name "Home City Savings and
Loan Association," Home City changed its name on May 1, 1996, to "Home City
Federal Savings Bank of Springfield."
As a federal savings bank, Home City is subject to supervision and
regulation by the OTS and the FDIC and is a member of the Federal Home Loan Bank
(the "FHLB") of Cincinnati. The deposits of Home City are insured up to
applicable limits by the FDIC in the Savings Association Insurance Fund (the
"SAIF"). See "REGULATION." At June 30, 1996, $31.9 million, or approximately 66%
of Home City's loan portfolio, consisted of loans secured by first mortgages on
one- to four-family homes, virtually all of which were located within Clark
County, Ohio, and adjacent counties. See "THE BUSINESS OF HOME CITY - Lending
Activities -- One- to Four-Family Residential Real Estate Loans."
Home City's capital exceeds all regulatory requirements by a substantial
margin. At June 30, 1996, Home City's tangible and core capital both equaled
$5.4 million, or 9.8% of assets, an amount which exceeded the minimum tangible
and core capital requirements by approximately $4.4 million and $3.6 million,
respectively. On a pro forma basis, assuming the sale of 720,000 Common Shares
(the mid-point of the Valuation Range) and the retention by HCFC of 50% of the
net proceeds from such sale, Home City's tangible and core capital ratios will
both equal 13.45%. See "REGULATORY CAPITAL COMPLIANCE," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY
Liquidity and Capital Resources," and "REGULATION - OTS Regulations --
Regulatory Capital Requirements."
Home City conducts business from its office in Springfield, Ohio. Home
City's primary market area consists of Clark County, Ohio, and adjacent
counties. The office of Home City is located at 63 West Main Street,
Springfield, Ohio, and its telephone number is (513) 324-5736.
THE CONVERSION
On September 3, 1996, the Board of Directors of Home City unanimously
approved the Plan of Conversion. The OTS approved the Plan, subject to the
approval of the Plan by Home City's voting members at the Special Meeting, to be
held at 10:00 a.m., Eastern Time, on December 19, 1996, at the office of Home
City at 63 West Main Street, Springfield, Ohio.
THE SUBSCRIPTION AND COMMUNITY OFFERINGS
The Plan provides for the formation of HCFC for the purpose of acquiring all
of the capital stock to be issued by Home City in the Conversion. Pursuant to
the Plan, subscription rights to purchase Common Shares are hereby offered at a
price of $10 per share to (a) depositors of Home City with Qualifying Deposits
as of June 30, 1995 ("Eligible Account Holders"), (b) the ESOP, (c) depositors
of Home City with Qualifying Deposits as of September 30, 1996 ("Supplemental
Eligible Account Holders"), and (d) each account holder of Home City having a
savings deposit of record on October 31, 1996 (the "Voting Record Date"), and
each borrower of record on the Voting Record Date whose loan was outstanding on
May 1, 1996 (such
<PAGE> 5
depositors and borrowers as of October 31, 1996, collectively, the "Voting
Members"). See "THE CONVERSION - Subscription Offering." Common Shares not
subscribed for in the Subscription Offering are hereby being concurrently
offered to those members of the general public receiving this Prospectus in the
Community Offering, in which preference will be given to natural persons
residing in Clark County, Ohio. See "THE CONVERSION - Community Offering."
The Plan authorizes the Boards of Directors of HCFC and Home City to
establish limits on the number of Common Shares that may be purchased by various
categories of persons. The Plan also permits the Boards of Directors of HCFC and
Home City, subject to any required regulatory approval and the requirements of
applicable laws and regulations, to increase or decrease such purchase
limitations in their sole discretion. Pursuant to such authority, the Boards of
Directors have established the limitation that, generally, an Eligible Account
Holder or a Supplemental Eligible Account Holder may purchase in the
Subscription Offering a number of Common Shares equal to the greater of (i) 1%
of the Common Shares sold in connection with the Conversion (9,522 Common Shares
at the maximum of the Valuation Range, as adjusted) or (ii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of Common Shares to be sold in connection with the Conversion by a fraction, the
numerator of which is the amount of such Eligible Account Holder's or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of Qualifying Deposits of all Eligible Account Holders
or Supplemental Eligible Account Holders, as the case may be. A Voting Member
may purchase in the Subscription Offering not more than 1% of the Common Shares
sold in connection with the Conversion (9,522 Common Shares at the maximum of
the Valuation Range, as adjusted).
The Boards of Directors have also established the limitation that any person
may purchase in the Community Offering a number of Common Shares equal to 1% of
the total number of Common Shares sold in connection with the Conversion (9,522
Common Shares at the maximum of the Valuation Range, as adjusted).
Subscriptions and orders for Common Shares in the Conversion are also
subject to the limitation that no person, together with any Associates or
persons Acting in Concert, may purchase more than 2% of the Common Shares sold
in connection with the Conversion (19,044 Common Shares at the maximum of the
Valuation Range, as adjusted). Such limitation does not apply to the ESOP, which
intends to purchase 8% of the Common Shares sold in connection with the
Conversion. The ESOP may purchase Common Shares if shares remain available after
satisfying the subscriptions of Eligible Account Holders up to $8,280,000, the
maximum of the Valuation Range. If Common Shares in excess of the maximum of the
Valuation Range are sold, the ESOP will have the first right to purchase such
excess Common Shares. If the ESOP is unable to purchase all or part of the
Common Shares for which it subscribes, the ESOP may purchase Common Shares in
the open market or may purchase authorized but unissued Common Shares from HCFC.
If the ESOP purchases authorized but unissued Common Shares from HCFC, such
purchases could have a dilutive effect on the interest of HCFC's shareholders.
Subject to applicable regulations, the purchase limitations may be increased or
decreased after the commencement of the Offering in the sole discretion of the
Boards of Directors. See "THE CONVERSION - Limitations on Purchases of Common
Shares" and "RESTRICTIONS ON ACQUISITION OF HCFC AND HOME CITY." The sale of
Common Shares pursuant to subscriptions or orders received in the Offering will
be subject to the approval of the Plan by the voting members of Home City at the
Special Meeting, to the sale of the requisite number of Common Shares and to
certain other conditions. See "THE CONVERSION - Subscription Offering; -
Community Offering; and - Pricing and Number of Common Shares to be Sold."
Home City has retained Webb to consult, advise and assist in the sale of the
Common Shares in the Offering. Webb has been paid a management fee of $25,000
and will receive a commission equal to 1.5% of the aggregate amount received by
HCFC in the Offering, excluding any amounts paid for Common Shares by Home
City's directors, executive officers and employees (and members of their
immediate families) and by the ESOP. Home City will reimburse Webb for legal and
out-of-pocket expenses. See "THE CONVERSION - Plan of Distribution."
The Subscription Offering will terminate at 4:00 p.m., Eastern Time, on
December 16, 1996. The Community Offering may be terminated at any time after
orders for at least 952,200 shares have been received, but in no event later
than January 30, 1997, unless extended. If the Community Offering extends beyond
45 days after the Subscription Expiration Date, persons who have subscribed for
Common Shares in the Subscription Offering or in the Community Offering will
receive a notice that, until a date specified in the notice, they have the right
to affirm, increase, decrease or rescind their subscriptions or orders for
Common Shares. Any person who does not affirmatively elect to continue his
subscription or order or elects to rescind his subscription or order during such
time will have all of his funds promptly refunded with interest. Any person who
elects to decrease his subscription or order will have the appropriate portion
of his funds promptly refunded with interest. The sale of Common Shares pursuant
to subscriptions or orders received in the Offering will be subject to the
approval of the Plan by the voting members of Home City at the Special Meeting,
to the determination by the Boards of Directors of HCFC and Home City of the
total number
-2-
<PAGE> 6
of Common Shares to be sold and to the satisfaction or waiver of certain other
conditions. See "THE CONVERSION - Subscription Offering; - Community Offering;
and - Pricing and Number of Common Shares to be Sold."
Assuming 720,000 Common Shares are sold in connection with the Conversion,
all directors and executive officers of HCFC and Home City and their Associates
intend to purchase an aggregate amount of 75,000 Common Shares in connection
with the Conversion, which would constitute 10.4% of the Common Shares sold. The
aggregate number of Common Shares proposed to be purchased by the directors, the
executive officers, the Associates of directors and executive officers and the
ESOP is 132,600, which would constitute 18.4% of the Common Shares sold. Such
percentages may increase or decrease if more or less than 720,000 Common Shares
are sold in the Conversion. See "THE CONVERSION - Shares to be Purchased by
Management Pursuant to Subscription Rights."
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Federal regulations prohibit any person from transferring or entering into
any agreement or understanding before the completion of the Conversion to
transfer the ownership of the subscription rights issued in the Conversion or
the shares to be issued upon the exercise of such subscription rights. Persons
attempting to violate such provision may lose their rights to purchase Common
Shares in the Conversion and may be subject to penalties imposed by the OTS.
Each person exercising subscription rights will be required to certify that a
purchase of Common Shares is solely for the subscriber's own account and that
there is no agreement or understanding regarding the sale or transfer of such
Common Shares.
PRICING OF THE COMMON SHARES
Keller, an independent firm experienced in valuing thrift institutions, has
prepared a valuation of the estimated pro forma market value of Home City, as
converted. Keller's valuation of the estimated pro forma market value of Home
City, as converted, is $7,200,000 as of September 6, 1996 (the "Pro Forma
Value"). The Boards of Directors of HCFC and Home City reviewed the valuation,
including the methodology and the appropriateness of the assumptions used by
Keller, and determined that the valuation was not unreasonable. HCFC will issue
the Common Shares at a fixed price of $10 per share and, by dividing the price
per share into the Pro Forma Value, will determine the number of shares to be
issued. Applicable regulations require, however, that Home City establish a
range of 15% above and below the Pro Forma Value to allow for fluctuations in
the aggregate value of the Common Shares due to changes in the market for thrift
shares and other factors from the time of the commencement of the Subscription
Offering until the completion of the offering of the Common Shares. Based on the
Pro Forma Value of Home City as of September 6, 1996, the Valuation Range is
$6,120,000 to $8,280,000, resulting in the offer of between 612,000 and 828,000
Common Shares at a purchase price of $10 per share. The valuation should not be
considered a recommendation as to the advisability of purchasing the Common
Shares. Keller has assumed and relied upon the accuracy and completeness of the
financial information provided by Home City and did not independently value Home
City's assets and liabilities.
The actual number of Common Shares sold in connection with the Conversion
will be determined in the discretion of the Boards of Directors of HCFC and Home
City upon the completion of the Subscription Offering and the Community
Offering, if any, and will be based upon the final valuation of Home City, as
converted. The final valuation will be determined by Keller at the time of the
closing of the Offering. If the final valuation is within the Valuation Range,
or does not exceed the maximum of the Valuation Range by more than 15%, the
number of Common Shares to be issued in connection with the Conversion will not
be less than 612,000 or more than 952,200. If, due to changing market
conditions, the final valuation is not between the minimum of the Valuation
Range and 15% above the maximum of the Valuation Range, subscribers will be
given the opportunity to affirm, increase, decrease or rescind their
subscriptions. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." If the final valuation is between the minimum and 15% above the maximum
of the Valuation Range, subscribers will not be permitted to increase, decrease
or rescind their subscriptions.
USE OF PROCEEDS
HCFC will retain 50% of the net proceeds from the sale of the Common Shares,
or approximately $3,414,000 at the mid-point of the Valuation Range, including
the value of a promissory note from the ESOP, which HCFC intends to accept in
exchange for the issuance of Common Shares to the ESOP. Such proceeds will be
used to fund the Home City Financial Corporation Recognition and Retention Plan
(the "RRP") and will be invested in short-term and intermediate-term government
securities.
-3-
<PAGE> 7
The remainder of the net proceeds received from the sale of the Common
Shares, $3,414,000 at the mid-point of the Valuation Range, will be invested by
HCFC in the capital stock to be issued by Home City to HCFC as a result of the
Conversion. Such investment will increase the regulatory capital of Home City
and will permit Home City to expand its lending and investment activities. Home
City anticipates that such net proceeds initially will be invested in short-term
interest-bearing deposits. Eventually, however, Home City will attempt to use
such net proceeds to originate mortgage, consumer and other loans in Home City's
market area. Home City may also use the proceeds from the Conversion to expand
operations through the establishment of a branch office, which would include
space for administrative operations. Home City estimates that the cost of
establishing a new branch will be approximately $1.25 million, including land
acquisition and construction costs. Neither HCFC nor Home City has, however,
entered into any agreements concerning the establishment of a branch office.
Although HCFC and Home City could use the proceeds from the Conversion to
acquire other financial institutions or for HCFC to purchase its own outstanding
shares, HCFC and Home City have no current intentions to do so. See "USE OF
PROCEEDS."
OFFICER AND DIRECTOR BENEFITS
In connection with the Conversion, HCFC will establish the ESOP. Common
Shares will be purchased by the ESOP in the Conversion with a loan from HCFC.
The ESOP intends to repay the loan with discretionary contributions made by Home
City to the ESOP. As the loan is repaid, the Common Shares held by the ESOP will
be allocated to the accounts of employees of Home City and HCFC, including
executive officers. See "MANAGEMENT OF HOME CITY - Employee Stock Ownership
Plan."
At a meeting of the shareholders of HCFC to be held at least six months
after the consummation of the Conversion, the Boards of Directors of HCFC and
Home City intend to present to the shareholders for approval both the RRP and
the Home City Financial Corporation 1997 Stock Option and Incentive Plan (the
"Stock Option Plan"). If the RRP is approved at such meeting, HCFC will form a
trust (the "RRP Trust") to which HCFC will contribute sufficient amounts for the
purchase by the RRP Trust of an unspecified number of HCFC common shares equal
to up to 4% of the number of Common Shares sold in the Conversion. Such HCFC
common shares may be purchased in the open market or from the authorized but
unissued common shares of HCFC, and will be awarded by a committee of the HCFC
Board of Directors to the officers and directors of HCFC and Home City for
services rendered to Home City. See "MANAGEMENT OF HOME CITY - Stock Option
Plan; and Recognition and Retention Plan and Trust."
If the Stock Option Plan is approved at a meeting of shareholders following
the Conversion, directors, officers and employees of HCFC and Home City will be
granted options to purchase, in the aggregate, a number of Common Shares equal
to up to 10% of the Common Shares sold in the Conversion. The exercise price for
options granted will equal the HCFC market price on the date of grant. The grant
of such options, in combination with purchases of Common Shares by such officers
and directors and certain anti-takeover provisions in the Articles of
Incorporation and Code of Regulations of HCFC and the Federal Stock Charter of
Home City, may facilitate the perpetuation of current management and discourage
proxy contests and takeover attempts. See "RESTRICTIONS ON ACQUISITION OF HOME
CITY AND HCFC AND RELATED ANTI-TAKEOVER PROVISIONS."
Assuming the purchase by directors and executive officers and their
Associates of 10.4% of the Common Shares sold at the mid-point of the Valuation
Range, the purchase by the RRP of a number of Common Shares equal to 4% of the
Common Shares sold in the Conversion, the exercise by directors and executive
officers of all options authorized pursuant to the Stock Option Plan and the
control by directors and executive officers of the 8% of the Common Shares
purchased by the ESOP in the Conversion, directors and executive officers could
own or control up to 29.5% of the outstanding common shares of HCFC. See "RISK
FACTORS - Controlling Influence of Management and Anti-Takeover Provisions Which
May Discourage Sales of Common Shares for Premium Prices."
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The aggregate offering
price for the Common Shares is based upon an independent appraisal of Home City.
The appraisal is not a recommendation as to the advisability of purchasing
Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." No assurance can be given that persons purchasing Common Shares will
thereafter be able to sell such shares at a price at or above the $10 offering
price.
HCFC has received approval to have the Common Shares quoted on The
Nasdaq SmallCap Market under the symbol "HCFC" upon the closing of the
Conversion, subject to certain conditions which HCFC and Home City believe will
be satisfied, although no assurance can be provided that the conditions will be
met. In connection with such approval, Webb has informed
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<PAGE> 8
Home City that Keefe, Bruyette & Woods, Inc., intends to make a market in the
Common Shares. No assurance can be given, however, that an active or liquid
market for the Common Shares will develop after the completion of the Conversion
or, if such a market does develop, that such market will continue. Investors
should consider, therefore, the potentially illiquid and long-term nature of an
investment in the Common Shares. See "RISK FACTORS - Market for the Common
Shares."
DIVIDEND POLICY
The declaration and payment of dividends by HCFC will be subject to the
discretion of the Board of Directors of HCFC and will be based on the earnings
and financial condition of HCFC and general economic conditions. Other than the
earnings on the investment of the proceeds retained by HCFC from the sale of the
Common Shares in the Conversion, the only source of income of HCFC will be
dividends periodically declared and paid by the Board of Directors of Home City
on the common shares of Home City owned by HCFC. The payment of dividends by
Home City to HCFC will be subject to various regulatory restrictions. On a pro
forma basis, as of June 30, 1996, assuming (i) receipt by Home City of $3.4
million of net conversion proceeds, (ii) the investment of such net proceeds in
assets having a risk weighting of 20% and (iii) the establishment of a
Liquidation Account (hereinafter defined) in the amount of $5.4 million (the
regulatory capital of Home City at June 30, 1996), Home City would have $4.19
million available for the payment of dividends to HCFC.
In an effort to manage the capital of HCFC, the Board of Directors of HCFC
may determine that the payment of a regular or a special cash dividend or both
may be prudent. No assurance can be given, however, that any dividend will be
declared, what the amount will be or whether such dividends, if declared, will
continue in the future. See "DIVIDEND POLICY."
INVESTMENT RISKS
Special attention should be given to the matters discussed under "RISK
FACTORS," beginning on page 9, prior to investing in the Common Shares.
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<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Home City at
the dates and for the periods indicated. The financial information should be
read in conjunction with the consolidated financial statements and notes thereto
included elsewhere herein. In addition, the financial information should be read
in conjunction with the "Recent Developments" section, beginning on page 33, for
the impact of the special SAIF assessment on Home City's capital and earnings
for the three months ended September 30, 1996. However, in the opinion of
management of Home City, all adjustments necessary for a fair presentation of
such financial data have been included. All such adjustments are of a normal
recurring nature.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION At June 30,
AND OTHER DATA: 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $55,728 $48,578 $39,680 $40,769 $42,325
Cash and cash equivalents (1) 1,843 2,377 987 3,358 5,889
Investment securities available for sale 2,188 259 314 1,398 20
Investment securities held to maturity -- 1,901 2,098 2,473 4,484
Mortgage-backed securities
available for sale 2,975 -- -- -- --
Mortgage-backed securities
held to maturity -- 3,667 4,257 5,314 2,064
Loans receivable - net 45,225 38,960 31,103 28,648 28,875
FHLB stock - at cost 394 288 248 216 205
Deposits 47,174 40,936 34,816 36,688 39,398
FHLB advances 2,903 2,618 424 460 --
Retained earnings, substantially
restricted-net (2) 5,271 4,757 4,202 3,497 2,832
Number of offices, all full service 1 1 1 1 1
<CAPTION>
At June 30,
SUMMARY OF EARNINGS: 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 4,507 $ 3,835 $ 3,542 $ 3,565 $ 3,439
Interest expense 2,542 1,942 1,446 1,710 2,370
------- ------- ------- ------- -------
Net interest income 1,965 1,893 2,096 1,855 1,069
Provision for loan losses 50 109 113 83 52
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 1,915 1,784 1,983 1,772 1,017
Noninterest income 58 9 12 44 1
Noninterest expense 1,216 998 923 727 845
------- ------- ------- ------- -------
Income before income tax 757 795 1,072 1,089 173
Income tax expense (2) 243 240 367 424 73
------- ------- ------- ------- -------
Net income (2) $ 514 $ 555 $ 705 $ 665 $ 100
======= ======= ======= ======= =======
</TABLE>
- ----------
(Footnotes on next page)
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<PAGE> 10
<TABLE>
<CAPTION>
At or for the year ended june 30,
SELECTED FINANCIAL RATIOS: 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Return on assets (3) 0.98% 1.24% 1.69% 1.66% 0.26%
Return on equity (4) 10.46 12.20 17.23 21.08 3.52
Interest rate spread (5) 3.42 3.95 4.88 4.58 3.12
Net interest margin (6) 3.86 4.36 5.28 4.81 2.92
Noninterest expense to average assets (7) 2.31 2.22 2.28 1.82 2.21
Average equity to average assets 9.55 10.21 10.09 7.88 7.42
Equity to assets at period end 9.69 10.06 10.87 8.58 6.69
Nonperforming loans to total loans 0.54 0.53 0.11 1.35 0.17
Nonperforming assets to total assets (8) 0.44 0.43 0.09 0.96 0.12
Allowance for loan losses to total loans 0.80 0.82 0.74 0.69 0.38
Allowance for loan losses to
nonperforming loans 146.56 154.11 673.53 50.77 222.00
Net charge-offs to average loans 0.02 0.05 0.27 (0.01) --
- ----------
<FN>
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits in other financial institutions.
(2) Effective January 1, 1993, Home City adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
effect of adopting SFAS No. 109 on income tax expense in 1994 and 1993 was
not material.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) Noninterest expense divided by average total assets.
(8) Nonperforming assets consist of nonaccruing loans, accruing loans 90 days or
more past due and real estate acquired (or deemed acquired) in foreclosure
proceedings or in lieu thereof. See "THE BUSINESS OF HOME CITY Delinquent
Loans, Nonperforming Assets and Classified Assets."
</TABLE>
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<PAGE> 11
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of Home City at June 30, 1996, based on the receipt of proceeds for the
number of Common Shares indicated, less estimated expenses of $357,000,
$372,000, $387,000 and $404,000 at the minimum, mid-point, maximum and maximum,
as adjusted, of the Valuation Range, respectively, assuming all of such shares
are sold in the Subscription Offering.
<TABLE>
<CAPTION>
Pro forma capital at June 30, 1996, assuming the sale of
------------------------------------------------------------------------------------------------
612,000 720,000 828,000 952,200
Common Shares Common Shares Common Shares Common Shares
Historical at (offering price (offering price (offering price (offering price
June 30, 1996(1) of $10 per share) of $10 per share) of $10 per share) of $10 per share)
----------------- ---------------- ---------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles, before $5,398 9.68% $7,545 13.07% $7,948 13.67% $8,351 14.27% $8,847 14.99%
adjustments (2)(3)
Current tangible
capital (2)(3):
Capital level $5,271 9.48% $7,418 12.85% $7,821 13.45% $8,224 14.05% $8,720 14.77%
Requirement 834 1.50 866 1.50 872 1.50 878 1.50 886 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess $4,437 7.98% $6,552 11.35% $6,949 11.95% $7,346 12.55% $7,834 13.27%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Current core
capital (2)(3):
Capital level $5,271 9.48% $7,418 12.85% $7,821 13.45% $8,224 14.88% $8,720 15.83%
Requirement 1,668 3.00 1,732 3.00 1,744 3.00 1,756 3.00 1,771 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess $3,603 6.48% $5,686 9.85% $6,077 10.45% $6,468 11.88% $6,949 11.77%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Current risk-based
capital (4):
Capital level $5,633 18.77% $7,780 25.57% $8,183 26.82% $8,586 28.07% $9,082 29.59%
Requirement 2,400 8.00 2,434 8.00 2,441 8.00 2,447 8.00 2,455 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess $3,233 10.77% $5,346 17.57% $5,742 18.82% $6,139 20.07% $6,627 21.59%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- ----------
<FN>
(1) See Note N of the Notes to Financial Statements.
(2) Pro forma amounts assume Home City will receive 50% of the conversion
proceeds before reduction for the ESOP loan. Also reflects a deduction from
capital for unearned ESOP shares and unearned RRP shares equal to 8% and 4%,
respectively, of the Common Shares assumed to have been sold in the
Offering.
(3) Historical tangible and core capital percentages are based on adjusted total
assets of $56.0 million. Pro forma tangible and core capital percentages are
based on adjusted total assets of $52.7 million, $58.1 million, $58.5
million and $59.0 million, which assumes the receipt by Home City of net
proceeds from the sale of Common Shares of $2.9 million, $3.4 million, $3.9
million and $4.6 million, at the minimum, mid-point, maximum and maximum, as
adjusted, of the Valuation Range, respectively. The OTS has proposed a new
regulation which would increase the core capital requirement to between 4%
and 5% of adjusted total assets, with the specific requirement to be
determined on a case-by-case basis. See "REGULATION - OTS Regulations --
Regulatory Capital Requirements."
(4) Historical risk-based capital percentages are based on risk-weighted assets
of $30.0 million. Pro forma risk-based capital percentages are based on the
receipt by Home City of net proceeds of $2.9 million, $3.4 million, $3.9
million and $4.6 million at the minimum, mid-point, maximum and maximum, as
adjusted, of the Valuation Range, respectively, and assumes the net proceeds
will be invested in short-term interest-bearing deposits having a risk
weighting of 20%.
</TABLE>
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<PAGE> 12
RISK FACTORS
INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. BEFORE INVESTING,
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING MATTERS, IN
ADDITION TO THE OTHER INFORMATION DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
INTEREST RATE RISK
Home City's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans
and investments and interest expense on deposits. Like most thrift institutions,
the interest income and interest expense of Home City change as the interest
rates on mortgages, securities and other assets and on deposits and other
liabilities change. Interest rates may change because of general economic
conditions, the policies of various regulatory authorities and other factors
beyond Home City's control. The interest rates on specific assets and
liabilities of Home City will change or "reprice" in accordance with the
contractual terms of the asset or liability instrument and in accordance with
customer reaction to general economic trends.
Home City, 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, Home City uses the "net portfolio value" ("NPV") methodology
recently adopted by the OTS as part of its capital regulations. Although Home
City is not currently subject to the NPV regulation because such regulation does
not apply to institutions with less than $300 million in assets and risk-based
capital in excess of 12%, the application of the NPV methodology may illustrate
Home City's interest rate risk.
Generally, NPV is the difference between incoming cash flows on
interest-earning and other assets and outgoing cash flows on interest-bearing
and other liabilities, discounted to their economic value. 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. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the economic value of the
institution's assets with either an increase or a decrease in market rates, the
institution must, in determining its risk-based capital, deduct from its capital
50% of the amount of the decrease in excess of such 2%.
At June 30, 1996, 2% of the economic value of Home City's assets was
approximately $1.2 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $1.6 million at June 30, 1996, Home City
would have been required to deduct approximately $200,000 (half of the
approximate $400,000 difference) from its capital in determining whether Home
City met its risk-based capital requirement. Regardless of such reduction,
however, Home City's risk-based capital at June 30, 1996, would still have
exceeded the regulatory requirement by approximately $ 3.0 million.
Home City'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. As a result, in a rising interest rate environment, the amount of
interest Home City would receive on its loans would increase relatively slowly
as loans are slowly prepaid and new loans at higher rates are made. Moreover,
the interest Home City would pay on its deposits would increase rapidly because
Home City's deposits generally have shorter periods to repricing. Because Home
City has not originated loans in accordance with traditional secondary market
guidelines, the sale of fixed-rate loans may be difficult. In addition,
increases in interest rates can also result in the flow of funds away from
savings institutions into direct investments or other investment vehicles, such
as mutual funds, which may pay higher rates of return than savings institutions.
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. For further
discussion of the NPV methodology, the risks to Home City and the steps Home
City is taking to reduce such risks, see "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY - Asset and
Liability Management."
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<PAGE> 13
If interest rates continue to rise from recent levels, Home City's net
interest income will be negatively affected. Moreover, rising interest rates may
negatively affect Home City's earnings due to diminished loan demand. A negative
effect on Home City's interest income and earnings will adversely affect the
value of an investment in the Common Shares.
RISK ASSOCIATED WITH LOANS SECURED BY NONRESIDENTIAL REAL ESTATE
Over the last three years, up to 17% of Home City's loan portfolio has been
comprised of loans secured by nonresidential real estate. The security for
nonresidential real estate loans currently in Home City's portfolio includes
retail stores, office buildings and business premises. At June 30, 1996, Home
City had a total of $7.3 million invested in nonresidential real estate loans,
which comprised 14.9% of Home City's total loans at such date. Of such amount,
$197,000 was delinquent and classified as substandard. See "THE BUSINESS OF HOME
CITY - Lending Activities -- Delinquent Loans, Nonperforming Assets and
Classified Assets."
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. If the cash flow on a nonresidential
property is reduced, for example, as leases are not obtained or renewed, the
borrower's ability to repay may be impaired. Home City has endeavored to reduce
such risk by evaluating the credit history and past performance of its
borrowers, the location of nonresidential real estate securing its loans, the
quality of the management and operation of such properties, the debt service
ratio, the quality and characteristics of the income stream generated by such
properties and the appraisals supporting the valuation of such properties.
Although management considers its allowance for loan losses to be sufficient to
cover anticipated losses on classified assets, the amount of any actual loss
could adversely affect Home City's net income and regulatory capital.
LIMITED MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The aggregate offering
price of the Common Shares is based upon an independent appraisal of Home City.
The appraisal is not a recommendation as to the advisability of purchasing
Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." No assurance can be given that persons purchasing Common Shares will
thereafter be able to sell such shares at a price at or above the offering
price.
HCFC has received approval to have the Common Shares quoted on The Nasdaq
SmallCap Market under the symbol "HCFC" upon the closing of the Conversion,
subject to certain conditions which HCFC and Home City believe will be
satisfied, although no assurance can be provided that the conditions will be
met. In connection with such approval, Webb has informed Home City that Keefe,
Bruyette & Woods, Inc., intends to make a market in the Common Shares. No
assurance can be given, however, that an active or liquid market for the Common
Shares will develop after the completion of the Conversion or, if such a market
does develop, that it will continue. Investors should consider, therefore, the
potentially illiquid and long-term nature of an investment in the Common Shares.
COMPETITION IN MARKET AREA
Home City faces strong direct competition in its market area for deposits
and loans from commercial banks, other savings associations, credit unions and
mortgage banking companies. Mortgage banking companies and other
non-FDIC-insured providers of financial services are not subject to the same
degree of regulatory oversight as savings associations and thus have greater
operational flexibility, without the costs and burdens associated with
compliance with OTS and FDIC regulations.
POSSIBLE INADEQUACY OF THE ALLOWANCE FOR LOAN LOSSES
Home City maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the lending area, past loss experience, possible losses arising
from specific problem assets and changes in the composition of the loan
portfolio. While the Board of Directors believes that it uses the best
information available to determine the amount of the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
income could be significantly adversely affected, if circumstances differ
substantially from the assumptions used in making the determination of the
amount of the allowance for loan losses.
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<PAGE> 14
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT HOME CITY'S EARNINGS
Home City is subject to extensive regulation by the OTS and the FDIC and is
periodically examined by such regulatory agencies to test compliance with
various regulatory requirements. As a savings and loan holding company, HCFC
will also be subject to regulation and examination by the OTS. Such supervision
and regulation of Home City and HCFC are intended primarily for the protection
of depositors and not for the maximization of shareholder value and may affect
the ability of HCFC to engage in various business activities. The assessments,
filing fees and other costs associated with reports, examinations and other
regulatory matters are significant and may have an adverse effect on HCFC's net
earnings. See "REGULATION."
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the Bank Insurance Fund (the "BIF") and the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the 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 such system, assessments may vary depending on the risk
the institution poses to its deposit insurance fund. Such risk level is
determined by reference to the institution's capital level and the FDIC's level
of supervisory concern about the institution.
Legislation to recapitalize the SAIF and to eliminate the significant
premium disparity between the SAIF and the BIF became effective September 30,
1996. The recapitalization plan provides for the payment of a special assessment
equal to $.657 per $100 of SAIF deposits held at March 31, 1995, in order to
increase SAIF reserves to the level required by law. On the basis of its $40.4
million in deposits at March 31, 1995, Home City will pay, by November 29, 1996,
an additional pre-tax assessment of $265,000. Such payment was recorded as an
expense and accounted for by Home City as of September 30, 1996. Earnings and
capital were, therefore, negatively affected for the quarter ended September 30,
1996, by an after-tax amount of approximately $175,000.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, Home City would have to convert to a national bank
charter, a state savings and loan association, state savings bank or state
commercial bank. In addition, Home City would be regulated under federal law as
a bank and, therefore, would become subject to the more restrictive activity
limitations imposed on national banks. See "REGULATION - FDIC Regulations --
Assessments."
CONTROLLING INFLUENCE OF MANAGEMENT AND ANTI-TAKEOVER PROVISIONS WHICH MAY
DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM PRICES
The Articles of Incorporation of HCFC and the ESOP and RRP contain certain
provisions that could deter or prohibit non-negotiated changes in the control of
HCFC and Home City. Such provisions include a restriction on the acquisition of
more than 10% of the outstanding shares of HCFC by any person during the
five-year period following the effective date of the Conversion, the ability to
issue additional common shares and a supermajority voting requirement for
certain transactions. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS
ON ACQUISITION OF HOME CITY AND HCFC AND RELATED ANTI-TAKEOVER PROVISIONS."
The Articles of Incorporation of HCFC provide that for five years after the
effective date of the Conversion, no person, except the ESOP, may acquire the
beneficial ownership of more than 10% of any class of outstanding equity
securities of HCFC. If such a prohibited acquisition occurs, the securities
owned by such person in excess of the 10% limit may not be voted on any matter
submitted to the shareholders of HCFC. Such provision may not be waived by
management. The ability of management or any other person to solicit revocable
proxies from shareholders and vote on behalf of such shareholders will not be
restricted by such 10% limit.
The Articles of Incorporation of HCFC also provide that if the Board of
Directors recommends that shareholders approve certain matters, including
mergers, acquisitions of a majority of the shares of HCFC or the transfer of
substantially all of the assets of HCFC, the affirmative vote of the holders of
only a majority of the voting shares of HCFC is required to approve such matter.
If, however, the Board of Directors recommends against the approval of any such
matter, the affirmative vote of the holders of at least 75% of the voting shares
of HCFC is required to approve such matters. The existence of such 75% provision
in the Articles of Incorporation of HCFC may make more difficult actions which
certain shareholders deem to be in their best interests.
-11-
<PAGE> 15
Officers and directors of HCFC are expected to purchase approximately 10.4%
of the Common Shares issued in connection with the Conversion at the mid-point
of the Valuation Range. In addition, the ESOP intends to purchase approximately
8% of the Common Shares issued in connection with the Conversion. The ESOP
trustee must vote shares allocated under the ESOP as directed by the
participants to whom the shares are allocated and vote unallocated shares in his
sole discretion in the best interest of the participants. The RRP may acquire
Common Shares in the open market or acquire authorized but unissued common
shares from HCFC following approval of the RRP by the shareholders of HCFC at a
meeting of the shareholders in an amount equal to up to 4% of the Common Shares
issued in connection with the Conversion. The RRP trustees, who are expected to
be two directors of HCFC, will vote shares awarded but not distributed under the
RRP in their discretion.
In view of the various provisions of the Articles of Incorporation and the
stock benefit plans of HCFC and Home City, as well as an employment agreement
which Home City proposes to enter into with its President, the aggregate
ownership by the ESOP, the RRP and the directors and officers of HCFC and Home
City may have the effect of facilitating the perpetuation of current management
and discouraging proxy contests and takeover attempts. Thus, officers and
directors, who are anticipated to be allocated or awarded shares under such
plans, will have a significant influence over the vote on such a transaction and
may be able to defeat such a proposal. The Boards of Directors of HCFC and Home
City believe that such provisions will be in the best interests of shareholders
by encouraging prospective acquirors to negotiate a proposed acquisition with
the directors. Such provisions could, however, adversely affect the market value
of the Common Shares or deprive shareholders of the opportunity to sell their
shares for premium prices.
Federal and Ohio law also restrict the acquisition of control of HCFC and
Home City. Any or all of these provisions may facilitate the perpetuation of
current management and discourage proxy contests or takeover attempts not first
negotiated with the Board of Directors. See "RESTRICTIONS ON ACQUISITION OF HOME
CITY AND HCFC AND RELATED ANTI-TAKEOVER PROVISIONS."
Regulations of the OTS also restrict the ability of any person to acquire
the beneficial ownership of more than 10% of any class of voting equity security
of Home City or HCFC without the prior written approval of or lack of objection
by the OTS. Such restrictions could restrict the use of revocable proxies. See
"RESTRICTIONS ON ACQUISITION OF HOME CITY AND HCFC AND RELATED ANTI-TAKEOVER
PROVISIONS."
POSSIBLE ADVERSE EFFECTS IF PREFERRED SHARES ARE ISSUED
The HCFC Articles of Incorporation authorize the issuance of one million
preferred shares. The Board of Directors is authorized to issue, without
shareholder approval, preferred shares and to fix the designations, preferences
or other special rights of such shares and the qualifications, limitations and
restrictions thereof. If preferred shares are issued, each holder of preferred
shares will be entitled to one vote for each preferred share held of record on
all matters submitted to a vote of shareholders. The issuance of preferred
shares and any conversion rights which may be specified by the Board of
Directors for the preferred shares could adversely affect the voting power of
holders of the Common Shares. In addition, if the purchase price of the
preferred shares is less than the book value of the Common Shares, the book
value of the Common Shares could be adversely affected. No preferred shares will
be issued in connection with the Conversion, and the Board of Directors has no
present intention to issue any of the preferred shares. See "DESCRIPTION OF
AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF HOME CITY AND HCFC AND
RELATED ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of HCFC -- Ability
of the Board of Directors to Issue Additional Shares."
RISK OF DELAYED OFFERING
HCFC and Home City expect to complete the Conversion by December 31, 1996.
It is possible, however, that adverse market, economic or other factors could
delay the completion of the Conversion. If the Community Offering is extended
beyond January 30, 1997, each subscriber will be given a notice of such delay
and the right to affirm, increase, decrease or rescind his subscription. In such
event, any person who does not affirmatively elect to continue his subscription
or elects to rescind his subscription will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription will
have the appropriate portion of his funds promptly refunded with interest. If
the Community Offering is extended, the cost of the Conversion could increase
and the valuation of Home City could change. Extensions of the Community
Offering will not extend past December 19, 1998.
-12-
<PAGE> 16
DILUTIVE EFFECT OF INCREASE IN VALUATION RANGE
The number of Common Shares to be sold in the Conversion may be as much as
15% greater than the maximum of the Valuation Range due to changes in market and
financial conditions following the commencement of the Offering. An increase in
the number of Common Shares sold will decrease net earnings per share and
shareholders' equity per share on a pro forma basis. See "CAPITALIZATION" and
"PRO FORMA DATA."
DILUTIVE EFFECT OF PURCHASES BY THE ESOP AND THE RRP AND OF ESTABLISHMENT OF THE
STOCK OPTION PLAN
If the ESOP is unable to purchase Common Shares in the Conversion due to an
oversubscription by Eligible Account Holders, the ESOP may purchase authorized
but unissued shares from HCFC or purchase in the open market a number of shares
equal to up to 8% of the Common Shares issued in connection with the Conversion.
If the ESOP shares are purchased from authorized but unissued shares,
shareholders will experience a dilution of their ownership interests of up to
7.4%. In addition, the RRP may purchase authorized but unissued shares from HCFC
or purchase in the open market a number of shares equal to 4% of the Common
Shares issued in connection with the Conversion. The purchase of authorized but
unissued shares by the RRP will have a dilutive effect on the ownership
interests of HCFC's shareholders of up to 3.85%. See "CAPITALIZATION" and "PRO
FORMA DATA." The exercise of stock options, assuming implementation of the Stock
Option Plan, will also have a dilutive effect on the ownership interests of
then-existing shareholders.
NEGATIVE EFFECT ON EARNINGS AND RETURN ON EQUITY OF CONVERSION PROCEEDS AND ESOP
AND RRP EXPENSE
Because the investment of the proceeds of the Conversion in loans will not
occur immediately upon receipt and because HCFC's total shareholders' equity
will increase significantly, the return on equity of HCFC may decrease
substantially for some time after the completion of the Conversion. Moreover,
net earnings and return on equity may be negatively affected by the purchase of
shares by the ESOP and the RRP and the exercise of stock options. HCFC will be
required to record as compensation expense the fair value of shares as they are
committed to be released to participants pursuant to the ESOP. In addition, if
the RRP is implemented, the fair value of the shares held by the RRP will be
recorded as compensation expense as the shares are earned. See "PRO FORMA DATA."
HOME CITY FINANCIAL CORPORATION
HCFC was incorporated under Ohio law in August 1996 at the direction of Home
City for the purpose of serving as the holding company for Home City. HCFC has
not conducted and will not conduct any business other than business related to
the Conversion prior to the completion of the Conversion. HCFC has received
approval of the OTS to acquire the capital stock to be issued by Home City in
the Conversion. Upon the consummation of the Conversion, HCFC will be a unitary
savings and loan holding company, the principal assets of which will initially
be the capital stock of Home City, a loan to the ESOP for the purchase of Common
Shares and the investments made with the proceeds retained by HCFC from the sale
of Common Shares. See "USE OF PROCEEDS." As a savings and loan holding company,
HCFC will be required to register with, and will be subject to examination and
supervision by, the OTS. See "REGULATION - OTS Regulations -- Holding Company
Regulation." The types of business activities in which a unitary savings and
loan holding company may engage are virtually unrestricted. See, however, "RISK
FACTORS - Legislation and Regulation Which May Adversely Affect Home City's
Earnings."
The office of HCFC is located at 63 West Main Street, Springfield, Ohio
45502-1309, and its telephone number is (513) 324-5736.
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
Home City is a federal mutual savings bank which has served the Springfield,
Ohio, area since 1925. Originally formed under the name "Home City Savings and
Loan Association," Home City changed its name to "Home City Federal Savings Bank
of Springfield" on May 1, 1996. As a federal savings bank chartered under the
laws of the United States, Home City is subject to supervision and regulation by
the OTS and the FDIC and is a member of the FHLB of Cincinnati. The deposits of
Home City are insured up to applicable limits by the FDIC in the SAIF. See
"REGULATION."
Home City is principally engaged in the business of making conventional
first mortgage loans secured by one- to four-family residential real estate and
nonresidential real estate located within Clark County, Ohio, and adjacent
counties and
-13-
<PAGE> 17
investing in U.S. Government agency obligations, interest-bearing deposits in
other financial institutions, mortgage-backed securities and municipal
securities. Home City also makes loans secured by multifamily real estate (over
four units) and construction, consumer and commercial loans. Loan funds are
obtained primarily from savings deposits, loan repayments and borrowings from
the FHLB of Cincinnati. See "THE BUSINESS OF HOME CITY - Lending Activities; and
Investment Activities."
Interest on loans and mortgage-backed securities is Home City's primary
source of income. The principal expense of Home City is interest paid on deposit
accounts. Operating results are dependent to a significant degree on the net
interest income of Home City, which is the difference between interest earned on
loans and mortgage-backed securities and interest paid on deposits. Like most
thrift institutions, Home City's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities. See "RISK FACTORS" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY."
Home City conducts business from its office at 63 West Main Street,
Springfield, Ohio 45502-1309. The telephone number of Home City is (513)
324-5736. See "THE BUSINESS OF HOME CITY."
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from the
sale of the Common Shares in connection with the Conversion based on the
Valuation Range:
<TABLE>
<CAPTION>
Maximum,
Minimum Mid-point Maximum As Adjusted
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross proceeds $6,120,000 $7,200,000 $8,280,000 $9,522,000
Less estimated expenses 357,000 372,000 387,000 404,000
---------- ---------- ---------- ----------
Total net proceeds $5,763,000 $6,828,000 $7,893,000 $9,118,000
========== ========== ========== ==========
</TABLE>
The net proceeds from the sale of the Common Shares may be outside the Valuation
Range, depending upon financial and market and regulatory conditions at the time
of the completion of the Offering. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold." The expenses are estimated assuming that (a) all of
the indicated number of Common Shares are sold in the Subscription Offering; (b)
the directors, officers and their Associates purchase 75,000 Common Shares; and
(c) the ESOP purchases 8% of the Common Shares sold. Actual expenses may be more
or less than estimated. See "THE CONVERSION - Plan of Distribution."
HCFC will retain 50% of the net proceeds from the sale of the Common Shares,
or approximately $3,414,000 at the mid-point of the Valuation Range, including
the value of a promissory note from the ESOP which HCFC intends to accept in
exchange for the issuance of Common Shares to the ESOP. Such proceeds will be
used to fund the RRP and will be invested in short-term and intermediate-term
government securities. The remainder of the net proceeds received from the sale
of the Common Shares, approximately $3,414,000 at the mid-point of the Valuation
Range, will be invested by HCFC in the capital stock to be issued by Home City
to HCFC as a result of the Conversion. Such investment will increase the
regulatory capital of Home City and will permit Home City to expand its lending
and investment activities and to enhance customer services.
Home City anticipates that such net proceeds initially will be invested in
short-term interest-bearing deposits in other financial institutions.
Eventually, however, Home City will attempt to use the net proceeds to originate
mortgage, consumer and other loans in Home City's market areas and may also use
the proceeds from the Conversion to expand operations through the establishment
of a branch office, which would include space for administrative operations.
Home City estimates that the cost of establishing a new branch would be
approximately $1.25 million, including land acquisition and construction costs.
Although HCFC and Home City could use the increase in capital which will result
from the Conversion to acquire other financial institutions or for HCFC to
repurchase its own outstanding shares, HCFC and Home City have no current plans
or agreements, written or oral, and are not negotiating, to acquire any other
institution and have no current plans for HCFC to repurchase any of its shares.
See "THE BUSINESS OF HOME CITY."
-14-
<PAGE> 18
MARKET FOR COMMON SHARES
There is presently no market for the Common Shares. The aggregate offering
price for the Common Shares is based upon an independent appraisal of Home City.
The appraisal is not a recommendation as to the advisability of purchasing
Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold." No assurance can be given that persons purchasing Common Shares will
thereafter be able to sell such shares at a price at or above the offering
price.
HCFC has received approval to have the Common Shares quoted on The Nasdaq
SmallCap Market under the symbol "HCFC" upon the closing of the Conversion,
subject to certain conditions which HCFC and Home City believe will be
satisfied, although no assurance can be provided that the conditions will be
met. In connection with such approval, Webb has informed Home City that Keefe,
Bruyette & Woods, Inc., intends to make a market in the Common Shares. No
assurance can be given, however, that an active or liquid market for the Common
Shares will develop after the completion of the Conversion or, if such a market
does develop, that such market will continue. Investors should consider,
therefore, the potentially illiquid and long-term nature of an investment in the
Common Shares. See "RISK FACTORS - Limited Market for the Common Shares."
DIVIDEND POLICY
The declaration and payment of dividends by HCFC will be subject to the
discretion of the Board of Directors of HCFC and will be based on the earnings
and financial condition of HCFC and general economic conditions. In an effort to
manage the capital of HCFC, the Board of Directors may determine that the
payment of a regular or special cash dividend or both may be prudent. No
assurance can be given that any dividend will be declared or that any dividend,
if declared, will continue in the future.
Other than earnings on the investment of the proceeds retained by HCFC, the
only source of income of HCFC will be dividends periodically declared and paid
by the Board of Directors of Home City on the common shares of Home City held by
HCFC. The declaration and payment of dividends by Home City to HCFC will be
subject to the discretion of the Board of Directors of Home City, to the
earnings and financial condition of Home City, to general economic conditions
and to federal restrictions on the payment of dividends by thrift institutions.
Under regulations of the OTS applicable to converted savings associations, Home
City will not be permitted to pay a cash dividend on its capital stock after the
Conversion if its regulatory capital would, as a result of the payment of such
dividend, be reduced below the amount required for the Liquidation Account or
the applicable regulatory capital requirements prescribed by the OTS. See "THE
CONVERSION - Principal Effects of the Conversion -- Liquidation Account" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HOME CITY - Liquidity and Capital Resources."
Home City may not pay a dividend unless such dividend also complies with a
regulation of the OTS limiting capital distributions by savings associations.
Capital distributions, for purposes of such regulation, 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. The capital
distribution regulation adopts a 3-tier classification of associations based
upon their capital immediately before and, on a pro forma basis, after giving
effect to the capital distribution. A tier 1 association is an association which
has capital immediately before and after giving effect to a proposed capital
distribution that is equal to or greater than the amount of its fully phased-in
capital requirement. A tier 2 association is an association which has capital
immediately before and after giving effect to a capital distribution which is
equal to or in excess of its minimum capital requirement, but is less than the
amount of its fully phased-in capital requirement. A tier 3 association is an
association which fails to meet its minimum capital requirement immediately
before or after giving effect to a capital distribution.
A tier 1 association may make capital distributions equal to up to the
higher of (1) 100% of its net earnings to date during the calendar year in which
the distribution is made, plus the amount that would reduce by one-half its
"surplus capital ratio" at the beginning of the calendar year or (2) 75% of its
net income over the most recent four-quarter period. The "surplus capital ratio"
is the percentage by which an association's capital-to-assets ratio exceeds Home
City's ratio of fully phased-in capital requirement to assets. A tier 2
association may make capital distributions up to 75% of its net earnings over
the most recent four-quarter period, if such association meets the current
risk-based capital standard. A tier 3 association may make capital distributions
only with the prior written approval of the Regional Director of the OTS or in
accordance with an approved capital plan.
-15-
<PAGE> 19
If an association meeting the tier 1 criteria has been notified by the OTS
that such association requires more than normal supervision, such association
will be treated as a tier 2 or tier 3 association, unless the OTS determines
that such treatment is not necessary to ensure its safe and sound operation.
Moreover, the OTS may prohibit any capital distribution otherwise permitted by
the regulation if the OTS determines that such distribution would constitute an
unsafe or unsound practice. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY - Liquidity and
Capital Resources."
At June 30, 1996, Home City met the fully phased-in capital requirement.
Other than the earnings on the investment of proceeds retained by HCFC, the only
source of income of HCFC will be dividends periodically declared and paid by the
Board of Directors of Home City on the common shares of Home City held by HCFC.
The payment of dividends by Home City will be subject to various regulatory
restrictions. On a pro forma basis, as of June 30, 1996, assuming (i) receipt by
Home City of $3.4 million of net conversion proceeds, (ii) the investment of
such net proceeds in assets having a risk weighting of 20% and (iii) the
establishment of a Liquidation Account in the amount of $5.4 million (the
regulatory capital of Home City at June 30, 1996), Home City would have $4.19
million available for the payment of dividends to HCFC. See "REGULATORY CAPITAL
COMPLIANCE."
CAPITALIZATION
Set forth below is the capitalization of Home City as of June 30, 1996, and
the consolidated pro forma capitalization of HCFC, as adjusted to give effect to
the sale of Common Shares based on the Valuation Range and estimated expenses. A
change in the number of Common Shares sold in the Conversion would materially
affect such pro forma capitalization. See "USE OF PROCEEDS" and "THE CONVERSION
- - Pricing and Number of Common Shares to be Sold."
<TABLE>
<CAPTION>
Pro forma capitalization of HCFC at June 30, 1996,
assuming the sale of:
-----------------------------------------------------------------
612,000 720,000 828,000 952,200
Home City's Common Common Common Common
historical Shares Shares Shares Shares
capitalization (offering (offering (offering (offering
at price of price of price of price of
June 30, 1996 $10 per share) $10 per share) $10 per share) $10 per share)
------------- -------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1) $47,174 $ 47,174 $ 47,174 $ 47,174 $ 47,174
======= ======== ======== ======== ========
Borrowings 2,903 2,903 2,903 2,903 2,903
======= ======== ======== ======== ========
Preferred shares, no par value:
authorized - 1,000,000 shares;
assumed outstanding - none -- -- -- -- --
Common Shares, no par value:
authorized - 5,000,000 shares;
assumed outstanding - as shown (2) -- -- -- -- --
Additional paid-in capital -- 5,763 6,828 7,893 9,118
Unrealized gain on securities 127 127 127 127 127
Less Common Shares acquired by the -- (490) (576) (662) (762)
ESOP (3)
Less Common Shares acquired by the RRP -- (245) (288) (331) (381)
(4)
Retained earnings (5) 5,271 5,271 5,271 5,271 5,271
------- -------- -------- -------- --------
Total capital and retained earnings $ 5,398 $ 10,426 $ 11,362 $ 12,298 $ 13,373
======= ======== ======== ======== ========
- ----------
<FN>
(1) Withdrawals from deposit accounts for the purchase of Common Shares have not
been reflected in these adjustments. Any deposit withdrawals will reduce pro
forma deposits by the amount of such withdrawals.
(2) The number of Common Shares to be issued will be determined on the basis of
the final valuation of Home City. See "THE CONVERSION - Pricing and Number
of Common Shares to be Sold." Common Shares assumed to be outstanding does
not reflect the issuance of any Common Shares reserved for issuance under
the Stock Option Plan. See "MANAGEMENT OF HOME CITY - Stock Option Plan."
(Footnotes continued on next page)
</TABLE>
-16-
<PAGE> 20
(3) Assumes that 8% of the Common Shares sold in connection with the Conversion
will be acquired by the ESOP trust, a separate entity, and that the funds
used to acquire such Common Shares will be borrowed by the ESOP trust from
HCFC, with repayment thereof secured solely by the Common Shares purchased
by the ESOP trust. Home City has agreed, however, to use its best efforts to
fund the ESOP based on future earnings, which best efforts funding will
reduce the total capital and retained earnings, as reflected in the table.
See "MANAGEMENT OF HOME CITY -Employee Stock Ownership Plan."
(4) Assumes the establishment of the RRP and its acquisition of Common Shares
equal to 4% of the shares sold in the Conversion. The pro forma table
assumes the Common Shares for the RRP will be purchased in the open market
at a price of $10 per share. The Board of Directors may elect, however, to
issue the RRP shares from authorized but unissued shares. In the event the
RRP shares are obtained from authorized but unissued shares or in the event
the RRP is not ratified by the shareholders of HCFC, pro forma shareholders'
equity would increase by $245,000, $288,000, $331,000 and $381,000 at the
minimum, mid-point, maximum and 15% above the maximum of the Valuation
Range, respectively. The issuance of shares to the RRP would have the effect
of diluting the percentage interest of existing shareholders by 3.85%.
(5) Retained earnings are substantially restricted. See "THE CONVERSION -
Principal Effects of the Conversion -- Liquidation Account" for information
concerning the Liquidation Account to be established in connection with the
Conversion and "TAXATION - Federal Taxation" for information concerning
restricted retained earnings for federal tax purposes.
-17-
<PAGE> 21
PRO FORMA DATA
Set forth below are the pro forma consolidated net earnings of HCFC for the
year ended June 30, 1996, and the pro forma shareholders' equity of HCFC at such
date, along with the related pro forma per share amounts, giving effect to the
sale of the Common Shares in connection with the Conversion. The computations
are based on the assumed issuance of 612,000 Common Shares (minimum of the
Valuation Range), 720,000 Common Shares (mid-point of the Valuation Range),
828,000 Common Shares (maximum of the Valuation Range) and 952,200 Common Shares
(15% above the maximum of the Valuation Range). See "THE CONVERSION - Pricing
and Number of Common Shares to be Sold." The pro forma data is based on the
following assumptions: (i) the sale of the Common Shares occurred at the
beginning of the periods and yielded the net proceeds indicated; (ii) such net
proceeds were invested by HCFC and Home City at the beginning of the specified
periods at 5.78%; (iii) no withdrawals from existing deposit accounts were made
to purchase the Common Shares; (iv) HCFC will accept a promissory note from the
ESOP in exchange for the issuance of Common Shares; and (v) the cash proceeds
retained by HCFC will be used to fund the RRP and, pending such investment, will
be invested in short-term and intermediate-term government securities. The
assumed return is based upon the market rate for FHLB 90-day deposits because
management intends to invest the initial cash proceeds in short-term
interest-bearing deposits with the FHLB. In calculating pro forma net earnings,
a statutory federal income tax rate of 34% has been assumed for the period,
resulting in an after-tax yield of 3.81%. In the opinion of management, the
assumed after-tax yield does not differ materially from the estimated after-tax
yield which will be obtained on the initial investment of the cash proceeds in
short-term, interest-bearing deposits and is viewed as being more relevant in
the current low interest rate environment than the use of an arithmetic average
of the fiscal year 1996 weighted average yield on interest-earning assets and
weighted average rates paid on deposits during such period. Management also
believes that utilization of savings withdrawals to fund purchases of Common
Shares would not have a material impact on the pro forma data presented.
NO ASSURANCE CAN BE PROVIDED THAT THE YIELDS OR RESULTS SET FORTH IN THE PRO
FORMA DATA WILL BE ACHIEVED ON INVESTMENT OF THE CONVERSION PROCEEDS. MOREOVER,
THE PRO FORMA NET EARNINGS AMOUNTS DERIVED FROM THE ASSUMPTIONS SET FORTH HEREIN
SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF OPERATIONS OF HCFC
THAT WOULD HAVE BEEN ATTAINED FOR ANY PERIOD IF THE CONVERSION HAD BEEN ACTUALLY
CONSUMMATED AT THE BEGINNING OF SUCH PERIOD. FURTHER, THE RATIO OF SHARE
OFFERING PRICE TO THE PRO FORMA BOOK VALUE IS NOT REPRESENTATIVE OF ANY
POTENTIAL PRICE APPRECIATION ON THE COMMON SHARES. NO EFFECT HAS BEEN GIVEN IN
THE PRO FORMA SHAREHOLDERS' EQUITY FOR ANY ASSUMED EARNINGS ON THE NET PROCEEDS
OF THE CONVERSION.
-18-
<PAGE> 22
<TABLE>
<CAPTION>
At or for the year ended June 30, 1996
-----------------------------------------------------------------------------------
612,000 720,000 828,000 952,200
Common Shares Common Shares Common Shares Common Shares
(offering price of (offering price of (offering price of (offering price of
$10 per share) $10 per share) $10 per share) $10 per share)(1)
------------------ ------------------ ------------------ -------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 6,120 $ 7,200 $ 8,280 $ 9,522
Less offering expenses and commissions (357) (372) (387) (404)
-------- -------- -------- --------
Estimated conversion proceeds 5,763 6,828 7,893 9,118
Less common shares acquired by ESOP (490) (576) (662) (762)
Less common shares acquired by RRP (245) (288) (331) (381)
-------- -------- -------- --------
Net cash proceeds $ 5,029 $ 5,964 $ 6,899 $ 7,975
======== ======== ======== ========
Consolidated net income:
Historical net income $ 514 $ 514 $ 514 $ 514
Pro forma income on net proceeds (2) 192 227 263 304
Pro forma ESOP adjustment (3) (46) (54) (62) (72)
Pro forma RRP adjustment (4) (32) (38) (44) (50)
-------- -------- -------- --------
Pro forma net income $ 628 $ 649 $ 671 $ 696
======== ======== ======== ========
Per share net income: (5)
Historical net income (6) $ .84 $ .71 $ .62 $ .54
Pro forma income on net proceeds (2) .32 .32 .32 .32
Pro forma ESOP adjustment (3) (.08) (.08) (.08) (.08)
Pro forma RRP adjustment (4) (.05) (.05) (.05) (.05)
-------- -------- -------- --------
Pro forma net income per share $ 1.03 $ 0.90 $ 0.81 $ 0.73
======== ======== ======== ========
Offering price to pro forma net income
per share ("P/E Ratio") 9.71X 11.11X 12.35X 13.70X
Shareholders' equity: (7)
Historical $ 5,398 $ 5,398 $ 5,398 $ 5,398
Estimated conversion proceeds 5,763 6,828 7,893 9,118
Less Common Shares acquired by:
ESOP (3) (490) (576) (662) (762)
RRP (4) (245) (288) (331) (381)
-------- -------- -------- --------
Pro forma shareholders' equity $ 10,426 $ 11,362 $ 12,298 $ 13,373
======== ======== ======== ========
Shareholders' equity per share:
Historical (6) $ 8.82 $ 7.49 $ 6.51 $ 5.66
Estimated conversion proceeds 9.42 9.48 9.53 9.58
Less Common Shares acquired by:
ESOP (8) (0.80) (0.80) (0.80) (0.80)
RRP (4) (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma shareholders' equity per share $ 17.04 $ 15.77 $ 14.84 $ 14.04
======== ======== ======== ========
Offering price as a percentage of pro
forma shareholders' equity per share 58.70% 63.37% 67.33% 71.20%
======== ======== ======== ========
- ----------
<FN>
(1) Reflects an increase in the number of shares which could occur due to an
increase in the Valuation Range of up to 15% to reflect changes in market
and financial conditions following the commencement of the Subscription and
Community Offerings.
(2) Pro forma net income is calculated using pro forma income earned on net cash
proceeds, as discussed above.
</TABLE>
(Footnotes continued on next page)
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<PAGE> 23
(3) It is assumed that 8% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP trust from HCFC, with repayment
thereof secured solely by the Common Shares purchased by the ESOP trust.
Home City intends to make contributions to the ESOP in amounts equal to the
principal and interest requirement of the debt. Home City's payment of the
ESOP debt is based upon equal installments of principal over a seven-year
period, plus interest. Interest income earned by HCFC on the ESOP debt
offsets the interest paid by Home City on the ESOP loan. Accordingly, only
the principal payments on the ESOP debt are recorded as an expense
(tax-effected) to HCFC on a consolidated basis. The amount borrowed is
reflected as a reduction of shareholders' equity. No reinvestment is assumed
on proceeds contributed to fund the ESOP. The ESOP expense has been computed
in accordance with the American Institute of Certified Public Accountants'
Statement of Position 93-6 ("SOP 93-6"), which requires recognition of
expense based upon shares committed to be released as security for the loan.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF HOME CITY Impact of New Accounting Standards." The
valuation of shares committed to be released is based upon the average
market value of the shares during the year, which for purposes of this
calculation was assumed to be equal to the $10 per share offering price. See
"MANAGEMENT OF HOME CITY -- Employee Stock Ownership Plan."
(4) Assumes the establishment of the RRP, which will require approval by the
shareholders of HCFC at a meeting to be held not sooner than six months
following the completion of the Conversion, its acquisition of Common Shares
equal to 4% of the shares sold in the Conversion and that one-fifth of such
Common Shares will be earned by participants in each of the first five years
following approval of the RRP. The pro forma table assumes the Common Shares
for the RRP will be purchased in the open market at a price of $10 per
share. The effect reported on pro forma consolidated net income includes the
expense related to the vested RRP shares as well as the reduction in income
due to a decline in cash proceeds available for investment. The Board of
Directors may elect, however, to issue to the RRP authorized but unissued
shares. In the event RRP shares are obtained from authorized but unissued
shares, pro forma net income per share would decrease $.05 at each level of
the Valuation Range. See "MANAGEMENT OF HOME CITY - Recognition and
Retention Plan and Trust." The issuance of shares to the RRP would have the
effect of diluting the percentage interest of existing shareholders by
3.85%. In the event the RRP is not approved by the shareholders of HCFC, pro
forma net income per share would increase $.05 at each level of the
Valuation Range. In the event RRP shares are obtained from authorized but
unissued shares or in the event the RRP is not ratified by shareholders, pro
forma book value per share would increase by $.40 per share at each level of
Valuation Range. No effect has been given to the shares reserved for
issuance under the Stock Option Plan.
(5) Per share amounts are based upon the weighted average number of shares
outstanding of 612,000, 720,000, 828,000 and 952,200 at the minimum,
mid-point, maximum and 15% above the maximum of the Valuation Range,
respectively. Per share amounts also reflect the effect of SOP 93-6.
(6) Historical per share amounts have been computed as if the Common Shares
expected to be issued in the Conversion had been outstanding during the
period or on the dates shown, but without any adjustments of historical net
income or historical retained earnings to reflect the investment of the
estimated net proceeds of the sale of shares in the Conversion or the
additional ESOP or RRP expense. At June 30, 1996, per share amounts are
based upon shares outstanding of 612,000, 720,000, 828,000 and 952,200 at
the minimum, mid-point, maximum and 15% above the maximum of the Valuation
Range, respectively.
(7) The effect of the Liquidation Account is not included in these computations.
For additional information concerning the Liquidation Account, see "THE
CONVERSION - Principal Effects of the Conversion -- Liquidation Account."
The amounts shown do not reflect the federal income tax consequences of the
potential restoration of the bad debt reserves to income for tax purposes,
which would be required in the event of liquidation. See "TAXATION - Federal
Taxation."
(8) Not intended to represent or suggest possible future appreciation or
depreciation of Common Shares.
-20-
<PAGE> 24
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
The following Summary Consolidated Statements of Income set forth
information concerning Home City for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Interest income:
Interest on loans $4,094 $3,344 $3,074
Interest on mortgage-backed 209 274 314
securities
Interest on investments and 204 217 154
------- ------- -------
deposits
4,507 3,835 3,542
Interest expense:
Interest on deposits 2,370 1,835 1,408
Interest on borrowing 172 107 38
-------- ------- --------
2,542 1,942 1,446
Net interest income 1,965 1,893 2,096
Provision for loan losses 50 109 113
--------- ------- -------
Interest income after provision for 1,915 1,784 1,983
loan losses
Noninterest income 58 9 12
Noninterest expense 1,216 998 923
------- ------- -------
Income before income tax 757 795 1,072
Income tax expense 243 240 367
-------- ------- -------
Net income $ 514 $ 555 $ 705
======= ====== ======
</TABLE>
-21-
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF HOME CITY
Home City is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in permanent mortgage
loans secured by one- to four-family residential and nonresidential real estate
located primarily within Clark County, Ohio, and adjacent counties and in U. S.
Government obligations, interest-bearing deposits in other financial
institutions, mortgage-backed securities, municipal securities and other
investments permitted by applicable law. Home City also originates loans for the
construction of one- to four-family residential real estate, loans secured by
multifamily real estate (over four units) and consumer and commercial loans.
ANALYSIS OF FINANCIAL CONDITION
GENERAL. Home City's assets totaled $55.7 million at June 30, 1996, an
increase of $7.1 million, or 14.7%, from $48.6 million at June 30, 1995. The
principal factor in such growth was an increase in loans receivable, offset by
decreases in mortgage-backed securities and cash and cash equivalents.
CASH AND CASH EQUIVALENTS, INVESTMENT SECURITIES, MORTGAGE-BACKED
SECURITIES AND FHLB STOCK. Cash and cash equivalents, investment securities,
mortgage-backed securities and FHLB stock decreased to $8.5 million at June 30,
1996, from $8.9 million at June 30, 1995. The decrease in cash and cash
equivalents and mortgage-backed securities at June 30, 1996, is directly related
to the increase in mortgage lending during the past several years. See "THE
BUSINESS OF HOME CITY - Lending Activities." Mortgage-backed securities include
Federal Home Loan Mortgage Corporation ("FHLMC") and Government National
Mortgage Association ("GNMA") securities. The decrease in mortgage-backed
securities occurred solely by repayments upon maturity. Home City did not sell
any mortgage-backed securities during the fiscal year ended June 30, 1996, 1995
or 1994. Investment securities are composed of U. S. Government and federal
agency securities, municipal securities, FHLMC common stock, an $18,000
investment in a joint venture and a $20,000 investment in a service corporation.
At June 30, 1996, all of Home City's investment securities were classified
as available-for-sale. During the three months ended December 31, 1995,
management reclassified certain investment securities, with total amortized
costs of $1.4 million at December 31, 1995, from held-to-maturity to
available-for-sale. Such securities had an unrealized gain of approximately
$6,000. The increase in the carrying value of the investment securities
portfolio reflects, in addition to such reclassification, maturities and
purchases of securities, as well as a $49,000 increase in the market value of
FHLMC stock held in the portfolio during the year.
LOANS RECEIVABLE. Net loans receivable equaled $45.2 million at June 30,
1996, an increase of $6.2 million, or 16.2%, from $39.0 million at June 30,
1995. Home City originated approximately $15.8 million in loans during the
fiscal year ended June 30, 1996. Principal payments during the same period were
approximately $8.8 million.
Such growth was primarily attributable to an increase in one- to
four-family real estate loans, which increase resulted from high loan demand in
Home City's market area. Of the $6.2 million in loan growth, $1.4 million
occurred in consumer lending. During the quarter ended December 31, 1995, Home
City expanded its loan product line to include consumer loans for other than
real estate related purchases. Management plans, however, to continue
emphasizing single-family residential lending, which has traditionally been Home
City's strength.
DEPOSITS. Loan growth during the fiscal year ended June 30, 1996, was
primarily funded by an increase of $6.2 million, or 15.2%, in savings deposits,
from $40.9 million at June 30, 1995, to $47.2 million at June 30, 1996. As the
interest rate environment changed during 1995 and 1996, impacting the rates paid
on Home City's deposits, customers moved their deposits from passbook accounts
into certificate accounts. As a result, total passbook accounts decreased
$939,000, or 8.9%, from $10.5 million at June 30, 1995, to $9.6 million at June
30, 1996. Customers also began to take advantage of new deposit product
offerings, namely NOW accounts and interest-bearing checking accounts. Deposit
balances in the one- to three-year and three- to five-year certificate
categories increased $500,000 and $1.8 million, respectively, at June 30, 1996,
compared to June 30, 1995, and at June 30, 1995, compared to June 30, 1994.
Short-term certificate accounts also increased $5.3 million at June 30, 1996,
compared to June 30, 1995. The change in the deposit mix did not significantly
affect Home City's interest rate risk at June 30, 1996. See "Asset and Liability
Management."
-22-
<PAGE> 26
Total equity increased $513,000, from $4.9 million at June 30, 1995, to
$5.4 million at June 30, 1996. Such increase resulted from net income of
$514,000 and a $1,000 decrease in unrealized gains (net of deferred taxes) in
fiscal 1996.
COMPARISON OF RESULTS OF OPERATIONS
GENERAL. Home City's net income is primarily dependent upon net interest
income, which is a function of the difference, or spread, between the average
yield earned on loans and other investments and the average rate paid on
deposits and advances, as well as the related amounts of such assets and
liabilities. The interest rate spread is affected by economic and competitive
factors that influence interest rates, loan demand and deposit flows. Home City,
like other financial institutions, is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
times, or on a different basis, than its interest-earning assets. See "RISK
FACTORS Interest Rate Risk" and "Asset and Liability Management."
Home City had net income of $514,000 for the fiscal year ended June 30,
1996, compared to $555,000 in fiscal 1995 and $705,000 in fiscal 1994. The
decrease in net income from June 30, 1995, to June 30, 1996, was primarily
attributable to an increase of $218,000 in other expenses, offset by an increase
of $72,000 in net interest income and a decrease in provision for loan losses
from $109,000 to $50,000.
The decrease in net income during the fiscal year ended June 30, 1995, was
primarily attributable to a $203,000 decrease in net interest income and an
increase of $75,000 in other expenses, which were partially offset by a
reduction of $127,000 in federal income taxes.
NET INTEREST INCOME. Home City's net interest income increased $72,000 for
the fiscal year ended June 30, 1996, compared to the fiscal year ended June 30,
1995, and decreased $203,000 for the fiscal year ended June 30, 1995, compared
to the same period in 1994. The increase in fiscal 1996 was primarily
attributable to the increase in loan volume exceeding the increase in deposit
volume, even though the interest rate spread decreased from 3.95% to 3.42%. The
decrease in the interest rate spread was due primarily to the increasing
interest cost on certificates of deposit and FHLB advances. The increases in
deposits and FHLB advances, combined with the increases in deposit interest
rates, resulted in an increase in the average rate paid on deposits from 4.81%
at June 30, 1995, to 5.37% at June 30, 1996, and on FHLB advances from 6.57% to
6.66% at such dates. The average yield on interest-earning assets increased
slightly, from 8.83% during the fiscal year ended June 30, 1995, to 8.86% in
fiscal 1996, due primarily to the increased demand to fund loans, both new and
existing, at lower rates and a change in the mix of interest-earning assets.
The decrease in net interest income for the fiscal year ended June 30,
1995, compared to fiscal 1994, was primarily caused by a decrease in the yields
on interest-earning assets from 8.92% to 8.83%. The decrease in such yields was
due to lower market interest rates, coupled with increasing demand to fund
loans. The decrease in asset yields was accompanied by an increase in the cost
of deposits from 3.98% to 4.81% and a decrease in the cost of borrowed funds
from 8.74% to 6.57%. The decrease in net interest income was partially offset by
a decrease of $4,000 in the provision for loan losses.
Gross interest income increased $672,000, or 17.5%, for the fiscal year
ended June 30, 1996, compared to the fiscal year ended June 30, 1995, due
primarily to the average loan balance increasing by $8.6 million, or 24.4%. The
average yield on loans was 9.37% and 9.52% in fiscal 1996 and 1995,
respectively. Home City's loan portfolio is composed primarily of loans secured
by real estate, with either fixed or adjustable interest rates. At June 30,
1996, approximately 48% of the loans outstanding had adjustable interest rates,
providing for repricing at one, three or ten year (a fixed rate for ten years
followed by one-year adjustment periods) intervals. Home City's interest income
on interest-bearing deposits, investment securities, and mortgage-backed
securities decreased by $78,000, or 15.9%, for the fiscal year ended June 30,
1996, compared to the same period in 1995. Such decrease resulted from
reallocation of investable funds to loan originations, due primarily to
increased loan demand.
Gross interest income increased $293,000, or 8.3%, for the fiscal year
ended June 30, 1995, compared to the same period in 1994, due primarily to a
$4.8 million, or 15.9%, increase in the average outstanding loan balances. Of
such increase in interest income, $468,000 was attributable to an increase in
loan volume and $288,000 was the result of an increase in interest-bearing
deposits, primarily for liquidity purposes. Such increases were offset by a
$218,000 decrease in interest income caused by a decrease in the loan portfolio
yield to 9.52% from 10.14%, and further offset by decreases of $211,000 and
$590,000 in investments and mortgage-backed securities, respectively.
-23-
<PAGE> 27
Total interest expense increased $600,000, or 30.9%, for the fiscal year
ended June 30, 1996, compared to the fiscal year ended June 30, 1995, and
increased $496,000, or 34.3%, for fiscal 1995, compared to fiscal 1994. The
increase in fiscal 1996 was primarily attributable to a $6.9 million increase in
average interest-bearing liabilities and an increase in the weighted average
interest rate to 5.44% in fiscal 1996 from 4.88% in fiscal 1995. The increase in
the weighted average rate can be attributed to an increase in certificate
account rates to 6.19% from 5.65% in fiscal 1996, compared to fiscal 1995, as a
result of competitive rates offered throughout the year and special rates
offered to obtain funds for loans. The $496,000 increase in fiscal 1995,
compared to fiscal 1994, was attributable to rising interest rates and rising
interest-bearing liability volume. Average deposits increased $2.8 million and
advances increased $1.2 million in fiscal 1995, compared to fiscal 1994. The
weighted average interest rate on all interest-bearing liabilities also
increased in fiscal 1995, to 4.88% from 4.04% in fiscal 1994.
PROVISION FOR LOAN LOSSES. Home City maintains an allowance for loan losses
account which, in management's judgment, is adequate to absorb reasonably
foreseeable losses inherent in the loan portfolio. See "THE BUSINESS OF HOME
CITY - Lending Activities -- Allowance for Loan Losses." While management
utilizes its best judgment and information available, the ultimate adequacy of
the allowance is dependent upon a variety of factors, including the performance
of Home City's loan portfolio, the economy, changes in real estate values and
interest rates and regulatory requirements regarding asset classifications. The
provision for loan losses is determined by management as the amount to be added
to the allowance for loan losses, after net charge-offs have been deducted, to
bring the allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio in accordance with generally accepted accounting
principles ("GAAP"). The amount of the provision is based on management's
regular review of the loan portfolio and consideration of such factors as
historical loss experience, general prevailing economic conditions, changes in
the size and composition of the loan portfolio and considerations relating to
specific loans, including the ability of the borrower to repay the loan and the
estimated value of the underlying collateral. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
Home City's allowance for loan losses. Such agencies may require Home City to
provide additions to the allowance based on judgments different from those of
management. Although management uses the best information available, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory, and other conditions that may be beyond Home City's control. There
can be no assurance that the amount of past or future provisions for loan losses
or the balance of the allowance for loan losses account will be adequate to
absorb actual loan losses in the future.
Home City had net charge-offs of $7,000, $19,000 and $82,000 during the
fiscal years ended June 30, 1996, 1995 and 1994, respectively. Home City's
charge-off history is a product of a variety of factors, including Home City's
underwriting guidelines and the composition of its loan portfolio. Loans secured
by real estate make up 96% of Home City's loan portfolio, and loans secured by
first mortgages on one- to four-family residential real estate make up 66% of
total loans at June 30, 1996. Such loans typically present less risk to a lender
than loans which are not secured by real estate. Substantially all of Home
City's loans are secured by properties in its primary market area. The provision
for loan losses was $50,000, $109,000 and $113,000 for the fiscal years ended
June 30, 1996, 1995, and 1994, respectively. The ratio of nonperforming loans to
total loans increased to 0.54% in fiscal 1996 from 0.53% in fiscal 1995,
following an increase from 0.11% in fiscal 1994. At June 30, 1996, 1995, and
1994, respectively, Home City had ratios of allowance for loan losses to total
loans of 0.80%, 0.82% and 0.74% and ratios of allowance for loan losses to
nonperforming loans of 146.56%, 154.11% and 673.53%. Due to low ratios of
nonperforming loans to total loans, low historical charge-offs and low
delinquency history, provisions of $109,000 and $113,000 were made in 1995 and
1994. Primarily as a result of the recent addition of consumer installment loan
products to Home City's product line and the greater risk to a lender inherent
in consumer lending, compared to loans secured by real estate, management
determined that a $50,000 provision for loan losses was prudent for the year
ended June 30, 1996.
At June 30, 1996, Home City had no real estate owned and acquired through
foreclosure.
OTHER INCOME. Other income increased by $49,000, or 544.4%, in fiscal 1996,
compared to fiscal 1995, and decreased $3,000, or 25.0%, in fiscal 1995,
compared to fiscal 1994. An increase in the cash surrender value of life
insurance policies which Home City maintains on four directors to fund a
deferred compensation plan for directors' fees accounted for $46,000 of the
total increase in fiscal 1996. Service charge income also increased by $7,000
and other miscellaneous income decreased by $4,000 during fiscal 1996. The
$3,000 decrease in fiscal 1995 was attributable to a $4,000 decline in
miscellaneous income, offset by a $1,000 increase in service charge income.
OTHER EXPENSES. Salaries and employee benefits expenses increased $134,000,
or 33.7%, for the year ended June 30, 1996, compared to the year ended June 30,
1995, as a result of the adoption in September 1995 of a deferred
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<PAGE> 28
compensation plan for directors' fees, an increase in Home City's required
payment toward the funding of a multi-employer pension plan due to such pension
plan no longer being overfunded, as it was in 1995 and 1994, staff expansion and
normal pay raises of 2% to 3%. Federal deposit insurance premiums increased
$13,000, to $96,000, in fiscal 1996, primarily as a result of an increase in
Home City's deposit base. State franchise taxes increased by 14.3%, or $9,000,
in fiscal 1996, compared to fiscal 1995, as a result of earnings and the related
equity growth. Fees paid to professionals for legal, tax accounting and general
management consulting increased $27,000, or 32.5%, during fiscal 1996. A number
of such professional fees were associated with Home City's product and service
expansion. Compensation and benefits expenses increased by $87,000, or 28.0%,
for the fiscal year ended June 30, 1995, compared to the same period in 1994, as
a result of staff expansion, increases in profit sharing bonus payments and
normal wage increases. State franchise taxes increased $10,000 in fiscal 1995,
compared to fiscal 1994, as a result of earnings and equity growth and occupancy
and equipment expenses decreased $16,000, or 13.3%. Management expects that Home
City will experience some increase in non-interest expense relating to
compliance with securities laws, ESOP and RRP expenses, and other monetary
consequences of the Conversion. With the exception of expenses associated with
the ESOP and RRP, such expenses cannot be quantified at this time, although
management does not expect that such expenses will have a material effect on
non-interest expenses. See "PRO FORMA DATA."
INCOME TAX EXPENSE. Effective January 1, 1993, Home City adopted SFAS
109, "Accounting for Income Taxes." The cumulative effect of the change in
accounting for income taxes was immaterial to fiscal 1994 and 1993 income tax
expense. Federal income tax expense increased $3,000, or 1.3%, in fiscal 1996
compared to fiscal 1995. Federal income tax expense decreased by $127,000, or
34.6%, in fiscal 1995 compared to fiscal 1994, due to a decrease in income
before federal income taxes of $277,000, or 25.8%. The effective tax rate of
Home City was 32.1% in 1996, 30.2% in 1995 and 34.2% in 1994.
YIELDS EARNED AND RATES PAID. The net interest rate spread decreased
from 3.95% for the fiscal year ended June 30, 1995, to 3.42% for the fiscal year
ended June 30, 1996. The yield on average interest-earning assets remained
almost constant, increasing only 3 basis points, from 8.83% for fiscal 1995 to
8.86% for fiscal 1996, primarily as a result of loans receivable yielding less
in fiscal 1996 than in fiscal 1995, even though loan volume increased. The
decrease in the interest rate spread was caused by an increase in the cost of
funds, primarily due to an increase in certificate account rates from 5.65% in
fiscal 1995 to 6.19% in fiscal 1996. The interest rate spread decreased from
4.88% in fiscal 1994 to 3.95% in fiscal 1995. The yield on average
interest-earning assets decreased from 8.92% in fiscal 1994 to 8.83% in fiscal
1995, primarily as a result of a decrease in the yield on loans receivable. The
average rate paid on deposits increased from 3.98% to 4.81% during the same
period, as a result of an increase in certificate account rates. The average
rate paid on advances decreased from 8.74% to 6.57% during the same period. The
net interest margin for the year ended June 30, 1996, decreased to 3.86% from
5.28% for the year ended June 30, 1994.
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<PAGE> 29
The following table presents certain information relating to Home City's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of customer deposits for the periods indicated. Such
yields and costs are derived by dividing annual income or expense by the average
monthly balance of interest-earning assets or customer deposits, respectively,
for the years presented. Average balances are derived from daily balances, which
include nonaccruing loans in the loan portfolio, net of the allowance for loan
losses.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1996 1995 1994
----- ----- ----
Average Interest Average Interest Average Interest
outstandingearned/ Yield/ outstandingearned/ Yield/ outstanding earned/ Yield/
PAID RATE RATE BALANCE RATE
BALANCE BALANCE PAID PAID
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 1,373 $ 61 4.44% $ 1,344 $ 72 5.36% $ 1,233 $ 51 4.14%
Investment securities 2,396 143 5.97 2,996 145 4.84 3,395 103 3.03
Mortgage-backed securities 3,367 209 6.21 3,947 274 6.94 4,753 314 6.61
Loans receivable (1) 43,711 4,094 9.37 35,139 3,344 9.52 30,317 3,074 10.14
------ ------ ------- ------ ------- ------
Total interest-earning assets 50,847 4,507 8.86 43,426 3,835 8.83 39,698 3,542 8.92
Non-interest-earning assets:
Cash and amounts due from
depository institutions 742 6721 131
Less: Allowance for loan losses (320) (283) (213)
Premises and equipment, net 829 468 440
Other nonearning assets 829 575 506
------- ------- -------
Total assets $52,577 $44,213 $40,562
======= ======= =======
Interest-bearing liabilities:
NOW accounts $ 146 $ 2 1.37% $ - $ - - $ $ - -
-
Money market accounts 48 1 2.08 - - - - - -
Passbook savings accounts 9,748 251 2.57 12,678 395 3.12 18,756 609 3.25
Certificates of deposit 34,189 2,116 6.19 25,504 1,440 5.65 16,629 799 4.80
-------- ------- -------- ------ -------- ------ -----
Total deposits 44,131 2,370 5.37 38,182 1,835 4.81 35,385 1,408 3.98
FHLB advances 2,582 172 6.66 1,628 107 6.57 38 8.74
-------- ------- ------ --------- ------ ------ ------- ------ -----
435
Total interest-bearing 46,713 2,542 5.44 39,810 1,942 4.88 35,820 1,446 4.04
liabilities
Non-interest-bearing liabilities 842 467
-------- --------
650
Total liabilities 47,555 40,277 36,470
Unrealized gains on securities 109 32 -
Retained earnings 4,913 4,549
--------- ---------
4,092
Total liabilities and retained $52,577 $44,858 $40,562
======= ======= =======
earnings
Net interest income; net interest $1,965 3.42% $1,893 3.95% $2,096 4.88%
====== ====== ====== ===== ====== =====
rate spread
Net interest margin (net interest
income as a percent of average 3.86% 4.36% 5.28%
====== ===== =====
interest-earning assets)
Average interest-earning assets to
interest-bearing liabilities 108.85% 109.08% 110.83%
====== ===== ======
- ------------------------------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
</TABLE>
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<PAGE> 30
The following table sets forth, for the periods indicated, the weighted
average yields earned on Home City's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities, the interest rate
spread and the net interest margin on interest-earning assets. Such yields and
costs are derived by dividing income or expense by the average balances of
assets or liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
AT JUNE 30, 1996 1996 1995 1994
---------------- ------ ----- ------
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio 9.26% 9.37% 9.52% 10.14%
Weighted average yield on mortgage-backed securities 6.69 6.21 6.94 6.61
Weighted average yield on investment securities 6.51 5.97 4.84 3.03
Weighted average yield on interest-bearing deposits 3.08 4.44 5.36 4.14
Weighted average yield on all interest-earning assets 8.76 8.86 8.83 8.92
Weighted average interest rate paid on all
interest-bearing liabilities 5.48 5.44 4.88 4.04
Interest rate spread (spread between weighted average
interest rate on all interest-bearing assets and
all interest-bearing liabilities) 3.28 3.42 3.95 4.88
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.80 3.86 4.36 5.28
</TABLE>
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 Home City's interest income and expense during the
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii) total
changes 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,
--------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
--------------------------------- ----------------------------
Increase Increase
(decrease) (decrease)
due to due to
------------------- --------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(In thousands)
Interest income attributable to:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 2 $ (13) $ (11) $ 5 $ 16 $ 21
Investment securities (29) 27 (2) (12) 54 42
Mortgage-backed securities (40) (25) (65) (53) 13 (40)
Loans receivable 816 (66) 750 488 (218) 270
---- ------ ---- ---- ----- ------
Total interest income 749 (77) 672 428 (135) 293
---- ------ ---- ---- ----- ------
Interest expense attributable to:
NOW accounts 2 - 2 - - -
Money market accounts 1 - 1 - - -
Passbook savings accounts (91) (53) (144) (197) (17) (214)
Certificates of deposit 491 185 676 426 215 641
Borrowed funds 63 2 65 104 (35) 69
----- -------- ----- ----- ------- -------
Total interest expense 466 134 600 333 163 496
---- ------ ---- ----- ------ ------
Increase (decrease) in net
interest income $283 $(211) $ 72 $ 95 $(298) $(203)
==== ===== ===== ==== ===== =====
</TABLE>
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<PAGE> 31
ASSET AND LIABILITY MANAGEMENT
Home City, 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, Home City uses the NPV methodology recently adopted
by the OTS as part of its capital regulations. Although Home City is not
currently subject to the NPV regulation because such regulation does not apply
to institutions with less than $300 million in assets and risk-based capital in
excess of 12%, the application of the NPV methodology may illustrate Home City's
interest rate risk.
Generally, NPV is the discounted economic 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. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the economic value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital. See "Liquidity and
Capital Resources."
At June 30, 1996, 2% of the economic value of Home City's assets was
approximately $1.2 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $1.6 million at June 30, 1996, Home City
would have been required to deduct approximately $200,000 (half of the
approximate $400,000 difference) from its capital in determining whether Home
City met its risk-based capital requirement. Regardless of such reduction,
however, Home City's risk-based capital at June 30, 1996, would still have
exceeded the regulatory requirement by approximately $ 3.0 million.
Presented below, as of June 30, 1996, is an analysis of Home City's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates. The table also
contains the policy limits set by the Board of Directors of Home City as the
maximum change in NPV that the Board of Directors deems advisable in the event
of various changes in interest rates. Such limits have been established with
consideration of the dollar impact of various rate changes and Home City's
strong capital position.
As illustrated in the table, Home City'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. As a result, in a rising
interest rate environment, the amount of interest Home City would receive on its
loans would increase relatively slowly as loans are slowly prepaid and new loans
at higher rates are made. Moreover, the interest Home City would pay on its
deposits would increase rapidly because Home City's deposits generally have
shorter periods to repricing. Because Home City has not originated loans in
accordance with traditional secondary market guidelines, the sale of fixed-rate
loans may be difficult. In addition, increases in interest rates can also result
in the flow of funds away from savings institutions into direct investments or
other investment vehicles, such as mutual funds, which may pay higher rates of
return than savings institutions. Assumptions used in calculating the amounts in
this table are OTS assumptions.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------
Change in interest rate Board limit $ change % change
(BASIS POINTS) % CHANGE IN NPV IN NPV
-------------- -------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 (50)% $(3,482) (52)%
+300 (35) (2,562) (38)
+200 (25) (1,643) (25)
+100 (10) (772) (12)
0 0 0 0
-100 10 573 9
-200 25 918 14
-300 35 1,394 21
-400 50 1,986 30
</TABLE>
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<PAGE> 32
The NPV table indicates that at each 100 basis point increment, the
change in Home City's NPV that would have been caused by an increase in interest
rates would have exceeded the policy limits set by the Board of Directors. The
Board of Directors will consider the June 30, 1996, analysis and will factor
such information into its decisions in adjusting the pricing of loans and
deposits in the future.
As with any method of measuring interest rate risk, however, 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.
If interest rates continue to rise from recent levels, Home City's net
interest income will be negatively affected. Moreover, rising interest rates may
negatively affect Home City's earnings due to diminished loan demand.
LIQUIDITY AND CAPITAL RESOURCES
Home City's liquidity, primarily represented by cash equivalents, is a
result of its operating, investing and financing activities. These activities
are summarized below for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net income $ 514 $ 555 $ 705
Adjustments to reconcile net income to net cash from
operating activities 29 43 50
-------- ------- --------
Net cash provided by operating activities 543 598 755
Net cash provided by (used in) investing activities (7,585) (7,522) (97)
Net cash provided by (used in) financing activities 6,508 8,314 (1,908)
------ ------ ------
Net change in cash and cash equivalents (534) 1,390 (1,250)
Cash and cash equivalents at beginning of period 2,377 987 2,237
------ ------- ------
Cash and cash equivalents at end of period $1,843 $2,377 $ 987
====== ====== =======
</TABLE>
Home City's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. Home City also has the ability to borrow from the FHLB
of Cincinnati. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions and competition. Home City maintains investments in liquid assets
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/liability management program. In the ordinary course
of business, part of such liquid investments portfolio is composed of deposits
at correspondent banks. Although the amount on deposit at such banks often
exceeds the $100,000 limit covered by FDIC insurance, Home City monitors the
capital of such institutions to ensure that such deposits do not expose Home
City to undue risk of loss.
OTS regulations presently require Home City to maintain an average
daily balance of investments in United States Treasury, federal agency
obligations and other investments having maturities of five years or less in an
amount equal to 5% of the sum of Home City'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 Home City may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At June 30, 1996, Home
City's regulatory liquidity ratio was 8.45%. At such date, Home City had
commitments to originate loans totaling $1.3 million and no commitments to
purchase or sell loans. Home City considers its liquidity and capital reserves
sufficient to meet its outstanding short and long-term needs. See Note O of the
Notes to the Consolidated Financial Statements.
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<PAGE> 33
Home City is required by applicable law and regulations to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement. See "REGULATION - OTS Regulations -- Regulatory Capital
Requirements." Home City exceeded all of its capital requirements at June 30,
1996, June 30, 1995, and June 30, 1994.
Savings associations are required to maintain "tangible capital" of not
less than 1.5% of such association's adjusted total assets. Tangible capital is
defined in OTS regulations as core capital and intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to increase such requirement to 4% to 5%, except for those
associations with the highest examination rating and acceptable levels of risk.
See "REGULATION - OTS Regulations -- Regulatory Capital Requirements."
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Home City includes a general loan loss allowance of
$362,000 at June 30, 1996.
The following table summarizes Home City's regulatory capital
requirements and actual capital (see Note N of the Notes to Financial Statements
for a reconciliation of capital under GAAP and regulatory capital amounts) at
June 30, 1996.
<TABLE>
<CAPTION>
EXCESS OF ACTUAL
CAPITAL OVER CURRENT
ACTUAL CAPITAL CURRENT REQUIREMENT REQUIREMENT APPLICABLE
-------------- ------------------- ----------- ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ASSET TOTAL
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital $5,271 9.48% $ 834 1.5% $4,437 7.98% $55,585
Core Capital 5,271 9.48 1,688 3.0 3,603 6.48 55,585
Risk-based Capital 5,633 18.77 2,400 8.0 3,233 10.77 29,999
</TABLE>
For information concerning regulatory capital on a pro forma basis
after the Conversion, see "REGULATORY CAPITAL COMPLIANCE."
At June 30, 1996, Home City had no material commitments for capital
expenditures.
SAIF ASSESSMENT
Home City, a SAIF-insured institution, is subject to regulation by the
OTS and the FDIC. The FDIC is authorized to establish different annual
assessment rates for deposit insurance for members of the BIF and the SAIF.
Legislation to recapitalize the SAIF and eliminate the significant premium
disparity between the SAIF and the BIF became effective September 30, 1996. The
recapitalization plan provides for the payment by November 29, 1996, of a
special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995.
Based on its $40.4 million in deposits at March 31, 1995, Home City will pay an
additional assessment of $265,000. The payment of the assessment was recorded as
an expense as of September 30, 1996, reducing capital and earnings for the three
months ended September 30, 1996, by an after-tax amount of approximately
$175,000.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming all savings associations have become
banks. It is expected, therefore, that the federal thrift charter or the
separate regulation of thrifts will be eliminated. As a result, Home City would
be regulated under federal law as a bank, and become subject to the more
restrictive activity limitations imposed on national banks. See "RISK FACTORS
Legislation and Regulation Which May Adversely Affect Home City's Earnings" and
"REGULATION - FDIC Regulations -- Assessments."
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<PAGE> 34
IMPACT OF NEW ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which revised the accounting
treatment, classification and carrying value of investment securities. This new
accounting standard results in adjusting certain investment securities to market
value. Under SFAS No. 115, investment securities are classified for balance
sheet purposes based on whether such securities are either held in trading
accounts, available for sale or strictly to be held to maturity. Under the new
standard, trading account securities are marked to market and the corresponding
unrealized gains and losses are reflected in income. Investment securities
"available for sale" are adjusted to market value with the corresponding
unrealized gain or loss shown as an adjustment to shareholders' equity net of
deferred income taxes. Investment securities earmarked to be held to maturity
are carried at amortized cost. Home City adopted SFAS No. 115 for the fiscal
year beginning July 1, 1994. The effect of adoption was to initially increase
retained earnings by approximately $91,000 on July 1, 1994, representing the
unrealized market value appreciation of Home City's securities, net of
applicable deferred federal income taxes. As of June 30, 1996, the amount of
unrealized gains on securities designated as available for sale had increased to
approximately $127,000, which is reflected in Home City's equity accounts.
In November 1995, the FASB issued a "Special Report" on implementation
of SFAS No. 115 (the "Special Report"). The Special Report allowed an entity to
reclassify securities, including held-to-maturity debt securities, without
calling into question the intent of the entity to hold debt securities to
maturity in the future. Any transfers from the held-to-maturity category to an
available-for-sale classification would result in unrealized gains or losses
being recognized as a separate component of equity, net of related tax effects.
Pursuant to the provisions of the Special Report, on December 31, 1995, Home
City's management transferred approximately $1.4 million of securities to an
available-for-sale classification.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which further clarifies the accounting treatment,
classification and valuation of impaired loans. SFAS No. 114, as amended by SFAS
No. 118 in December 1994 as to certain income recognition and financial
statement disclosure provisions, will result in applying discounted cash flow
analysis and other valuation techniques to impaired or other nonperforming loans
as those terms are defined in the Statement. Based upon the composition of Home
City's loan portfolio, SFAS No. 114 did not have a material effect on Home
City's financial position at the implementation date of October 1, 1995.
In November 1993, the American Institute of Certified Public
Accountants issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." SOP 93-6 addresses the accounting for shares of stock issued to
employees by an employee stock ownership plan ("Employee Plan"). SOP 93-6
requires that the employer record compensation expense in an amount equal to the
fair value of shares committed to be released from the Employee Plan to
employees. SOP 93-6 is effective for fiscal years beginning after December 31,
1993, and relates to shares purchased by an Employee Plan after December 31,
1992. Assuming the Common Shares appreciate in value over time, the adoption of
SOP 93-6 will likely increase compensation expense relative to the ESOP, as
compared with prior guidance which required the recognition of compensation
expense based on the cost of shares acquired by the ESOP. However, the amount of
the increase has not been determined as the expense will be based on the fair
value of the shares committed to be released to employees, which is not yet
determinable.
In December 1994, the Accounting Standards Division of the AICPA
approved SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties."
SOP 94-6 requires disclosures in the financial statements beyond those now being
required or generally made in the financial statements about the risks and
uncertainties existing as of the date of those financial statements in the
following areas: nature of operation, use of estimates in the preparation of
financial statements, certain significant estimates, and current vulnerability
due to certain concentrations. The standard is effective for financial
statements issued for fiscal years ending after December 15, 1995. The
implementation of SOP 94-6 has not had a significant impact on the financial
statements of Home City.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of."
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. The standard requires an impairment loss to be recognized
when the carrying amount of the asset exceeds the fair value of the asset. The
fair value of an asset is the amount at which the asset could be bought or sold
in a current transaction between willing parties, that is, other than in a
forced liquidation sale. An entity that recognizes an impairment loss shall
disclose additional information in the financial statements related to the
impaired asset. All long-lived assets and certain identifiable intangibles to be
disposed of and for which management has committed to a plan to dispose of the
assets, whether by sale or abandonment, shall be reported at the lower of the
carrying
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<PAGE> 35
amount or fair value less cost to sell. Subsequent revisions in estimates of
fair value less cost to sell shall be reported as adjustments to the carrying
amount of assets to be disposed of, provided that the carrying amount of the
asset does not exceed the carrying amount of the asset before an adjustment was
made to reflect the decision to dispose of the asset. The statement requires
additional disclosure in the footnotes regarding assets to be disposed of. SFAS
No. 121 is effective for fiscal years beginning after December 15, 1995. SFAS
No. 121 has not had and is not expected to have a material effect on Home City's
financial condition or results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights and Excess Servicing Receivables and for Securitization of
Mortgage Loans." SFAS No. 122, which is effective for years beginning after
December 15, 1995, will require Home City, to the extent it services mortgage
loans for others in return for servicing fees, to recognize these servicing
rights as assets, regardless of how such assets were acquired. Additionally,
Home City would be required to assess the fair value of these assets at each
reporting date to determine any potential impairment. The adoption of SFAS No.
122 has not had a material effect on the financial condition or results of
operations of Home City.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. As Home City is
currently a mutual savings association, management of Home City cannot complete
an analysis of the potential effects of SFAS No. 123 on its financial condition
or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The standards are based on
a consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 supersedes SFAS No. 122.
SFAS No. 125 is effective for transactions occurring after December 31, 1996.
Management does not expect an impact from adoption of SFAS No. 125.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes included herein have been prepared
in accordance with GAAP. GAAP requires Home City to measure financial position
and operating results in terms of historical dollars, and changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies.
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<PAGE> 36
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for
Home City at September 30, 1996, and June 30, 1996, and selected earnings data
for Home City for the three months ended September 30, 1996, and 1995. In the
opinion of the management of Home City, all adjustments necessary for a fair
presentation have been included. All such adjustments are of a normal recurring
nature. The results of operations presented below are not necessarily indicative
of the results that may be expected for any other period. This information
should be read in conjunction with the financial statements and notes thereto
included herein.
<TABLE>
<CAPTION>
September 30, June 30,
SELECTED FINANCIAL CONDITION AND OTHER DATA: 1996 1996
------------- --------
(Dollars in thousands)
<S> <C> <C>
Total amount of:
Assets $58,380 $55,728
Cash and cash equivalents (1) 2,328 2,904
Investment securities available for sale 2,189 2,188
Investment securities held to maturity - -
Mortgage-backed securities
available for sale 2,873 2,975
Mortgage-backed securities
held to maturity - -
Loans receivable - net 47,761 45,225
FHLB stock - at cost 401 394
Deposits 49,260 47,174
FHLB advances 2,673 2,903
Retained earnings, substantially
restricted-net 5,262 5,271
Number of offices, all full service 1 1
<CAPTION>
Three months ended
September 30,
-------------
SUMMARY OF EARNINGS: 1996 1995
------------- --------
(Dollars in thousands)
<S> <C> <C>
Interest and dividend income $1,170 $1,041
Interest expense 692 602
Net interest income 478 439
Provision for loan losses - -
Net interest income after
provision for loan losses 478 439
Noninterest income 120 68
Noninterest expense 610 323
Income before income tax (12) 184
Income tax expense (3) 59
Net income (9) 125
<FN>
- ------------------------
(Footnotes on next page)
</TABLE>
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<PAGE> 37
<TABLE>
<CAPTION>
At or for the three months ended
September 30,
-------------
SELECTED FINANCIAL RATIOS: 1996 1995
---- ----
<S> <C> <C>
Return on assets (2) (0.02)% 0.25%
Return on equity (3) (0.17)% 2.56%
Interest rate spread (4) 3.30% 3.07%
Net interest margin (5) 3.53% 3.63%
Noninterest expense to average assets (6) 4.32% 2.62%
Average equity to average assets 9.60% 9.93%
Equity to assets at period end 9.01% 9.64%
Nonperforming loans to total loans 0.55% 0.36%
Nonperforming assets to total assets (7) 0.43% 0.30%
Allowance for loan losses to total loans 0.80% 0.76%
Allowance for loan losses to nonperforming
loans 145.74% 208.84%
Net charge-offs to average loans 0.01% 0.02%
<FN>
- ------------------------------------
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits in other financial institutions.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Noninterest expense divided by average total assets.
(7) Nonperforming assets consist of nonaccruing loans, accruing loans 90 days
or more past due and real estate acquired (or deemed acquired) in
foreclosure proceedings or in lieu thereof. See "THE BUSINESS OF HOME CITY-
Delinquent Loans, Nonperforming Assets and Classified Assets."
</TABLE>
The following table summarizes Home City's regulatory capital
requirements and actual capital at September 30, 1996:
<TABLE>
<CAPTION>
EXCESS OF ACTUAL CAPITAL
ACTUAL CAPITAL CURRENT REQUIREMENT OVER CURRENT REQUIREMENT
-------------- ------------------- ------------------------ APPLICABLE
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ASSET TOTAL
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $5,208 8.95% $ 872 1.50% $4,386 7.45% $58,164
Core capital 5,208 8.95 1,745 3.00 3,463 5.95 $58,164
Risk-based capital 5,572 17.38 2,564 8.00 3,008 9.38 $32,052
</TABLE>
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<PAGE> 38
ANALYSIS OF FINANCIAL CONDITION
GENERAL. Home City's assets totaled $58.4 million at September 30, 1996, an
increase of $2.6 million, or 4.8%, from $55.7 million at June 30, 1996. Such
growth was primarily attributable to an increase in loans receivable, which was
funded by an increase in deposits.
LOANS RECEIVABLE. Net loans receivable equaled $47.8 million at September
30, 1996, compared to $45.2 million at June 30, 1996, a 5.6% increase
attributable to increased mortgage loan demand and the addition of consumer
loans to the product line. Management is continuing to emphasize single-family
residential lending.
DEPOSITS. Total deposits increased by $2.1 million, to $49.3 million, at
September 30, 1996, from $47.2 million at June 30, 1996.
COMPARISON OF RESULTS OF OPERATIONS
GENERAL. Home City recorded a net loss of $9,000 for the three months ended
September 30, 1996, compared to income of $125,000 for the same period in 1995.
Such loss resulted primarily from the accrual of a $265,000 expense due to the
SAIF assessment recognized as of September 30, 1996. If not for such assessment,
Home City would have had approximately $165,000 of net income for the three
months ended September 30, 1996.
NET INTEREST INCOME. Home City's net interest income for the three months
ended September 30, 1996, increased by $39,000, to $478,000, compared to the
same period in 1995, due to an increase of $129,000 in interest income,
partially offset by an increase in interest expenses of $90,000.
NONINTEREST INCOME AND EXPENSE. Noninterest income was $120,000 for the
three months ended September 30, 1996, compared to $68,000 for the same period
in 1995. Such increase resulted from fees related to the initiation of new
services and increased volume of transactions. The $287,000 increase in
noninterest expense for the three months ended September 30, 1996, compared to
the same period in 1995, is primarily attributable to the SAIF assessment. It is
management's goal to continue to manage controllable costs as much as possible.
YIELDS EARNED AND RATES PAID. Home City's net interest rate spread was
3.30% for the three months ended September 30, 1996, compared to 3.07% for the
three months ended September 30, 1995. The average yield on interest earning
assets was 8.85% for the three months ended September, 1996, compared to 8.52%
for the same period in 1995, while the average cost of interest bearing
liabilities was 5.55% for the three months ended September 30, 1996, compared to
5.45% for the same period in 1995.
OTHER SIGNIFICANT RATIOS. The ratio of average equity to average assets
decreased 33 basis points at September 30, 1996, compared to September 30, 1995,
as a direct result of Home City's asset growth and continued profitability. At
September 30, 1996, Home City's ratio of average assets to average equity was
9.60% compared to 9.93% at September 30, 1995.
THE BUSINESS OF HOME CITY
GENERAL
Home City is principally engaged in the business of making permanent first
and second mortgage loans secured by one- to four-family residential real estate
and nonresidential real estate located in Home City's primary lending area and
investing in U.S. Government and agency obligations, interest-bearing deposits
in other financial institutions, mortgage-backed securities, and municipal
securities. Home City also originates loans for the construction of residential
real estate, loans secured by multifamily real estate (over four units),
commercial loans and consumer loans. The origination of consumer loans,
including unsecured loans and loans secured by deposits, constitutes a growing
portion of Home City's lending activities. Loan funds are obtained primarily
from deposits, which are insured up to applicable limits by the FDIC, and loan
and mortgage-backed securities repayments.
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<PAGE> 39
MARKET AREA
Home City conducts business from its main office, located in
Springfield, Ohio. Springfield is located 25 miles east of Dayton, 40 miles west
of Columbus and 80 miles north of Cincinnati. Home City's primary market area
consists of Clark County, Ohio, and adjacent counties. Clark County, Ohio, is
characterized by lower than average levels of income and housing values and a
slightly higher unemployment level. Its strongest employment categories are
wholesale/retail trade, services and manufacturing, with smaller numbers of
residents employed in the finance, insurance and real estate industry
categories.
During the period from 1990 to 1995, Clark County experienced an
increase of 0.2% in population, compared to an increase of 2.8% in Ohio and 5.7%
in the United States. From 1990 to 1995, Clark County witnessed an increase of
0.3% in the number of households. Such increase was lower than Ohio's increase
of 2.7% and the 5.6% increase in households in the United States for the same
period.
Median household income figures for Clark County were at lower levels
than both Ohio and the United States for 1990 and 1995. In 1990, the median
household income for Clark County was $27,868. The median household income
levels for Ohio and the United States were $29,276 and $28,255, respectively.
From 1990 to 1995, Clark County's median household income increased by 16.0%, to
$32,325. During such period, Ohio's median household income level grew 12.9%, to
$33,038, and the United States experienced an increase in its median household
income level by 19.0%, to $33,610.
The major source of employment by industry group, based on number of
employees, for Clark County is the wholesale/retail industry, which accounted
for 30.4% of jobs in 1993. In 1993, the services industry was the second major
employer in Clark County, at 30.1%, and manufacturing was the third major
employer in Clark County, at 27.3%. Construction, finance, insurance and real
estate, transportation/utilities, and agriculture/mining combined to account for
12.0% of employment in Clark County in 1993.
An economic indicator that pertains more directly to the banking and
thrift industries, because of its direct relationship to lending activity, is
the issuance of new housing permits. In 1992, the issuance of new housing
permits remained relatively unchanged in Clark County while Ohio and the United
States witnessed positive growth rates of 16.3% and 20.1%, respectively. In
1993, Clark County once again remained relatively unchanged, while Ohio and the
United States witnessed increases in the number of new housing permits
authorized.
Another key economic indicator is the unemployment rate. Clark County
experienced a decrease in the unemployment rate from 4.9% to 4.6% in 1995. Ohio
experienced a decrease from 5.5% to 4.9%, and the unemployment rate in the
United States decreased from 6.1% to 5.2% in 1995. In June 1996, unemployment
increased to 5.7%, 5.0% and 5.5% in Clark County, Ohio and the United States,
respectively.
LENDING ACTIVITIES
GENERAL. Home City's primary lending activity is the origination of
conventional mortgage loans and home equity loans secured by one- to four-family
homes and nonresidential real estate located in Home City's primary lending
area. Loans for the construction of one- to four-family homes and mortgage loans
on multifamily properties containing five units or more are also offered by Home
City. Home City does not originate loans insured by the Federal Housing
Administration or loans guaranteed by the Veterans Administration. In addition
to mortgage lending, Home City makes commercial loans secured by assets of the
borrower other than real estate, unsecured loans and consumer loans secured by
deposits. Home City does not originate its loans in accordance with traditional
secondary market guidelines.
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<PAGE> 40
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Home City's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- ----------------------
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>
Residential real estate loans:
One- to four-family (first mortgage) $31,580 64.89% $24,724 58.85% $19,784 57.63%
Multifamily 3,233 6.64 3,288 7.82 2,581 7.52
Home equity (second mortgage) 313 0.64 232 0.55 121 0.35
Nonresidential real estate loans 7,255 14.91 7,309 17.39 5,197 15.14
Land loans 2,223 4.57 1,684 4.01 1,020 2.97
Construction loans 2,350 4.83 4,582 10.90 5,444 15.86
-------- ------- -------- ------- -------- ------
Total real estate loans 46,954 96.48 4,819 99.52 34,147 99.47
Commercial loans 73 0.15 - - - -
Consumer loans:
Loans on deposits 160 0.33 201 0.48 183 0.53
Other consumer loans 1,481 3.04 - - - -
--------- ------- ---------- ---------- ------------ -------
Total consumer loans 1,641 3.37 201 0.48 183 0.53
--------- ------- ------- ------- --------- ------
Total loans 48,668 100.00% 42,020 100.00% 34,330 100.00%
====== ====== ======
Less:
Unearned and deferred (income)
expense, net (447) (420) (324)
Loans in process (2,634) (2,321) (2,674)
Allowance for loan losses (362) (319) (229)
--------- --------- ---------
Net loans $45,225 $38,960 $31,103
======= ======= =======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of June 30, 1996, regarding the dollar amount of loans maturing
in Home City's portfolio based on their contractual terms to maturity. Demand
loans and loans having no stated schedule of repayments and no stated maturity
are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the
Year ending June 30, Due 4-5 Due 6-10 Due 11-20 Due more than
---------------------- years after years after years after 20 years after
1997 1998 1999 6/30/96 6/30/96 6/30/96 6/30/96 Total
---- ---- ---- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $1,004 $8,092 $8,223 $205 $ 721 $9,309 $3,549 $31,103
Nonresidential 283 585 364 129 3,082 6,465 1,814 12,722
Consumer loans 213 101 151 652 344 200 28 1,689
Commercial loans 50 - 10 13 - - - 73
------ ------ ------ ---- ------- ------ ------ -------
Total loans $1,550 $8,778 $8,748 $999 $4,147 $15,974 $5,391 $45,587
====== ====== ====== ==== ====== ======= ====== =======
</TABLE>
Of the loans due more than one year after June 30, 1996, loans with
aggregate balances of $22.7 million have fixed rates of interest, and loans with
aggregate balances of $21.3 million have adjustable interest rates.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Home City has been the origination of permanent conventional loans
secured by one- to four-family residences, primarily single-family residences,
located within Home City's designated lending area. Home City also originates
loans for the construction of one- to four-
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<PAGE> 41
family residences and home equity loans. Each of such loans is secured by a
mortgage on the underlying real estate and improvements thereon, if any.
OTS regulations limit the amount that Home City may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Home City makes
fixed-rate first mortgage loans on one- to four-family, owner-occupied
residences up to 95% of the value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV"). Low-to-moderate income loans are granted up to
95% on one- to four-family, owner-occupied, residences. Home City makes
adjustable-rate first mortgage loans for investment purposes on one- to
four-family, non-owner-occupied residences in amounts up to 75% LTV. Home City
generally requires private mortgage insurance ("PMI") for the amount of a loan
in excess of 80% of the value of the real estate securing such loan. PMI is
required for the amount of any loan in excess of 85% of the value of the real
estate and improvements for low-to-moderate income loans. Fixed-rate residential
real estate loans are offered by Home City for terms of up to 15 years.
Home City has been originating adjustable-rate mortgage loans ("ARMs")
for several years. ARMs are offered by Home City for terms of up to 30 years and
with various alternative features. The interest rate adjustment periods on the
ARMs are either one year, three years or a fixed rate for 10 years followed by
one-year adjustment periods. The interest rate adjustments on ARMs presently
originated by Home City are tied to changes in the weekly average yield on the
one-and three-year U.S. Treasury constant maturities index, respectively. Rate
adjustments are computed by adding a stated margin, typically 2.75%, but up to
3.5%, to the index. The maximum allowable adjustment at each adjustment date had
been 1% with a maximum adjustment of 3% over the term of the loan, although Home
City now offers an ARM with a 2% maximum adjustment at each adjustment date and
a maximum adjustment of 6% over the term of the loan. The initial rate is
dependent, in part, on how often the rate can be adjusted. Home City originates
ARMs which have initial interest rates lower than the sum of the index plus the
margin. Such loans are subject to increased risk of delinquency or default due
to increasing monthly payments as the interest rates on such loans increase to
the fully-indexed level, although such increase is generally lower than industry
standards and is considered in Home City's underwriting of any such loans with a
one-year adjustment period. See "USE OF PROCEEDS."
The aggregate amount of Home City's one- to four-family residential
real estate loans equaled approximately $31.8 million at June 30, 1996, and
represented 68% of Home City's total loans at such date. The largest individual
loan balance on a one- to four-family loan at such date was $299,000. At such
date, loans secured by one- to four-family residential real estate with
outstanding balances of $247,000, or .54% of Home City's one- to four-family
residential real estate loan balance, were more than 90 days delinquent or
nonaccruing. See "Delinquent Loans, Nonperforming Assets and Classified Assets."
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Home City makes loans secured by multifamily
properties containing over four units. Such loans are made with adjustable
interest rates, maximum LTVs of 75% and maximum terms of 15 years.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the property 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. Home
City 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. Home City currently requires that borrowers agree to submit
financial statements, rent rolls and tax returns annually to enable Home City to
monitor the loans.
At June 30, 1996, loans secured by multifamily properties totaled
approximately $3.2 million, all of which were secured by property located within
Home City's primary market area, and all of which were performing in accordance
with their terms. The largest loan secured by a multifamily property had a
balance at June 30, 1996, of approximately $332,000.
HOME EQUITY LOANS. Home City offers home equity loans secured by second
mortgages on one- to four-family residential real estate located in Clark
County, Ohio, and adjacent counties. Such loans are made for various purposes,
including home improvement, debt consolidation and consumer purchases. The
interest rates on loans secured by such second mortgages are fixed, with a
maximum combined LTV for the first and second mortgage of 100%.
At June 30, 1996, home equity loans totaled approximately $313,000, or
0.64% of Home City's total loan portfolio. All of such loans were secured by
property located within Home City's primary market area and all were performing
in accordance with their terms. The balance of the largest single home equity
loan was $39,200 at June 30, 1996.
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<PAGE> 42
NONRESIDENTIAL REAL ESTATE LOANS. Home City also makes loans secured by
nonresidential real estate consisting of retail stores, office buildings and
businesses. Such loans generally are originated with adjustable interest rates,
terms of up to 15 years, a minimum loan amount of $10,000 and a maximum loan
amount of $800,000. Such loans have a maximum LTV of 75%.
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. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Home City has endeavored to reduce such risk
by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation. Home City also requires personal guarantees on such loans.
At June 30, 1996, Home City had a total of $7.3 million invested in
nonresidential real estate loans, all of which were secured by property located
within Home City's primary market area. Such loans comprised approximately 15%
of Home City's total loans at such date. At such date, Home City had $197,000 in
delinquent nonresidential real estate loans, or 0.43% of total loans. See
"Delinquent Loans, Nonperforming Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which a savings association may make to 400% of its tangible capital. At June
30, 1996, Home City's nonresidential mortgage loans totaled 138% of Home City's
tangible capital.
LAND LOANS. Home City makes two varieties of land loans. Loans are made
for the acquisition of land to be developed for construction. Such loans are
usually made for relatively short periods of time, generally not more than three
years, with fixed interest rates. Loans are also made to borrowers who purchase
and hold land for various reasons, such as the future construction of a
residence. Such loans are generally originated with adjustable interest rates
and terms of up to 15 years. Land loans are secured by the land being purchased
with the loan proceeds and have maximum LTVs of 75%.
At June 30, 1996, land loans totaled approximately $2.2 million, or
4.57% of Home City's total loan portfolio. All of such loans were secured by
property located within Home City's primary market area, and all were performing
in accordance with their terms. The largest land loan at June 30, 1996, had a
balance of approximately $421,100.
CONSTRUCTION LOANS. Home City makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates of interest and for terms of up to 15 years.
Most of the construction loans originated by Home City have been made to
owner-occupants for the construction of single-family homes by a general
contractor.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTV
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Home City must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Additional risk exists with
respect to loans made to developers who do not have a buyer for the property, as
the developer may lack funds to pay the loan if the property is not sold upon
completion. Home City attempts to reduce such risks on loans to developers by
requiring personal guarantees and reviewing current personal financial
statements and tax returns and other projects undertaken by the developers.
At June 30, 1996, a total of $2.3 million, or approximately 4.8% of
Home City's total loans, consisted of construction loans. All of Home City's
construction loans are secured by property located within Home City's primary
market area. At June 30, 1996, all of such loans were performing in accordance
with their terms.
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<PAGE> 43
COMMERCIAL LOANS. Home City occasionally makes loans for commercial
purposes. Such loans may be secured by assets of the borrower other than real
estate, such as equipment or receivables. At June 30, 1996, Home City had three
commercial loans in the aggregate amount of $73,000, each of which was
performing in accordance with its terms.
CONSUMER LOANS. Home City makes various types of consumer loans,
including unsecured loans and loans secured by deposits. Such loans are made
only at fixed rates of interest for terms of up to 10 years. Home City has been
attempting to increase its consumer loan portfolio as part of its interest rate
risk management efforts and because a higher rate of interest is received on
consumer loans. See "RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY."
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment and other adverse economic conditions. Although
Home City has not had significant delinquencies on consumer loans, no assurance
can be provided that delinquencies will not increase.
At June 30, 1996, Home City had approximately $1.6 million, or 3.4%
of its total loans, invested in consumer loans, and none of such loans were more
than 90 days delinquent or nonaccruing. See "Delinquent Loans, Nonperforming
Assets and Classified Assets."
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, borrowers
and real estate developers, periodic newspaper solicitations by Home City's
lending staff and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan
personnel. Home City obtains a credit report, verification of employment and
other documentation concerning the credit-worthiness of the borrower. Home City
limits the ratio of mortgage loan payments to the borrower's income to 25% and
the ratio of the borrower's total debt payments to income to 35% to 42%. An
appraisal of the fair market value of the real estate on which Home City will be
granted a mortgage to secure the loan is prepared by an independent fee
appraiser approved by the Board of Directors.
Unless Home City is aware of factors which may lead to an environmental
concern, Home City generally does not require any form of specific environmental
study at the time a loan secured by one- to four-family residential real estate
is made. If, however, Home City is aware of any such factor at the time of loan
origination, Home City requires the completion and satisfactory review of a
Phase I Environmental Assessment before such loan is made. For loans secured by
multifamily and nonresidential real estate, a Phase I Environmental Assessment
is generally required before the loan is made.
Upon the completion of the appraisal and the receipt of information on
the borrower, the application for a loan is submitted to various management
officials for approval or rejection if the loan amount does not exceed $300,000.
If the loan amount exceeds $300,000, or if the application does not conform in
all respects with Home City's underwriting guidelines, the application is
submitted to the Executive Loan Committee or the Board of Directors for review
and for final disposition. If a mortgage loan application is approved, an
attorney's opinion of title is obtained on the title to 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 Home City
as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specification and estimates of construction costs. Home City 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.
Commercial loans are underwritten on the basis of the source of the cash flow
required to service the debt and the value of the security for the loan.
Home City's loans carry no pre-payment penalties, but do provide that
the entire balance of the loan is due upon sale of the property securing the
loan. Home City generally enforces such due-on-sale provisions.
LOAN ORIGINATIONS, PURCHASES AND SALES. Home City originates an almost
equal number of fixed and adjustable rate loans. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY -
Asset and Liability Management." Home City occasionally participates in loans by
other
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<PAGE> 44
institutions. For a discussion of Home City's strategy for loan originations,
see "THE BUSINESS OF HOME CITY - General."
The following table presents Home City's mortgage loan origination,
repayment and sales activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1996 1995 1994
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family residential (1) $14,091 $ 9,269 $11,599
Multifamily residential 280 1,468 516
Nonresidential 2,210 3,303 2,478
Commercial 133 - -
Consumer 1,797 37 96
------- --------- ---------
Total loans originated 18,511 14,077 14,689
------ ------ ------
Reductions:
Principal repayments (9,287) (5,623) (11,804)
Loans sold (2,760) (338) (131)
Increase (decrease) in other items, net (2) (199) (148) (186)
--------- --------- ---------
Net increase $ 6,265 $ 7,968 $ 2,568
======= ======= ========
<FN>
- -----------------------------
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and the allowance for loan
losses.
</TABLE>
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of Home
City's total capital under the regulatory capital requirements plus any
additional loan reserve not included in total capital. A savings association may
lend to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." In addition, the regulations require that loans to
certain related or affiliated borrowers be aggregated for purposes of such
limits. An exception to these limits permits loans to one borrower of up to
$500,000 "for any purpose."
Based on such limits, Home City was able to lend approximately $842,000
to one borrower at June 30, 1996. The largest amount Home City had outstanding
to one borrower at June 30, 1996, was $653,000. Such loans were secured by
several one- to four-family residential properties and a residential property
under construction. All of such loans were current at June 30, 1996.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Home City attempts to cause
the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly.
When a loan is fifteen days or more delinquent, the borrower is sent a
delinquency notice. When a loan is thirty days delinquent, Home City generally
telephones the borrower. Depending upon the circumstances, Home City may also
inspect the property and inform the borrower of the availability of credit
counseling from Home City and counseling agencies. Before a loan becomes 90 days
delinquent, Home City will make further contact with the borrower and, depending
upon the circumstances, may arrange appropriate alternative payment
arrangements. After a loan becomes 90 days delinquent, Home City may refer the
matter to an attorney for foreclosure. A decision as to whether and when to
initiate foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of the
delinquency and the borrower's ability and willingness to cooperate in curing
delinquencies. If a foreclosure occurs, the real estate is sold at public sale
and may be purchased by Home City.
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<PAGE> 45
Real estate acquired, or deemed acquired, by Home City as a result of
foreclosure proceedings is classified as real estate owned ("REO") until it is
sold. When property is so acquired, or deemed to have been acquired, it is
initially recorded by Home City at the lower of cost or fair value of the real
estate, less estimated costs to sell. Any reduction in fair value is reflected
in a valuation allowance account established by a charge to income. Costs
incurred to carry other real estate are charged to expense.
Home City places a loan on nonaccrual status when the principal and
interest is delinquent 90 days or more and deducts from income the interest
previously accrued.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of total of total of total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1):
30 - 59 days 17 $565 1.24% 11 $296 1.01% 26 $804 2.57%
60 - 89 days 4 170 0.37 4 83 0.28 5 152 0.49
90 days and over 14 247 0.54 14 207 0.71 4 34 0.11
-- ---- ---- -- ----- ---- --- ----- ----
Total delinquent loans 35 $982 2.15% 29 $586 2.00% 35 $990 3.17%
== ==== ==== == ==== ==== == ==== ====
<FN>
- ----------------------------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
</TABLE>
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<PAGE> 46
The following table sets forth information with respect to the accrual
and nonaccrual status of Home City's loans which are 90 days or more past due
and other nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $247 $207 $34
Nonresidential - - -
Commercial - - -
Consumer - - -
----- ------ ------
Total nonperforming loans 247 207 34
Real estate owned - - -
------- ------- ------
Total nonperforming assets $247 $207 $ 34
==== ==== =====
Total loan loss allowance $362 $319 $229
Total nonperforming assets as a
percentage of total assets 0.44% 0.43% 0.09%
Loan loss allowance as a percent of
nonperforming loans 146.56% 154.11% 673.53%
</TABLE>
During the year ended June 30, 1996, $8,000 in interest income was
recognized and an additional $16,000 would have been recorded as interest income
on nonaccruing loans had such loans been accruing pursuant to contractual terms.
During the periods shown, Home City had no restructured loans within the meaning
of SFAS No. 115. There are no loans which are not currently classified as
nonaccrual, more than 90 days past due or restructured but which may be so
classified in the near future because management has concerns as to ability of
the borrowers to comply with repayment terms. For additional information, see
Note D of the Notes to Financial Statements.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. 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 the insured institution
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
on the basis of currently existing facts, conditions and values questionable 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 the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Home City classifies as "substandard" all loans that are
delinquent more than 90 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 90 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate.
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<PAGE> 47
The aggregate amount of Home City's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $518 $349 $515
Doubtful 19 - -
Loss 102 106 106
----- ----- -----
Total classified assets $639 $455 $621
==== ==== ====
</TABLE>
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the OTS. Home City
had no disagreements with the examiners regarding the classification of assets
at the time of the last examination.
OTS regulations require that Home City establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, Home City must either
establish specific allowances for losses in the amount of 100% of the portion of
the asset classified loss, or charge-off such amount.
ALLOWANCE FOR LOAN LOSSES. Home City maintains an allowance for loan
losses based upon a number of relevant factors, including but not limited to,
trends in the level of nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio.
The single largest component of Home City's loan portfolio consists of
one- to four-family residential real estate loans. Substantially all of these
loans are secured by residential real estate and require down payments of 20% of
the lower of the sales price or appraisal value of the real estate. In addition,
such loans are secured by property in Home City's primary lending area. Home
City's practice of making loans only in the market area and requiring a 20% down
payment have contributed to a low historical charge-off history.
In addition to one- to four-family residential real estate loans, Home
City makes additional real estate loans, including home equity, multifamily
residential real estate, nonresidential real estate and construction loans.
These loans are secured by property in Home City's lending area and also require
the borrower to provide a down payment. Home City also makes a limited amount of
commercial and consumer loans. Although these types of loans are considered to
involve a higher degree of risk than loans secured by one- to four-family
residential real estate, Home City has experienced charge-offs only from loans
secured by one- to four-family residential real estate.
The allowance for loan losses is reviewed quarterly by the Board of
Directors. The review process includes a credit analysis of loans on the "watch
list," past due loans, new significant borrowings and random samples of new
loans made. The analysis of loans secured by multifamily and nonresidential real
estate and commercial loans includes a review of tax returns and financial
statements, and the review of all loans includes an estimation of the value of
the collateral. The amounts of provisions for loan losses for the periods shown
in the table below were determined based upon such loan review, past loss
experience, anticipated growth and prevailing economic conditions. While the
Board of Directors believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in material adjustments, and net earnings could be significantly
adversely affected, if circumstances differ substantially from the assumptions
used in making the final determination.
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<PAGE> 48
The following table sets forth an analysis of Home City's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $319 $229 $198
Charge-offs (7) (19) (107)
Recoveries - - 25
Provision for loan losses (charged to operations) 50 109 113
---- ---- ----
Balance at end of period $362 $319 $229
==== ==== ====
Ratio of net charge-offs (recoveries) to average
net loans outstanding during the period 0.02% 0.05% 0.27%
Ratio of allowance for loan losses to total loans 0.79% 0.81% 0.73%
</TABLE>
For the year ended June 30, 1996, $250,000 of the allowance for loan
losses was allocated to loans secured by nonresidential real estate and $62,000
was allocated to loans secured by one- to four-family real estate. The allowance
was unallocated for the years ended June 30, 1995 and 1994. Home City's
management anticipates that loan losses will not exceed $25,000 during fiscal
year 1997 and that all of such losses will be experienced on loans secured by
one- to four-family residential real estate.
MORTGAGE-BACKED SECURITIES
Home City maintains a portfolio of mortgage-backed securities in the
form of FHLMC and GNMA participation certificates, as well as two
mortgage-backed securities not issued by government agencies. Mortgage-backed
securities generally entitle Home City to receive a portion of the cash flows
from an identified pool of mortgages. FHLMC and GNMA securities are each
guaranteed by their respective agencies as to principal and interest.
The FHLMC is a corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of principal
on participation certificates. Although FHLMC securities are not backed by the
full faith and credit of the U.S. Government, these securities are generally
considered among the highest quality investments with minimal credit risk. GNMA
is a government agency. GNMA securities are backed by Federal Housing Authority
insured and Veterans Administration guaranteed loans. The timely payment of
principal and interest on GNMA securities is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government.
The following table sets forth the value of Home City's mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1996 1995
---- -----------------------------
Fair Amortized Fair
Value Cost Value
----- --------- -----
(In thousands)
<S> <C> <C> <C>
GNMA certificates $2,946 $3,635 $3,567
FHLMC certificates 29 32 36
------ ------ ------
Total mortgage-backed securities $2,975 $3,667 $3,603
====== ====== ======
</TABLE>
-45-
<PAGE> 49
The following table sets forth information regarding scheduled maturities,
amortized costs, market values and weighted average yields of Home City's
mortgage-backed securities at June 30, 1996. Expected maturities will differ
from contractual maturities due to scheduled repayments and because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------------------------------------------------------------------
Total mortgage-backed
One year or less After one to five years After five to ten years After ten years Securities portfolio
---------------- ----------------------- ----------------------- --------------- --------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA certificates $ - -% $ - -% $904 7.51% $2,042 7.67% $2,946 $2,946 7.62%
FHLMC certificates - - - - - - 29 10.35 29 29 10.35
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total $ - -% $ - -% $904 7.51% $2,071 7.70% $2,975 $2,975 7.64%
===== ===== ==== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
For additional information, see Note C of the Notes to Financial
Statements.
-46-
<PAGE> 50
INVESTMENT ACTIVITIES
OTS regulations require that Home City maintain a minimum amount of
liquid assets, which may be invested in U. S. Treasury obligations, securities
of various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Home City is also permitted to make investments
in certain commercial paper, corporate debt securities rated in one of the four
highest rating categories by one or more nationally recognized statistical
rating organizations, and mutual funds, as well as other investments permitted
by federal regulations. See "REGULATION" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY."
The following table sets forth information concerning Home City's
investments at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- ------------------------------- ------------------------------
Carrying % of Market % of Carrying % of Market % of Carrying % of Market % of
Value Total Value Total Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
deposits in other $588 12.70% $ 588 12.72% $ 307 6.65% $ 307 6.64% $ 77 2.42% $ 77 2.42%
financial institutions
Federal funds sold 400 8.64 400 8.65 1,500 32.50 1,500 32.45 450 14.12 450 14.15
Time deposits in other
financial institutions 1,061 22.91 1,053 22.78 360 7.80 360 7.79 - - - -
Investment securities:
U.S. government and
federal agency
securities 997 21.53 997 21.57 1,496 32.42 1,496 32.36 2,098 65.83 2,092 65.77
Municipal securities (1) 883 19.07 883 19.10 405 8.78 413 8.93 - - - -
Equity securities 270 5.83 270 5.84 221 4.79 221 4.78 273 8.57 273 8.58
Investment in joint
venture (2) 18 0.39 18 0.39 18 0.39 18 0.39 18 0.56 18 0.57
Service corporation (3) 20 0.43 20 0.43 20 0.43 20 0.43 23 0.72 23 0.72
FHLB stock 394 8.51 394 8.52 288 6.24 288 6.23 248 7.78 248 7.80
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total investments $4,631 100.00% $4,623 100.00% $4,615 100.00% $4,623 100.00% $3,187 100.00% $3,181 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<FN>
- -----------------------------
(1) Bonds issued by local school districts.
(2) Home City has a 50% ownership interest in a joint venture that is primarily
involved in the development of low income housing.
(3) Home City owns 100% of Homciti Service Corp., whose assets consist of
common shares of Intrieve, a data service provider, and a 0.875% interest
in a joint venture which owns The Springfield Inn, a hotel in Springfield,
Ohio.
</TABLE>
-47-
<PAGE> 51
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Home City's investments at June 30,
1996.
<TABLE>
<CAPTION>
At June 30, 1996
------------------------------------------------------------------------------------
One year or less After one to five years After five 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 demand deposits
in other financial
institutions $ 588 5.10% $ - -% $ - -%
Federal funds sold 400 5.07 - - - -
Time deposits in other financial
institutions 1,038 5.23 - - 23 1.25
Investment securities:
U.S. government and federal
agency securities - - 997 6.10% - -
Municipal securities 134 5.04 568 5.36 181 5.36
Equity securities - - - - 270 1.44
Investment in joint venture - - - - 18 -
Service corporation - - - - 20 -
FHLB stock - - - - 394 6.43
-------- ---- ------ ---- ---- ----
Total investments $ 2,160 5.15% $1,565 5.83% $906 4.90%
======== ==== ====== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
------------------------------------------------------------
Average Weighted
life Carrying Market average
in years Value Value Yield
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Certificates of
deposit in FHLB
and other
financial
institutions .33 $1,061 $1,053 4.57%
Investment
securities:
U.S. government
and federal
agency
securities 2.11 997 997 -
FHLB and FHLMC
stock - 650 650 -
Municipal
securities 3.52 883 883 5.31
------ ------
Total $3,591 $3,583
====== ======
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Home
City's funds for use in lending and other investment activities. In addition to
deposits, Home City derives funds from FHLB advances, interest payments and
principal repayments on loans and mortgage-backed securities, income on earning
assets, service charges and gains on the sale of assets. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME
CITY." Loan payments are a relatively stable source of funds, while deposit
inflows and outflows fluctuate more in response to general interest rates and
money market conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF HOME CITY - Analysis of Financial
Condition."
DEPOSITS. Deposits are attracted principally from within Home City's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, passbook savings
accounts and term certificate accounts. Home City also offers individual
retirement accounts ("IRA"), both in passbook and certificate
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<PAGE> 52
form. Interest rates paid, maturity terms, service fees and withdrawal penalties
for the various types of accounts are established periodically by the management
of Home City based on Home City's liquidity requirements, growth goals and
interest rates paid by competitors. Home City does not use brokers to attract
deposits.
At June 30, 1996, Home City's certificates of deposit totaled $37.0
million, or 78% of total deposits. Of such amount, approximately $5.7 million in
certificates of deposit mature within one year. Based on past experience and
Home City's prevailing pricing strategies, management believes that a
substantial percentage of such certificates will renew with Home City at
maturity. If there is a significant deviation from historical experience, Home
City can utilize borrowings from the FHLB as an alternative to this source of
funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Home City at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ------------------------ ------------------------
Percent Percent Percent
of total of total of total
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION ACCOUNTS:
Demand $ 302 0.64% $ - -% $ - -%
NOW accounts (1) 395 0.84 - - - -
Passbook savings accounts (2) 9,561 20.27 10,500 25.65 15,128 43.45
------- ------- ------- ------- ------
Total transaction accounts 10,258 21.75 10,500 25.65 15,128 43.45
CERTIFICATES OF DEPOSIT:
2.01 - 4.00% - - 600 1.47 5,873 16.87
4.01 - 6.00% 15,810 33.51 13,287 32.46 10,849 31.16
6.01 - 8.00% 21,106 44.74 16,549 40.42 2,966 8.52
Total certificates of deposit 36,916 78.25 30,436 74.35 19,688 56.55
------- ------- ------- ------
Total deposits (3) $47,174 100.00% $40,936 100.00% $34,816 100.00%
======= ======= ======= ======
<FN>
- -----------------------------
(1) Home City's weighted average interest rate paid on NOW accounts fluctuates
with the general movement of interest rates. At June 30, 1996, the weighted
average rate on NOW accounts was 1.41%.
(2) Home City's weighted average rate on passbook savings accounts fluctuates
with the general movement of interest rates. The weighted average interest
rate on passbook accounts was 2.52%, 2.97% and 3.41% at June 30, 1996, 1995
and 1994, respectively.
(3) IRAs are included in the various certificates of deposit balances. IRAs
totaled $5.5 million, $4.4 million and $2.7 million as of June 30, 1996,
1995 and 1994.
</TABLE>
-49-
<PAGE> 53
The following table shows rate and maturity information for Home City's
certificates of deposit as of June 30, 1996:
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate One Year 2 Years 3 Years 3 Years Total
---- -------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00% $ - $ - $ - $ - $ -
4.01 - 6.00 10,409 2,913 2,304 184 15,810
6.01 - 8.00 5,000 13,660 1,950 496 21,106
------- ------- ------ ---- -------
Total certificates
of deposit $15,409 $16,573 $4,254 $680 $36,916
======= ======= ====== ==== =======
</TABLE>
The following table presents the amount of Home City's certificates of
deposit of $100,000 or more by the time remaining until maturity as of June 30,
1996:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $1,244
Over 3 months to 6 months 782
Over 6 months to 12 months 661
Over 12 months 4,529
-------
Total $7,216
=======
</TABLE>
The following table sets forth Home City's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $40,936 $34,816 $36,688
Deposits 42,110 24,327 15,447
Withdrawals (38,242) (20,052) (18,727)
-------- -------- --------
Net increases (decreases) before
interest credited 3,868 4,275 (3,280)
Interest credited 2,370 1,845 1,408
-------- -------- --------
Ending balance $ 47,174 $ 40,936 $ 34,816
======== ======== ========
Net increase (decrease) $ 6,238 $ 6,120 ($1,872)
Percent increase (decrease) 15.24% 17.58% (5.10%)
</TABLE>
BORROWINGS. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, Home City is authorized to apply for
advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender Test (the "QTL Test"). See "REGULATION - OTS
Regulations -- Qualified Thrift Lender Test." If an
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<PAGE> 54
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, 1996, Home City was in compliance with
the QTL Test.
Home City obtained advances from the FHLB of Cincinnati as set forth in
the following table:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding $2,582 $1,628 $435
Maximum amount outstanding at any month
during the period 3,564 2,715 457
Balance outstanding at end of period 2,903 2,618 424
Weighted average interest rate during the period 6.66% 6.57% 8.74%
Weighted average interest rate at end of period 6.49% 6.69% 5.91%
</TABLE>
COMPETITION
Home City competes for deposits with other savings associations,
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, Home City competes with other savings associations,
commercial banks, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. Home City competes for loan originations
primarily through the interest rates and loan fees offered and through the
efficiency and quality of services provided. 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. Three savings associations, seven banks and seven
credit unions have offices in Clark County. At June 30, 1995, Home City had
approximately 3.22% of all financial institution deposits in Clark County.
The size of financial institutions competing with Home City 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 Home
City.
SUBSIDIARIES
Home City owns all of the outstanding shares of Homciti Service
Corporation, an Ohio corporation ("Homciti"). Homciti owns common stock in
Intrieve, a data processing company which serves Home City, and a 0.875%
ownership interest in a joint venture which owns The Springfield Inn, a local
hotel. At June 30, 1996, the aggregate value of the Intrieve stock and the joint
venture investment equaled approximately $38,000.
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<PAGE> 55
PROPERTIES
The following table sets forth certain information at June 30, 1996,
regarding the ownership by Home City of the land and improvements at 63 West
Main Street, Springfield, Ohio, the office of Home City:
<TABLE>
<CAPTION>
Year Square Net
Acquired Footage Book value(1)
-------- ------- -------------
<S> <C> <C>
1975 5,839 $367,000
<FN>
- -----------------------------
(1) At June 30, 1996, Home City's office premises and equipment had a total net
book value of $488,000. For additional information regarding Home City's
office premises and equipment, see Notes A and F of Notes to Financial
Statements.
</TABLE>
PERSONNEL
As of June 30, 1996, Home City had 11 full-time employees and three
part-time employees. Home City believes that relations with its employees are
good. Home City offers health and life insurance benefits. None of the employees
of Home City are represented by a collective bargaining unit.
LEGAL PROCEEDINGS
On September 23, 1996, a civil suit was filed in the Common Pleas Court
of Clark County, Ohio, against Home City, Douglas L. Ulery, President of Home
City, and two other individuals (the "Other Individuals") by a Springfield,
Ohio, church (the "Church"), which obtained a mortgage loan from Home City, and
two members of the Church. Among other allegations in the lawsuit, the
plaintiffs allege that the Other Individuals wrongfully represented to Mr. Ulery
that they were the newly elected officers of the Church; that Mr. Ulery allowed
the Other Individuals access to confidential information about the Church; and
that, as a result, Church membership and income decreased. The plaintiffs are
seeking damages in an amount not less than $10,000. Home City and Mr. Ulery
filed an Answer to the Complaint on October 24, 1996, denying the substantive
allegations contained in the Complaint and raising a number of affirmative
defenses.
Home City is not presently involved in any other legal proceedings of a
material nature. From time to time, Home City is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Home City.
MANAGEMENT OF HCFCMANAGEMENT OF HCFC
The Board of Directors of HCFC consists of five members. Each of the
directors of Home City is also a director of HCFC. See "MANAGEMENT OF HOME CITY"
for information on each of such directors. The term of each of the directors
expires in 1997.
The following persons serve as the officers of HCFC:
Name Office
---- ------
Douglas L. Ulery President
P. Clark Engelmeier Chairman of the Board
Jo Ann Holdeman Secretary
Gary E. Brown Treasurer
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<PAGE> 56
MANAGEMENT OF HOME CITYMANAGEMENT OF HOME CITY
DIRECTORS AND EXECUTIVE OFFICERS
The Charter of Home City provides for a Board of Directors consisting of
not less than five nor more than 15 directors, such number to be fixed or
changed in the Bylaws or by the members. The Board of Directors currently
consists of five directors, divided into three classes. One class of directors
is elected each year. Each director serves for a three-year term. The Board of
Directors met 12 times during the fiscal year ended June 30, 1996, for regular
and special meetings. No director attended fewer than 75% of the aggregate of
such meetings and all meetings of the committees of which such director was a
member.
The following table presents certain information with respect to the
present directors and executive officers of Home City:
<TABLE>
<CAPTION>
Name Age(1) Position with Home City Director since Term expires
- ---- --- ----------------------- -------------- ------------
<S> <C> <C> <C> <C>
John D. Conroy 46 Director 1988 1998
P. Clark Engelmeier 65 Director, Chairman of the Board 1977 1997
James Foreman 56 Director 1995 1997
Terry A. Hoppes 47 Director 1994 1999
Douglas L. Ulery 49 Director, President, CEO 1993 1999
Gary E. Brown 56 Vice President and Treasurer N/A N/A
Jo Ann Holdeman 40 Vice President and Secretary N/A N/A
- ------------------------------
<FN>
(1) At November 1, 1996.
</TABLE>
Since 1971, Mr. Conroy has been the owner and President of Conroy Funeral
Home, Inc., in Springfield, Ohio. Mr. Conroy is a licensed funeral director and
embalmer. From January 1995 to March 1996, Mr. Conroy was the Secretary of Home
City.
Mr. Engelmeier has been a self-employed life insurance agent and securities
broker during the past 40 years and is a Chartered Life Underwriter. Mr.
Engelmeier retired from the U.S. Army in 1991 as a lieutenant colonel.
Mr. Foreman has been the President, Chief Executive Officer and owner of
Jim Foreman Pontiac-Nissan and the President and owner of SKDP Insurance Agency
for the past 26 years. Mr. Foreman is a member of the Board of Directors of the
Springfield Chamber of Commerce. Mr. Foreman served as Vice President of Home
City from 1995 to March 1996.
Mr. Hoppes is a professional engineer and surveyor and has been the owner
and the President of Hoppes Engineering and Surveying Company since 1977 and the
President of Hoppes Builders and Development Company since 1981. From January
1995 to March 1996, Mr. Hoppes was the Treasurer of Home City.
Mr. Ulery has been the President and the Chief Executive Officer of Home
City since 1992 and a director of Home City since 1994. From 1985 until joining
Home City, Mr. Ulery was the Vice President of Regional Banking Offices
Operation with Society Corporation.
Mr. Brown has been employed at Home City since October 1995, as Assistant
Vice President from October 1995 to March 1996 and as Vice President and
Treasurer since March 1996. During the five years prior to joining Home City,
Mr. Brown was employed as an Assistant Vice President at Huntington Bank.
Ms. Holdeman has been employed at Home City since 1986. Ms. Holdeman served
as Assistant Vice President and Assistant Secretary from 1992 to March 1996 and
has served as Vice President and Secretary since March 1996.
COMMITTEES OF DIRECTORS
Neither Home City nor HCFC maintains an audit, nominating or compensation
committee.
-53-
<PAGE> 57
COMPENSATION
Each director of Home City receives a retainer fee of $1,000 per month
for service as a director of Home City. In addition, the Chairman of the Board
of Directors receives an additional fee of $150 per month. Edgar Witten, a
Director Emeritus, receives a fee of $200 per month.
Four of Home City's directors participate in a deferred compensation
plan whereby payment of part or all of their directors' fees is deferred. Home
City records the deferred fees as expenses and in a liability account. Interest
is periodically credited on each account. Each director is fully vested in his
account and the balance is payable upon termination of directorship prior to
death or retirement. Home City has provided for the contingent liability created
by the deferred compensation plan by purchasing a single-premium universal life
insurance policy on each director. Upon retirement or death, a director or his
estate will receive the benefits payable pursuant to the policy on his life.
The following table presents certain information regarding the cash
compensation received by the President and Chief Executive Officer of Home City.
No other executive officer of Home City received compensation exceeding $100,000
during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
-------------------------------------------------------------------------------------------------
Annual Compensation
---------------------------------
Name and Principal Fiscal Year All Other
Position Ended June 30 Salary ($)(1) Bonus ($) Compensation(2)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas L. Ulery 1996 $100,000 $30,000 $3,338
President and Chief
Executive Officer
-------------------------------------------------------------------------------------------------
<FN>
- -----------------------------
(1) Includes directors' fees of $12,000. Does not include amounts attributable
to other miscellaneous benefits received by executive officers. The cost to
Home City of providing such benefits to Mr. Ulery was less than 10% of his
cash compensation.
(2) Consists of Home City's contribution to Mr. Ulery's 401(k) defined
contribution plan account.
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
HCFC has established the ESOP for the benefit of employees of HCFC and
Home City age 21 or older who have completed at least one year of full-time
service with HCFC or Home City. The establishment of the ESOP and the purchase
by the ESOP of the Common Shares of HCFC are subject to the receipt of a
favorable determination letter on the qualified status of the ESOP under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), from the Commissioner of Internal Revenue ("Commissioner"). HCFC will
submit to the Commissioner an application for a favorable determination letter
on the qualified status of the ESOP. Although no assurances can be given, HCFC
expects that the ESOP will receive a favorable determination letter from the
Commissioner.
HCFC intends to accept a promissory note from the ESOP in payment for
8% of the Common Shares sold in connection with the Conversion. The loan will be
secured by the shares purchased with the loan proceeds and will be repaid by the
ESOP over a period of seven years with funds from Home City's discretionary
contributions to the ESOP and earnings on ESOP assets. Shares purchased with
such loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. As payments are made and the shares are
released from the suspense account, such shares will be validly issued, fully
paid and non-assessable.
Contributions to the ESOP and shares released from the suspense account
will be allocated pro rata to participants on the basis of compensation. Except
for participants who retire, become disabled or die during the plan year, all
other participants must have completed at least 1,000 hours of service and be
employed on the last day of the plan year in order to receive an
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<PAGE> 58
allocation. Benefits become vested at a rate of 20% per year commencing after
three years of service and are fully vested after seven years of service.
Vesting will be accelerated upon retirement at or after age 65, death,
disability or termination of the ESOP. Forfeitures will be reallocated among
remaining participating employees. Benefits may be paid either in HCFC Common
Shares or in cash. Benefits may be payable upon retirement, death, disability or
separation from service. Benefits payable under the ESOP cannot be estimated.
A committee appointed by the Board of Directors of HCFC will administer
the ESOP. The Common Shares and other ESOP funds will be held and invested by a
trustee (the "ESOP Trustee"). The ESOP Committee may instruct the ESOP Trustee
regarding investments of funds contributed to the ESOP. The ESOP Trustee must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Shares for which employees do not give
instructions and unallocated shares will be voted by the ESOP Trustee in its
sole discretion.
From time to time, the ESOP may purchase additional Common Shares of
HCFC through purchases in the market or directly from HCFC. No such purchases
are currently contemplated. If the ESOP purchases newly issued shares from HCFC,
such purchases will have a dilutive effect on the interests of HCFC's
shareholders.
STOCK OPTION PLAN
The Board of Directors of HCFC expects to adopt the Stock Option Plan,
subject to approval by the shareholders of HCFC. A number of Common Shares equal
to 10% of the Common Shares to be issued in connection with the Conversion is
expected to be reserved for issuance by HCFC upon the exercise of options to be
granted to certain directors, officers and employees of Home City and HCFC from
time to time under the Stock Option Plan. The purposes of the Stock Option Plan
include retaining and providing incentives to the directors, officers and
employees of HCFC and Home City by facilitating their purchase of a stock
interest in HCFC.
Options granted to the officers and employees under the Stock Option
Plan may be "incentive stock options" within the meaning of Section 422 of the
Code (an "ISO"). Options granted under the Stock Option Plan to directors who
are not full-time employees of HCFC or Home City will not qualify under the Code
and thus will not be incentive stock options ("non-qualified stock options").
Although any eligible director, officer or employee of Home City and HCFC may
receive non-qualified stock options, Home City anticipates that the non-employee
directors of Home City and HCFC will receive non-qualified stock options, and
other eligible participants will receive incentive stock options.
The option exercise price of each option granted under the Stock Option
Plan will be determined at the time of grant by a committee of at least three
directors appointed to administer the Stock Option Plan (the "Committee"),
subject to the requirement that the exercise price for an option must not be
less than 100% of the fair market value of the shares on the date of the grant.
No stock option will be exercisable after the expiration of ten years from the
date that it is granted, except that in the case of an ISO granted to an
employee who owns more than 10% of HCFC's outstanding Common Shares at the time
an ISO is granted under the Stock Option Plan, the exercise price of such an ISO
may not be less than 110% of the fair market value of the shares on the date of
the grant, and the ISO shall not be exercisable after the expiration of five
years from the date it is granted.
An option recipient cannot transfer or assign an option other than by
will or in accordance with the laws of descent and distribution. "Termination
for cause," as defined in the Stock Option Plan, will result in the annulment of
any outstanding options.
HCFC will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, HCFC will receive
payment of cash, HCFC Common Shares or a combination of cash and Common Shares
from option recipients in exchange for shares issued.
The Committee may grant options under the Stock Option Plan at such
times as the committee members deem most beneficial to Home City and HCFC on the
basis of the individual participant's position, duties and responsibilities, the
value of his or her services to Home City and HCFC and any other factors deemed
relevant. A grant of options under the Stock Option Plan is expected to occur on
the date of approval of the Stock Option Plan by the shareholders of HCFC. The
members of the Committee have not yet been appointed and no specific grants have
been proposed. The directors of HCFC intend, however, to make such grants in
accordance with OTS regulations which provide that no individual may receive
options to purchase more than 25% of the shares which may be the subject of
options pursuant to the Stock Option Plan, and directors who are not employees
of HCFC or Home City may not receive options to purchase more than 5% of such
shares individually or 30% in the aggregate.
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Pursuant to OTS regulations, the Stock Option Plan may not be approved
by the shareholders of HCFC until at least six months after the Conversion is
completed. It is expected that options will be granted immediately after the
shareholders approve the Stock Option Plan.
RECOGNITION AND RETENTION PLAN AND TRUST
The Board of Directors of Home City intends to adopt the RRP, subject
to approval of the shareholders of HCFC, as a means of providing directors and
certain key employees of Home City with an ownership interest in HCFC in a
manner designed to compensate such directors and key employees for services to
Home City. Home City expects to contribute sufficient funds to enable the RRP to
purchase Common Shares in the open market or to purchase authorized but unissued
shares from HCFC in an amount equal to up to 4% of the Common Shares sold in
connection with the Conversion. Assuming the sale of 720,000 shares in
connection with the Conversion, 28,800 shares would be purchased by the RRP. The
purchase of authorized but unissued shares would have a dilutive effect on the
interests of HCFC's shareholders. See "CAPITALIZATION" and "PRO FORMA DATA."
While no specific awards have yet been proposed, the directors of Home City
intend to make such awards in accordance with OTS regulations, which provide
that no individual may receive more than 25% of the shares awarded pursuant to
the RRP, and directors who are not employees of HCFC or Home City may not
receive more than 5% of such shares individually or 30% in the aggregate.
Until shares awarded are earned by the participant, such shares will be
forfeited in the event that the employment of the employee is terminated for
cause. One-fifth of such shares will be earned and nonforfeitable on each of the
first five anniversaries of the date of the awards. In the event of the death or
disability of a participant, however, the participant's shares will be deemed to
be earned and nonforfeitable upon such date. A committee to be appointed by the
Board of Directors of Home City will administer the RRP and determine the number
of shares to be awarded to eligible participants. Two directors of Home City are
expected to serve as the trustees of the RRP Trust. Each participant will be
entitled to the benefit of any dividends or other distributions paid on shares
awarded but not yet earned, but such unearned shares will be voted by the
trustees in their discretion. Compensation expense in the amount of the fair
market value of the Common Shares at the date of the award to the employee will
be recognized as the shares are earned. In the event of a termination of a
participant's employment following a change in control of Home City or HCFC, all
shares awarded to such participant in the RRP become earned and nonforfeitable.
The RRP must be approved by the shareholders of HCFC. Pursuant to OTS
regulations, the shareholders may not approve the RRP until six months after the
completion of the Conversion. It is expected that the RRP will purchase shares
of HCFC and that awards will be made immediately after shareholder approval of
the RRP.
EMPLOYMENT AGREEMENT
Home City intends to enter into an employment agreement with Douglas L.
Ulery (the "Employment Agreement"). Home City currently has no employment
agreements with any of its officers. The Employment Agreement, which will become
effective upon completion of the Conversion, provides for a term of three years
and a salary and performance review by the Board of Directors not less often
than annually, as well as inclusion of the employee 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.
The Employment Agreement is terminable by Home City at any time. In the
event of termination by Home City for "just cause," as defined in the Employment
Agreement, Mr. Ulery will have no right to receive any compensation or other
benefits for any period after such termination. In the event of termination by
Home City other than for just cause, at the end of the term of the Employment
Agreement or in connection with a "change of control," as defined in the
Employment Agreement, Mr. Ulery will be entitled to a continuation of salary
payments for a period of time equal to 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. Ulery becomes employed
full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence within one year of a "change of control" of (1) the termination of
employment of Mr. Ulery for any reason other than just cause, retirement or
termination at the end of the term of the agreement, (2) a change in the
capacity or circumstances in which he is employed or (3) a material reduction in
his responsibilities, authority, compensation or other benefits provided under
the Employment Agreement without his written consent. In the event of any such
occurrence, Mr. Ulery will be entitled to payment of an amount equal to (a) the
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amount of compensation to which he would be entitled for the remainder of the
term of the Employment Agreement, plus (b) the difference between (i) three
times his average annual compensation for the three taxable years immediately
preceding the termination of employment, less (ii) the amount paid to Mr. Ulery
as compensation for the remainder of the employment term. In addition, Mr. Ulery
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 he 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 the Code or
exceed limitations imposed by the OTS. "Control," as defined in the Employment
Agreement, generally refers to the acquisition by any person or entity of the
ownership or power to vote 10% or more of the voting stock of Home City or HCFC,
the control of the election of a majority of Home City's or HCFC's directors or
the exercise of a controlling influence over the management or policies of Home
City or HCFC.
The aggregate payment that would have been made to Mr.Ulery assuming
his termination at June 30, 1996, following a change of control, would have been
approximately $264,000.
CERTAIN TRANSACTIONS WITH HOME CITY
In accordance with OTS regulations, Home City makes loans to executive
officers and directors of Home City in the ordinary course of business and on
the same terms and conditions, including interest rates and collateral, as those
of comparable loans to other persons. All outstanding loans to executive
officers and directors were made pursuant to such policy, do not involve more
than the normal risk of collectibility or present other unfavorable features and
are current in their payments. Loans to all directors and executive officers of
Home City and their immediate family members totaled $822,000 at June 30, 1996,
which would equal less than eight percent of HCFC's shareholder's equity
assuming completion of the Conversion at the mid-point of the Valuation Range.
PROXY HOLDERS
When a deposit account is established at Home City, a general proxy is
typically obtained from the depositor, authorizing the Board of Directors to
cast all votes which the depositor is entitled to cast on all matters to be
submitted to a vote of Home City's members. In the past, the proxyholders
appointed by the Board of Directors have been able to elect all members of the
Board of Directors and otherwise control the affairs of Home City. After the
Conversion, only HCFC, as the sole shareholder of Home City, will be entitled to
vote on matters requiring approval by the shareholders of Home City.
REGULATION
GENERAL
As a savings association organized under the laws of the United States,
Home City is subject to regulatory oversight by the OTS. Because Home City's
deposits are insured by the FDIC, Home City is also subject to examination and
regulation by the FDIC. Home City must file periodic reports with the OTS
concerning its activities and financial condition. Examinations are conducted
periodically by the OTS to determine whether Home City is in compliance with
various regulatory requirements and is operating in a safe and sound manner.
Home City is a member of the FHLB of Cincinnati.
HCFC also will be subject to regulation, examination and oversight by
the OTS as the holding company of Home City and will be required to submit
periodic reports to the OTS.
Legislation to recapitalize the SAIF became effective September 30,
1996. See "FDIC Regulations -- Assessments." Congress is considering proposed
legislation which would require Home City to convert to a state thrift charter
or to a bank charter, after which it would be regulated under federal law in the
same fashion as banks. As a result, Home City may become subject to additional
regulation, examination and oversight by the FDIC. In addition, HCFC might
become subject to more restrictive holding company requirements, including
greater activity and capital requirements than imposed on it by the OTS.
OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all
federally-chartered savings
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institutions. The OTS issues regulations governing the operation of savings
associations, regularly examines such institutions and imposes assessments on
savings associations based on their asset size to cover the costs of this
supervision and examination. It also promulgates regulations that prescribe the
permissible investments and activities of federally-chartered savings
associations, including the type of lending that such associations may engage in
and the investments in real estate, subsidiaries and securities they may make.
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.
Federally-chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, 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
transaction. 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 areas and borrowers. Home City has
received a "Satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. Home City is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for Home City is equal to tangible capital) of 3% of adjusted total assets, and
risk-based capital (which for Home City consists of core capital and general
valuation allowances) equal to 8% of risk-weighted assets. Assets and certain
off-balance-sheet items are weighted at percentage levels ranging from 0% to
100% depending on their relative risk.
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Home
City does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed. Home City's core capital ratio at
June 30, 1996, was 9.48% and will increase to 13.45% on a pro forma basis at
June 30, 1996, assuming the receipt of approximately $3.4 million in net
proceeds from the sale of the Common Shares at the mid-point of the Valuation
Range and the investment of 50% of the net proceeds by HCFC in Home City. For
information concerning Home City's capital, see "REGULATORY CAPITAL COMPLIANCE."
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, Home City will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and Home City currently qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and 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 can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be placed
in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Home City's capital at
June 30, 1996, meets the standards for a well-capitalized association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four
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consecutive calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution at the time the institution fails to comply with
its capital restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, 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.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of its net
income, current year-to-date, plus 50% of the amount by which the lesser of Home
City'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, or the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the proposed
capital distribution, meet their current minimum, but not fully phased-in
capital requirement. Associations in this category may make capital
distributions up to 75% of their net income over the most recent four quarters.
Tier 3 associations do not meet their current minimum capital requirement and
must obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or a Tier 3 association.
Home City meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision. As a subsidiary of
HCFC, Home City will also be required to give the OTS 30 days' notice prior to
declaring any dividend on its common shares. The OTS may object to the dividend
during that 30-day period based on safety and soundness concerns. Moreover, the
OTS may prohibit any capital distribution otherwise permitted by regulation if
the OTS determines that such distribution would constitute an unsafe or unsound
practice.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association not owned by a holding
company and having a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it remains adequately capitalized, as
described above, after the distribution is made. Any other association seeking
to make a capital distribution that would not cause Home City to fall below the
capital levels to qualify as adequately capitalized or better would have to
provide notice to the OTS. Except under limited circumstances and with OTS
approval, no capital distribution would be permitted if it would cause Home City
to become undercapitalized or worse.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet these
liquidity requirements. The eligible liquidity of Home City, as computed under
current regulations, at June 30, 1996, was approximately $4.0 million, or 8.5%,
and exceeded the then applicable 5% liquidity requirement by approximately $1.6
million, or 3.5%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTIs"). Such investments are generally related
to domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. The QTL Test requires that 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) consist
of QTIs on a monthly average basis in 9 out of every 12 months. The OTS may
grant exceptions to the QTL Test under certain circumstances. If a savings
association fails to meet the QTL Test, Home City and its holding company will
be subject to certain operating restrictions. A savings association that fails
to meet the QTL Test will not be eligible for FHLB advances to the fullest
possible extent. See "Federal Home Loan Banks." Under recently enacted
legislation, QTI's were expanded to include credit card and education loans
without restriction, and the QTL Test could be met by qualifying as a "domestic
building and loan" under the Code. Under this test, at least 60% of an
institution's assets (on a tax basis) must consist of specified assets
(generally loans secured by residential property or deposits, education loans,
cash and certain government obligations). At June 30, 1996, Home City had QTIs
equal to approximately 78.3% of its total portfolio assets.
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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
such association's total capital under the regulatory capital requirements plus
any additional loan reserve not included in total capital. A savings association
may loan to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional loan 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 these
limits. In applying these limits, loans to certain borrowers may be aggregated.
Based on such limits, Home City is able to lend up to $834,000 to one borrower.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." See "THE BUSINESS OF HOME CITY - Lending
Activities -- Loan Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limits on loans to one borrower and the total of such loans cannot
exceed an association's total regulatory capital plus additional loan reserves
(or 200% of such capital amount for qualifying institutions with less than $100
million in assets). 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 to the general public. Loans to executive officers
are subject to additional limitations. Home City was in compliance with such
restrictions at June 30, 1996. See "MANAGEMENT OF HOME CITY - Certain
Transactions with Home City."
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act (the "FRA") pertaining to transactions with affiliates. 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. After the
Conversion, HCFC will be an affiliate of Home City. Generally, Sections 23A and
23B of the FRA (i) limit the extent to which the savings institution 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
institution, as those provided in transactions with a non-affiliate. The term
"covered transaction" includes the making of loans, purchase 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. Home City
was in compliance with these requirements and restrictions at June 30, 1996.
HOLDING COMPANY REGULATION. Upon consummation of the Conversion, HCFC
will be a savings and loan holding company within the meaning of the Home
Owners' Loan Act (the "HOLA"). As such, HCFC will register with the OTS and will
be subject to OTS regulations, examination, supervision and reporting
requirements, in addition to the reporting requirements of the Securities and
Exchange Commission (the "SEC"). Congress is considering legislation which may
require that HCFC become subject to more restrictive holding company
requirements, including capital requirements similar to those imposed on Home
City and more restrictive activity and investment limits than savings and loan
holding companies. No assurances can be given that such legislation will be
enacted, and HCFC cannot be certain of the legislation's impact on its future
operations until it is enacted.
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
holding 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 company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Board of Directors presently intends to operate HCFC as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company, and such companies are
the only financial institution holding companies which may engage in commercial,
securities and insurance activities without limitation. Congress is considering,
however, either limiting unitary savings and loan holding companies to the same
activities as other financial institution holding companies or permitting
certain bank holding companies to engage in commercial activities and expanded
securities and insurance activities. HCFC cannot predict if and in what form
these proposals might become law. The
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broad latitude to engage in activities under current law can be restricted,
however, 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 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 such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At June 30, 1996, Home City met the QTL Test. See
"Qualified Thrift Lender Test."
If HCFC were to acquire control of another savings institution other
than through a merger or other business combination with Home City, HCFC would
thereupon become a multiple savings and loan holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL Test,
the activities of HCFC and any of its subsidiaries (other than Home City or
other subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
institution shall commence, or shall continue after becoming a multiple savings
and loan holding company or subsidiary thereof, any business activity other than
(i) furnishing or performing management services for a subsidiary savings
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by federal regulation as of
March 5, 1987, to be engaged in by multiple holding companies, or (vii) those
activities authorized by the FRB as permissible for bank holding companies,
unless the OTS by regulation prohibits or limits such activities for savings and
loan holding companies. Those activities described in (vii) above must also be
approved by the OTS prior to being engaged in by a multiple holding company.
The OTS may also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, if the multiple savings and loan holding company involved
controls a savings association which operated a home or branch office in the
state of Home City to be acquired as of March 5, 1987, or if the laws of the
state in which the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).
As under prior law, the OTS may approve an acquisition resulting in a multiple
savings and loan holding company controlling savings associations in more than
one state in the case of certain emergency thrift acquisitions.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund. The reserves of
the SAIF are below the level required by law because a significant portion of
the assessments paid into the fund are used to pay the cost of prior thrift
failures. The reserves of the BIF met the level required by law in May 1995.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met.
Home City 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 Home City, 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.
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ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
costs of prior thrift failures. The BIF has, however, met its required reserve
level.
Assessments paid by healthy savings associations exceeded those paid by
healthy commercial banks by approximately $.19 per $100 in deposits in late 1995
and no BIF assessments have been required of healthy commercial banks in 1996,
except a $2,000 minimum fee. Such premium disparity could have a negative
competitive impact on Home City and other institutions with SAIF deposits.
Legislation to recapitalize the SAIF and to eliminate the significant
premium disparity between the BIF and the SAIF became effective September 30,
1996. The recapitalization plan provides for a special assessment equal to $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain BIF institutions holding SAIF
insured deposits will pay a lower special assessment. On the basis of its $40.4
million in deposits at March 31, 1995, Home City will pay, by November 29, 1996,
an additional pre-tax assessment of $265,000. Such payment was recorded as an
expense and accounted for by Home City as of September 30, 1996. Earnings and
capital were, therefore, negatively affected for the quarter ended September 30,
1996, by an after-tax amount of approximately $175,000.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF, which will increase BIF
assessments for healthy banks to approximately $.013 per $100 in deposits in
1997. SAIF assessments for healthy savings associations in 1997 will be
approximately $.064 per $100 in deposits and may never be reduced below the
level set for healthy BIF institutions
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, Home City would have to convert to a different financial
institution charter and would be regulated under federal law as a bank,
including being subject to the more restrictive activity limitations imposed on
national banks.
In addition, HCFC might become subject to more restrictive holding
company requirements, including activity limits and capital requirements similar
to those imposed on Home City. HCFC cannot predict the impact of the conversion
of Home City to, or regulation of Home City as, a bank until the legislation
requiring such change is enacted.
FRB REGULATIONS
RESERVE REQUIREMENTS. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts) of
3% of deposits in net transaction accounts for that portion of accounts in
excess of $4.3 million up to $52 million, and to maintain reserves of 10% of
deposits in net transaction accounts against that portion of total transaction
accounts in excess of $52 million. These percentages are subject to adjustment
by the FRB. At June 30, 1996, Home City was in compliance with its reserve
requirements.
FEDERAL HOME LOAN BANKS
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances. Home
City 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 Home City's residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or 5% of its advances from the FHLB. Home City is in compliance
with this requirement with an investment in FHLB of Cincinnati stock of $394,000
at June 30, 1996.
FHLB advances to members such as Home City who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. At June 30, 1996, Home City's
maximum limit on advances was approximately $7.9 million. The granting of
advances is subject also to the FHLB's collateral and credit underwriting
guidelines. At June 30, 1996, the FHLB of Cincinnati offered advances with fixed
and variable interest rates ranging from 5.6% to 8.3%, which included the
following types of borrowings: short-term advances with terms ranging from
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one day to one year, including cash management accounts and lines of credit;
fixed-rate, long-term advances with terms ranging from seven months to 20 years;
and various customized advances with terms ranging from one month to 30 years
and with call, balloon or mortgage-matching features.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. 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 each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Home City has participated in such program.
TAXATION
FEDERAL TAXATION
HCFC is subject to the federal tax laws and regulations which apply to
corporations generally. Home City is also subject to the federal tax laws and
regulations which apply to corporations generally. However, certain thrift
institutions such as Home City were, prior to the enactment of the Small
Business Jobs Protection Act, which was signed into law on August 21, 1996,
allowed deductions for bad debts under methods more favorable to 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 the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method applicable
only to thrift institutions, or (ii) the "experience" method that also was
available to small banks. Under the "percentage of taxable income" method, a
thrift institution generally was allowed a deduction for an addition to its bad
debt reserve equal to 8% of its taxable income (determined without regard to
this deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1993, 1992 and
1991, Home City used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that would
be 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. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
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. Any adjustments under Section 481(a) of the Code
required to be recaptured with respect to such change generally 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 becomes 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
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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 becomes a small bank, like Home City, 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 then 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 real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct or improve the property.
In addition to the regular income tax, HCFC and Home City are subject
to a minimum tax. An alternative minimum tax 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. In addition, for taxable years after 1986 and before 1996, HCFC
and Home City are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2.0 million.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires 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 Home City to HCFC is deemed paid out of its pre-1988 reserves under these
rules, the pre-1988 reserves would be reduced and Home City's gross income 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, 1996,
Home City's pre-1988 reserves for tax purposes totaled approximately $1.1
million. Home City believes it had approximately $4.2 million of accumulated
earnings and profits for tax purposes as of June 30, 1996, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made as
to whether Home City will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Home City have been audited or closed without audit
through fiscal year 1992. 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 Home City.
OHIO TAXATION
HCFC is subject to the Ohio corporation franchise tax, which, as
applied to HCFC, 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.
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In computing its tax under the net worth method, HCFC may exclude 100%
of its investment in the capital stock of Home City after the Conversion, as
reflected on the balance sheet of HCFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of Home
City. 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, HCFC 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
HCFC, 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.
Home City is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Home City's book
net worth determined in accordance with GAAP. As a "financial institution," Home
City is not subject to any tax based upon net income or net profits imposed by
the State of Ohio.
THE CONVERSION
THE OTS HAS APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY
THE MEMBERS OF HOME CITY ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO THE
SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS. OTS APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN.
GENERAL
On September 3, 1996, the Board of Directors of Home City unanimously
adopted the Plan and recommended that the voting members of Home City approve
the Plan at the Special Meeting to be held on December 19, 1996. During and upon
completion of the Conversion, Home City will continue to provide the services
presently offered to depositors and borrowers, will maintain its existing office
and will retain its existing management and employees.
Based on the current Valuation Range, between 612,000 and 952,200
Common Shares are expected to be offered in the Subscription Offering and the
Community Offering, in which preference will be given to natural persons
residing in Clark County, Ohio, at a price of $10 per share. Federal regulations
require, with certain exceptions, that shares offered in connection with the
Conversion must be sold up to at least the minimum of the Valuation Range in
order for the Conversion to become effective. The actual number of shares sold
in connection with the Conversion will be determined upon completion of the
Conversion in the sole discretion of the Boards of Directors of HCFC and Home
City based upon the final determination of the pro forma market value of Home
City at the completion of the Subscription Offering and the Community Offering.
See "Pricing and Number of Common Shares to be Sold."
The Common Shares will be offered in the Subscription Offering to (1)
each account holder of Home City who, as of June 30, 1995, had a Qualifying
Deposit ("Eligible Account Holders"), (2) the ESOP, (3) each account holder of
Home City who, as of September 30, 1996, had a Qualifying Deposit ("Supplemental
Eligible Account Holders"), and (4) each account holder of Home City having a
savings deposit of record with Home City on October 31, 1996 (the "Voting Record
Date"), and each borrower of record on the Voting Record Date whose loan was
outstanding on May 1, 1996 (such depositors and borrowers as of October 31,
1996, collectively, the "Voting Members"). Any Common Shares not subscribed for
in the Subscription Offering may be sold to the general public in the Community
Offering in a manner which will seek to achieve the widest distribution of the
Common Shares, but in which preference will be given to natural persons residing
in Clark County, Ohio. Under OTS regulations, the Community Offering must be
completed within 45 days after completion of the Subscription Offering, unless
such period is extended by HCFC and Home City with the approval of the OTS. If
the Community Offering is determined not to be feasible, an occurrence that is
not currently anticipated, the Board of Directors of Home City will consult with
the OTS to determine an appropriate alternative method of selling unsubscribed
Common Shares. No alternative sales methods are currently planned.
OTS regulations require the completion of the Conversion within 24
months after the date of the approval of the Plan by the Voting Members of Home
City. The commencement and completion of the Conversion will be subject to
market
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conditions and other factors beyond Home City's control. Due to changing
economic and market conditions, no assurance can be given as to the length of
time that will be required to complete the sale of the Common Shares. If delays
are experienced, significant changes may occur in the estimated pro forma market
value of Home City, together with corresponding changes in the aggregate
offering price and the net proceeds realized by HCFC from the sale of the Common
Shares. In such circumstances, Home City may also incur substantial additional
printing, legal and accounting expenses in completing the Conversion. In the
event the Conversion is not successfully completed, Home City will be required
to charge all Conversion expenses against current earnings.
The following is a summary of the material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan, a copy of which may be inspected at the office of Home City and at the
office of the OTS. The Plan is also filed as an exhibit to the Registration
Statement of which this Prospectus is a part, and copies of the Registration
Statement may be obtained from the SEC. See "ADDITIONAL INFORMATION."
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Savings account holders who are members of Home City in
its mutual form will have no voting rights in Home City as converted and will
not participate, therefore, in the election of directors or otherwise control
Home City's affairs. After the Conversion, voting rights in Home City will be
vested exclusively in HCFC as the sole shareholder of Home City. Voting rights
in HCFC will be held exclusively by its shareholders. Each holder of HCFC's
Common Shares will be entitled to one vote for each Common Share owned on any
matter to be considered by HCFC's shareholders. See "DESCRIPTION OF AUTHORIZED
SHARES."
SAVINGS ACCOUNTS AND LOANS. Savings accounts in Home City, as
converted, will be equivalent in amount, interest rate and other terms to the
present savings accounts in Home City, and the existing FDIC insurance on such
deposits will not be affected by the Conversion. The Conversion will not affect
the terms of loan accounts or the rights and obligations of borrowers under
their individual contractual arrangements with Home City.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by Home City of a private letter ruling from the Internal
Revenue Service (the "IRS") or an opinion of counsel to the effect that the
Conversion will constitute a tax-free reorganization as defined in Section
368(a) of the Code. Home City intends to proceed with the Conversion based upon
an opinion rendered by its special counsel, Vorys, Sater, Seymour and Pease,
which opinion is an exhibit to the Registration Statement on Form S-1 (File No.
333-12501) filed with the SEC by HCFC, addressing the following federal tax
consequences, which are all of the material federal tax consequences of the
Conversion:
(1) The Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized by Home City in its mutual form or in its stock form as a
result of the Conversion. Home City in its mutual form and Home City in
its stock form will each be a "party to a reorganization" within the
meaning of Section 368(B) of the Code;
(2) No gain or loss will be recognized by Home City upon the receipt of
money from HCFC in exchange for the capital stock of Home City, as
converted;
(3) The assets of Home City will have the same basis in its hands
immediately after the Conversion as it had in its hands immediately
prior to the Conversion, and the holding period of the assets of Home
City after the Conversion will include the period during which the
assets were held by Home City before the Conversion;
(4) No gain or loss will be recognized to the deposit account holders
of Home City upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in Home City immediately prior
to the Conversion, of withdrawable deposit accounts in Home City
immediately after the Conversion, in the same dollar amount as their
withdrawable deposit accounts in Home City immediately prior to the
Conversion, plus, in the case of Eligible Account Holders and
Supplemental Eligible Account Holders, the interests in the Liquidation
Account of Home City, as described below;
(5) The basis of the withdrawable deposit accounts in Home City held by
its deposit account holders immediately after the Conversion will be
the same as the basis of their deposit accounts in Home City
immediately prior to the Conversion. The basis of the interests in the
Liquidation Account received by the Eligible Account Holders and
Supplemental Eligible Account Holders will be zero. The basis of the
nontransferable subscription rights received by
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Eligible Account Holders, Supplemental Eligible Account Holders and
Other Eligible Members (hereinafter defined) will be zero (assuming
that at distribution such rights have no ascertainable fair market
value);
(6) No gain or loss will be recognized to Eligible Account Holders,
Supplemental Eligible Account Holders or Other Eligible Members upon
the distribution to them of nontransferable subscription rights to
purchase Common Shares (assuming that at distribution such rights have
no ascertainable fair market value), and no taxable income will be
realized by such Eligible Account Holders, Supplemental Eligible
Account Holders or Other Eligible Members as a result of their exercise
of such nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of Home City
pursuant to the exercise of subscription rights will be the purchase
price thereof (assuming that such rights have no ascertainable fair
market value and that the purchase price is not less than the fair
market value of the shares on the date of such exercise), and the
holding period of such shares will commence on the date of such
exercise. The basis of the Common Shares purchased other than by the
exercise of subscription rights will be the purchase price thereof
(assuming in the case of the other subscribers that the opportunity to
buy in the Subscription Offering has no ascertainable fair market
value), and the holding period of such shares will commence on the day
after the date of the purchase;
(8) For purposes of Section 381 of the Code, Home City will be treated
as if there had been no reorganization. The taxable year of Home City
will not end on the effective date of the Conversion and, immediately
after the Conversion, Home City in its stock form will succeed to and
take into account the tax attributes of Home City in its mutual form
immediately prior to the Conversion, including Home City's earnings and
profits or deficit in earnings and profits;
(9) The bad debt reserves of Home City in its mutual form immediately
prior to the Conversion will not be required to be restored to the
gross income of Home City in its stock form as a result of the
Conversion, and immediately after the Conversion such bad debt reserves
will have the same character in the hands of Home City in its stock
form as they would have had if there had been no Conversion. Home City
in its stock form will succeed to and take into account the dollar
amounts of those accounts of Home City in its mutual form which
represent bad debt reserves in respect of which Home City in its mutual
form has taken a bad debt deduction for taxable years ending on or
before the Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of Home City available for the subsequent
distribution of dividends within the meaning of Section 316 of the
Code. The creation of the Liquidation Account on the records of Home
City will have no effect on its taxable income, deductions for
additions to reserves for bad debts under Section 593 of the Code or
distributions to stockholders under Section 593(e) of the Code.
Home City has received an opinion from Keller to the effect that the
subscription rights have no ascertainable fair market value because the rights
are received by specified persons at no cost, may not be transferred and are of
short duration. The IRS could challenge the assumption that the subscription
rights have no ascertainable fair market value.
For Ohio tax purposes, the tax consequences of the Conversion will be
as follows:
(1) Home City is a "financial institution" for State of Ohio tax
purposes, and the Conversion will not change such status;
(2) Home City is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5%
of Home City's equity capital determined in accordance with GAAP, and
the Conversion will not change such status;
(3) As a "financial institution," Home City is not subject to any tax
based upon net income or net profit imposed by the State of Ohio, and
the Conversion will not change such status;
(4) The Conversion will not be a taxable transaction to Home City in
its mutual or stock form for purposes of the Ohio corporate franchise
tax; however, as a consequence of the Conversion, the annual Ohio
corporate franchise tax liability of Home City will increase if the
taxable net worth of Home City (i.e., book net worth computed in
accordance with GAAP at the close of Home City's taxable year for
federal income tax purposes) increases thereby; and
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(5) The Conversion will not be a taxable transaction to any deposit
account holder or borrower member of Home City in its mutual or stock
form for purposes of the Ohio corporate franchise tax and the Ohio
personal income tax.
Each Eligible Account Holder, Supplemental Eligible Account Holder and
Other Eligible Member is urged to consult his or her own tax advisor with
respect to the effect of such tax consequences on his or her own particular
facts and circumstances.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
Home City in its present mutual form, each depositor in Home City would receive
a pro rata share of any assets of Home City remaining after payment of the
claims of all creditors, including the claims of all depositors to the
withdrawable value of their savings accounts. A depositor's pro rata share of
such remaining assets would be the same proportion of such assets as the value
of such depositor's savings deposits bears to the total aggregate value of all
savings deposits in Home City at the time of liquidation.
In the event of a complete liquidation of Home City in its stock form
after the Conversion, each savings depositor as of June 30, 1995, and September
30, 1996, would have a claim of the same general priority as the claims of all
other general creditors of Home City. Except as described below, each
depositor's claim would be solely in the amount of the balance in such
depositor's savings account plus accrued interest. The depositor would have no
interest in the assets of Home City above that amount. Such assets would be
distributed to HCFC as the sole shareholder of Home City.
For the purpose of granting a limited priority claim to the assets of
Home City in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain
savings accounts at Home City after the Conversion, Home City will, at the time
of Conversion, establish the Liquidation Account in an amount equal to the
regulatory capital of Home City as of the latest practicable date prior to the
Conversion at which such regulatory capital can be determined. For this purpose,
Home City shall use the regulatory capital figure no later than that set forth
in its latest statement of financial condition contained in the Prospectus. The
Liquidation Account will not operate to restrict the use or application of any
of the regulatory capital of Home City.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date, as the case may be. The balance of
each initial Subaccount shall be an amount determined by multiplying the amount
in the Liquidation Account by a fraction, the numerator of which is the closing
balance in the account holder's account as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as the case
may be, and the denominator of which is the total amount of Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders on the
corresponding record date. The balance of each Subaccount may be decreased but
will never be increased. If, at the close of business on any annual closing date
of Home City subsequent to the respective record dates the balance in the
savings account to which a Subaccount relates is less than the lesser of (i) the
deposit balance in such savings account at the close of business on any other
annual closing date subsequent to the Eligibility Record Date or Supplemental
Eligibility Record Date or (ii) the amount of the Qualifying Deposit as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, the balance
of the Subaccount for such savings account shall be adjusted proportionately to
the reduction in such savings account balance. In the event of any such downward
adjustment, such Subaccount balance shall not be subsequently increased
notwithstanding any increase in the deposit balance of the related savings
account. If any savings account is closed, its related Subaccount shall be
reduced to zero upon such closing.
In the event of a complete liquidation of the converted Home City (and
only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder shall receive from the Liquidation Account a distribution equal
to the current balance in each of such account holder's Subaccounts before any
liquidation distribution may be made to HCFC as the sole shareholder of Home
City. Any assets remaining after satisfaction of such liquidation rights and the
claims of Home City's creditors would be distributed to HCFC as the sole
shareholder of Home City. No merger, consolidation, purchase of bulk assets or
similar combination or transaction with another institution, the deposits of
which are insured by the FDIC, will be deemed to be a complete liquidation for
this purpose and, in any such transaction, the Liquidation Account shall be
assumed by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
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INTERPRETATION AND AMENDMENT OF THE PLAN
The Boards of Directors of Home City and HCFC will interpret the Plan.
To the extent permitted by law, all interpretations of the Plan by the Boards of
Directors of Home City and HCFC will be final. The Plan may be amended by the
Boards of Directors of Home City and HCFC at any time before completion of the
Conversion with the concurrence of the OTS. If Home City and HCFC determine upon
advice of counsel and after consultation with the OTS that any such amendment is
material, subscribers will be notified of the amendment and will be provided the
opportunity to affirm, increase, decrease or cancel their subscriptions. Any
person who does not affirmatively elect to continue his subscription or elects
to rescind his subscription before the date specified in the notice will have
all of his funds promptly refunded with interest. Any person who elects to
decrease his subscription will have the appropriate portion of his funds
promptly refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan and
the adoption of the Federal Stock Charter and Federal Stock Bylaws by the Voting
Members of Home City at the Special Meeting and the sale of the requisite amount
of Common Shares within 24 months following the date of such approval. If these
conditions are not satisfied, the Plan will automatically terminate and Home
City will continue its business in the mutual form of organization. The Plan may
be voluntarily terminated by the Board of Directors at any time before the
Special Meeting and at any time thereafter with the approval of the OTS.
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 4:00 P.M., EASTERN TIME, ON
THE SUBSCRIPTION EXPIRATION DATE. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE THE
SUBSCRIPTION EXPIRATION DATE WILL BE VOID, WHETHER OR NOT HCFC HAS BEEN ABLE TO
LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. Each person subscribing for shares must
represent to HCFC that he or she is purchasing such shares for his or her own
account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares.
The number of Common Shares which a person who has subscription rights
may purchase will be determined, in part, by the total number of Common Shares
to be issued and the availability of such shares for purchase under the
preference categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the Voting Members of Home City at the Special Meeting.
The preference categories for the allocation of Common Shares, which
have been established in the Plan in accordance with applicable regulations, are
as follows:
CATEGORY 1. Eligible Account Holders will receive, without
payment, nontransferable subscription rights to purchase up to the
greater of (i) the amount permitted to be purchased in the Community
Offering, (ii) .10% of the total number of Common Shares sold in
connection with the Conversion, or (iii) 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number
of Common Shares sold in connection with the Conversion by a fraction of
which the numerator is the amount of the Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date, subject to the overall purchase limitations set
forth in Section 10 of the Plan. See "Limitations on Purchases of Common
Shares."
If the exercise of subscription rights in this Category 1
results in an over-subscription, Common Shares will be allocated among
subscribing Eligible Account Holders in a manner which will, to the
extent possible, make the total allocation of each subscriber equal 100
shares or the amount subscribed for, whichever is less. Any Common
Shares remaining after such allocation has been made will be allocated
among the subscribing Eligible Account Holders whose subscriptions
remain unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Eligibility Record Date bears to the total
Qualifying Deposits of all subscribing Eligible Account Holders on such
date.
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No fractional shares will be issued. The subscription rights of the
Eligible Account Holders are subordinate to the limited priority right
of the ESOP set forth in the following paragraph.
CATEGORY 2. The ESOP will receive, without payment,
nontransferable subscription rights to purchase up to 10% of the
Common Shares sold in connection with the Conversion. The subscription
rights of the ESOP will be subordinate to the subscription rights in
Category 1, except that if the final pro forma market value of Home
City exceeds the maximum of the Valuation Range, the ESOP shall have
first priority with respect to the amount sold in excess of the
maximum of the Valuation Range. If the ESOP is unable to purchase all
or part of the Common Shares for which it subscribes due to an
oversubscription in Category 1, the ESOP may purchase Common Shares on
the open market or may purchase authorized but unissued shares of
HCFC. If the ESOP purchases authorized but unissued shares from HCFC,
such purchases would have a dilutive effect on the interests of HCFC's
shareholders.
CATEGORY 3. Supplemental Eligible Account Holders, will receive,
without payment, non-transferable subscription rights to purchase up
to the greater of (i) the amount permitted to be purchased in the
Community Offering, (ii) .10% of the total number of Common Shares
sold in connection with the Conversion, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the
total number of Common Shares sold in connection with the Conversion
by a fraction of which the numerator is the amount of the Supplemental
Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders, in each case on the Supplemental Eligibility
Record Date, subject to the overall purchase limitations set forth in
Section 10 of the Plan. See "Limitations on Purchases of Common
Shares."
If the exercise of subscription rights in this Category 3 results
in an over-subscription, Common Shares will be allocated among
subscribing Supplemental Eligible Account Holders in a manner which
will, to the extent possible, make the total allocation of each
subscriber equal 100 shares or the amount subscribed for, whichever is
lesser. Any Common Shares remaining after such allocation has been
made will be allocated among the subscribing Supplemental Account
Holders whose subscriptions remain unfilled in the proportion which
the amount of their respective Qualifying Deposits on the Supplemental
Eligibility Record Date bears to the total Qualifying Deposits of all
subscribing Supplemental Eligible Account Holders on such date. No
fractional shares will be issued.
Subscription rights received in this Category 3 will be
subordinate to the subscription rights in Categories 1 and 2.
CATEGORY 4. All Voting Members who are not Eligible Account
Holders or Supplemental Eligible Account Holders ("Other Eligible
Members") will receive nontransferable subscription rights to purchase
Common Shares in an amount up to the greater of the amount permitted
to be purchased in the Community Offering or .10% of the total number
of Common Shares sold in connection with the Conversion, subject to
the overall purchase limitations set forth in Section 10 of the Plan.
See "Limitations on Purchases of Common Shares." In the event of an
oversubscription in this Category 4, the available shares will be
allocated among subscribing Other Eligible Members on an equitable
basis in the same proportion that their respective subscriptions bear
to the total amount of all subscriptions in this Category 4.
Subscription rights received in this Category 4 will be
subordinate to the subscription rights in Categories 1 through 3.
The Board of Directors may reject any one or more subscriptions if,
based upon the Board of Directors' interpretation of applicable regulations,
such subscriber is not entitled to the shares for which he or she has subscribed
or if the sale of the shares subscribed for would be in violation of any
applicable statutes, regulations or rules.
HCFC will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons having subscription rights
reside. However, no person will be offered or receive any Common Shares under
the Plan who resides in a foreign country or in a state of the United States
with respect to which all of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares under the Plan resides in such
country or state; (ii) under the securities laws of such country or state, the
granting of subscription rights or the offer or sale of Common Shares to such
persons would require HCFC or its officers or directors, to register as a broker
or dealer or to register or otherwise qualify its securities for sale in such
country or state; and (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise.
The term "resident" as used herein with respect to the Subscription
Offering means any person who, on the date of submission of a Stock Order Form,
maintained a bona fide residence within a jurisdiction in which the Common
Shares are
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being offered for sale. If a person is a business entity, the person's residence
shall be the location of the principal place of business. If the person is a
personal benefit plan, the residence of the beneficiary shall be the residence
of the plan. In the case of all other benefit plans, the residence of the
trustee shall be the residence of the plan. In all cases, the determination of a
subscriber's residency shall be in the sole discretion of Home City and HCFC.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, HCFC is hereby offering
Common Shares in the Community Offering, subject to the limitations set forth
below, to the extent such shares remain available after the satisfaction of all
orders received in the Subscription Offering. If subscriptions are received in
the Subscription Offering for at least 952,200 Common Shares, Common Shares may
not be available for purchase in the Community Offering. All sales of Common
Shares in the Community Offering will be at the same price per share as in the
Subscription Offering. THE COMMUNITY OFFERING MAY BE TERMINATED AT ANY TIME
AFTER ORDERS FOR AT LEAST 952,200 COMMON SHARES HAVE BEEN RECEIVED, BUT IN NO
EVENT LATER THAN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE, OR JANUARY 30,
1996, UNLESS EXTENDED BY HOME CITY AND HCFC, WITH THE APPROVAL OF THE OTS, IF
NECESSARY. IN ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED BEYOND
DECEMBER 19, 1998.
In the event shares are available in the Community Offering, members of
the general public may purchase up to 1% of the Common Shares sold, which is
9,522 Common Shares at the maximum of the Valuation Range, as adjusted. See
"Limitations on Purchases of Common Shares." If an insufficient number of shares
is available to fill all of the orders received in the Community Offering, the
available shares will be allocated in a manner to be determined by the Board of
Directors of HCFC, subject to the following:
(i) Preference will be given to natural persons who are residents of
Clark County, Ohio, the county in which the offices of Home City are
located;
(ii) Orders received in the Community Offering will first be filled up
to a maximum of 2% of the total number of Common Shares offered, with
any remaining shares allocated on an equal number of shares per order
basis until all orders have been filled;
(iii) No person, together with any Associate and persons Acting in
Concert, may purchase more than 2% of the Common Shares; and
(iv) The right of any person to purchase Common Shares in the
Community Offering is subject to the right of HCFC and Home City to
accept or reject such purchases in whole or in part.
The term "resident" as used herein with respect to the Community
Offering means any natural person who, on the date of submission of a Stock
Order Form, maintained a bona fide residence within, as appropriate, Clark
County or a jurisdiction in which the Common Shares are being offered for sale.
LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of Common Shares. To the extent such shares are available, the
minimum number of shares that may be purchased by any party is 25. No fractional
shares will be issued.
Currently, no person, together with Associates and persons Acting in
Concert, may purchase more than 2% of the Common Shares. Subject to any required
regulatory approval and the requirements of applicable laws and regulations, but
without further approval of the members of Home City, purchase limitations may
be increased or decreased at the sole discretion of the Boards of Directors of
HCFC and Home City at any time. If such amount is increased, persons who
subscribed for the maximum amount will be given the opportunity to increase
their subscriptions up to the then applicable limit, subject to the rights and
preferences of any person who has priority subscription rights. The Boards of
Directors of HCFC and Home City may, in their sole discretion, increase the
maximum purchase limitation referred to above up to 10%, provided that orders
for shares exceeding 5% of the shares to be issued in the Conversion shall not
exceed, in the aggregate, 10% of the shares to be issued in the Conversion. In
the event that the purchase limitation is decreased after commencement of the
Subscription Offering, the order of any person who subscribed for the maximum
number of Common Shares shall be decreased by the minimum amount necessary so
that such person shall be in compliance with the then maximum number of shares
permitted to be subscribed for by such person.
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"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal" or "a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose." Persons shall be presumed to be Acting in Concert
with each other if: (i) both are purchasing Common Shares in the Conversion and
are (a) executive officers, directors, trustees, or anyone who performs, or
whose nominee or representative performs, a similar policy making function at a
company (other than Home City or HCFC) or principal business units or
subsidiaries of a company, or (b) any person who directly or indirectly owns or
controls 10% or more of the stock of a company (other than Home City or HCFC);
or (ii) one person provides credit to the other for the purchase of Common
Shares or is instrumental in obtaining that credit. In addition, if a person is
presumed to be Acting in Concert with another person, then the person is
presumed to Act in Concert with anyone else who is, or is presumed to be, Acting
in Concert with that other person.
For purposes of the Plan, (i) the directors of Home City are not deemed
to be Acting in Concert solely by reason of their membership on the Board of
Directors of Home City; (ii) an associate of a person (an "Associate") is (a)
any corporation or organization (other than Home City) of which such person is
an officer, partner or, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (b) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such person, or relative of such spouse, who either has the same home
as such person or who is a director or officer of Home City. Executive officers
and directors of Home City and their Associates may not purchase, in the
aggregate, more than 34.9% of the total number of Common Shares sold in the
Conversion. Shares acquired by the ESOP will not, pursuant to regulations
governing the Conversion, be aggregated with the shares purchased by the
directors, officers and employees of Home City.
Purchases of Common Shares are also subject to the change in control
regulations of the OTS. Such regulations restrict direct and indirect purchases
of 10% or more of the stock of any savings association by any person or group of
persons Acting in Concert. See "RESTRICTIONS ON ACQUISITION OF HOME CITY AND
HCFC AND RELATED ANTI-TAKEOVER PROVISIONS - Federal Law and Regulation."
After the Conversion, Common Shares, except for shares purchased by
officers and directors of HCFC, will be freely transferable, subject to OTS
regulations. See "Restrictions on Transferability of Common Shares by Directors
and Officers."
PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available to all eligible subscribers by mail. See
"ADDITIONAL INFORMATION." Additional copies are available at the offices of Home
City. Sales of Common Shares will be made primarily by registered
representatives affiliated with Webb. HCFC will rely on Rule 3a4-1 under the
Exchange Act, and sales of Common Shares will be conducted within the
requirements of Rule 3a4-1, which will permit officers, directors and employees
of HCFC and Home City to participate in the sale of Common Shares, in clerical
capacities, providing administrative support in effecting sales transactions or
answering questions relating to the proper execution of the Stock Order Form,
except that officers, directors and employees will not participate in the sale
of Common Shares to residents of any state in which such persons have not met
such state's requirements for participation. Management of Home City may answer
questions regarding the business of Home City. Other questions of prospective
purchasers, including questions as to the nature of the investment, will be
directed to registered representatives. Management and the employees of Home
City have been instructed not to solicit offers to purchase Common Shares or to
provide advice regarding the purchase of Common Shares. No officer, director or
employee of HCFC or Home City will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Shares.
To assist HCFC in marketing the Common Shares, HCFC has retained Webb,
a broker-dealer registered with the SEC and a member of the National Association
of Securities Dealers, Inc. (the "NASD"). Webb will consult with and advise HCFC
and assist with the sale of the Common Shares on a best efforts basis in
connection with the Conversion. The services to be rendered by Webb include
assisting HCFC in conducting the Subscription Offering and the Community
Offering and educating Home City personnel about the Conversion process. Webb is
not obligated to purchase any of the Common Shares.
For its services, Webb has been paid a management fee in the amount of
$25,000. Webb will also receive a commission equal to 1.5% of the aggregate
purchase price paid for Common Shares sold in the Conversion, excluding
purchases by Home City's directors, executive officers, and Associates of such
directors and executive officers, and the ESOP. If Webb and HCFC deem necessary,
Webb may enter into agreements with other NASD members ("Selected Dealers") for
assistance in the sale of the Common Shares, in which event Webb and such
Selected Dealers will receive a commission not to exceed 5.5%
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of the purchase price of Common Shares sold, if any, by the Selected Dealer. In
addition, HCFC will reimburse Webb for certain expenses, including reasonable
legal fees.
HCFC and Home City have agreed to indemnify Webb and its directors,
officers, employees, agents and any controlling person against any and all loss,
liability, claim, damage or expense arising out of any untrue statement, or
alleged untrue statement, of a material fact contained in the Summary Proxy
Statement or the Prospectus, any application to regulatory authorities, any
"blue sky" application, or any other related document prepared or executed by or
on behalf of HCFC or Home City with its consent in connection with, or in
contemplation of, the Conversion, or any omission therefrom of a material fact
required to be stated therein, unless such untrue statement or omission, or
alleged untrue statement or omission, was made in reliance upon certain
information furnished to Home City by Webb expressly for use in the Summary
Proxy Statement or the Prospectus.
The Common Shares will be offered principally by the distribution of
this Prospectus and through activities conducted at the Conversion Information
Center, which will be located at the office of Home City. The Conversion
Information Center will be staffed by one or more of Webb's employees, who will
be responsible for mailing materials relating to the Offering, responding to
questions regarding the Conversion and the Offering and processing stock orders.
A conspicuous legend that the Common Shares are not a federally-insured
or guaranteed deposit or account appears on all offering documents used in
connection with the Conversion and will appear on the certificates representing
the Common Shares. Any person purchasing Common Shares will be required to
execute the Stock Order Form certifying such person's knowledge that the Common
Shares are not federally-insured or guaranteed and that the purchaser has
received a Prospectus and understands the investment risk involved.
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond 45 days after the Subscription
Expiration Date, persons who have subscribed for Common Shares in the
Subscription Offering or in the Community Offering will receive a written notice
that until a date specified in the notice, they have the right to increase,
decrease or rescind their subscriptions for Common Shares. Any person who does
not affirmatively elect to continue his subscription or elects to rescind his
subscription during any such extension will have all of his funds promptly
refunded with interest. Any person who elects to decrease his subscription
during any such extension shall have the appropriate portion of his funds
promptly refunded with interest.
USE OF STOCK ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and the
Community Offering may be made only by completing and submitting a Stock Order
Form. Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to HCFC at 63 West Main Street, Springfield,
Ohio 45502-1309, by mail or in person, prior to 4:00 p.m., Eastern Time, on
December 16, 1996, a properly executed and completed original Stock Order Form,
together with full payment of the subscription price of $10 for each share for
which subscription is made. Photocopies or telecopies of Stock Order Forms will
not be accepted. See "ADDITIONAL INFORMATION." THE FAILURE TO DELIVER A PROPERLY
EXECUTED ORIGINAL ORDER FORM AND FULL PAYMENT IN A MANNER BY WHICH THEY ARE
ACTUALLY RECEIVED BY HCFC NO LATER THAN 4:00 P.M. ON THE SUBSCRIPTION EXPIRATION
DATE WILL PRECLUDE THE PURCHASE OF COMMON SHARES IN THE OFFERING.
AN EXECUTED STOCK ORDER FORM, ONCE RECEIVED BY HCFC, MAY NOT BE
MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF HCFC, UNLESS (I) THE
COMMUNITY OFFERING IS NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION
EXPIRATION DATE, OR (II) THE FINAL VALUATION OF HOME CITY, AS CONVERTED, IS LESS
THAN $6,120,000 OR MORE THAN $9,522,000. IF EITHER OF THOSE EVENTS OCCUR,
PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR IN
THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT UNTIL A DATE SPECIFIED
IN THE NOTICE, THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR
SUBSCRIPTIONS. ANY PERSON WHO DOES NOT AFFIRMATIVELY ELECT TO CONTINUE HIS
SUBSCRIPTION OR ELECTS TO RESCIND HIS SUBSCRIPTION DURING ANY SUCH EXTENSION
WILL HAVE ALL OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST. ANY PERSON WHO
ELECTS TO DECREASE HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE
APPROPRIATE PORTION OF HIS FUNDS PROMPTLY REFUNDED WITH INTEREST.
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PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany all completed Stock Order Forms in order for
subscriptions to be valid. Payment for Common Shares may be made (i) in cash, if
delivered in person, (ii) by check, bank draft or money order payable to the
order of Home City, or (iii) by authorization of withdrawal from savings
accounts in Home City (other than non-self-directed IRAs). Wire transfers will
not be accepted. Home City cannot lend money or otherwise extend credit to any
person to purchase Common Shares, other than the ESOP.
Payments made in cash or by check, bank draft or money order will be
placed in a segregated savings account insured by the FDIC up to applicable
limits. Interest will be paid by Home City on such accounts at Home City's
passbook rate, currently 2.5% annual percentage yield, from the date payment is
received until the Conversion is completed or terminated. Payments made by check
will not be deemed to have been received until such check has cleared for
payment.
Instructions for authorizing withdrawals from savings accounts are
provided in the Stock Order Form. Once a withdrawal has been authorized, none of
the designated withdrawal amount may be used by a subscriber for any purpose
other than to purchase Common Shares, unless the Conversion is terminated. All
sums authorized for withdrawal will continue to earn interest at the contract
rate for such account or certificate until the completion or termination of the
Conversion. Interest penalties for early withdrawal applicable to certificate
accounts will be waived in the case of withdrawals authorized for the purchase
of Common Shares. If a partial withdrawal from a certificate account results in
a balance less than the applicable minimum balance requirement, the certificate
will be cancelled and the remaining balance will earn interest at Home City's
passbook rate subsequent to the withdrawal.
Persons who are beneficial owners of IRAs maintained at Home City do
not personally have subscription rights related to such account. The account
itself, however, may have subscription rights. In order to utilize funds in an
IRA maintained at Home City, the funds must be transferred to a self-directed
IRA that permits the IRA funds to be invested in stock. The beneficial owner of
the IRA must direct the trustee of the IRA to use funds from such account to
purchase Common Shares in connection with the Conversion. Persons who are
interested in utilizing IRAs at Home City to subscribe for Common Shares should
contact the Home City Conversion Information Center at (513) 324-3830 for
instructions and assistance.
Subscriptions will not be filled by HCFC until subscriptions have been
received in the Subscription Offering and the Community Offering for up to
612,000 Common Shares, the minimum of the Valuation Range. If the Conversion is
terminated, all funds delivered to HCFC for the purchase of Common Shares will
be returned with interest, and all charges to savings accounts will be
rescinded. Subscribers and other purchasers will be notified by mail, promptly
on completion of the sale of the Common Shares, of the number of shares for
which their subscriptions have been accepted. Certificates representing Common
Shares will be delivered promptly thereafter.
If the ESOP subscribes for Common Shares in the Subscription Offering,
the ESOP will not be required to pay for the shares subscribed for at the time
it subscribes but may pay for such Common Shares upon consummation of the
Conversion.
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of Home City and their Associates. For purposes of this table, it has
been assumed that 720,000 Common Shares will be sold in connection with the
Conversion at $10 per share and that a sufficient number of Common Shares will
be available to satisfy the intended purchases by directors and executive
officers. The number of Common Shares purchased may decrease or increase if
fewer or greater than 720,000 Common Shares are sold in connection with the
Conversion. See "Pricing and Number of Common Shares to be Sold."
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<TABLE>
<CAPTION>
Percent Aggregate
Total of total purchase
Name Shares Offering Price
- ---- ------ -------- ---------
<S> <C> <C> <C>
John D. Conroy 14,400 2.0% $144,000
P. Clark Engelmeier 14,400 2.0 144,000
James Foreman 14,400 2.0 144,000
Terry A. Hoppes 14,400 2.0 144,000
Douglas L. Ulery 14,400 2.0 144,000
Gary E. Brown 2,000 0.3 20,000
Jo Ann Holdeman 1,000 0.1 10,000
------- ----- ----------
Total 75,000 10.4% $750,000
====== ==== ========
</TABLE>
All purchases by executive officers and directors of Home City are made
for investment purposes only and with no intent to resell.
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares will be based on the
pro forma market value of the shares as determined by an independent appraisal
of Home City. Keller, a firm which evaluates and appraises financial
institutions, was retained by Home City to prepare an appraisal of the estimated
pro forma market value of Home City as converted. Keller will receive a fee of
$15,000 for its appraisal, which amount includes out-of-pocket expenses.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the present and projected operating results and financial condition of Home City
and the economic and demographic conditions in Home City's existing market area;
the quality and depth of Home City's management and personnel; certain
historical financial and other information relating to Home City and a
comparative evaluation of the operating and financial statistics of Home City
with those of other thrift institutions; the aggregate size of the offering; the
impact of the Conversion on Home City's regulatory capital and earnings
potential; the trading market for stock of comparable thrift institutions; the
effect of Home City becoming a subsidiary of HCFC; and general conditions in the
markets for such stocks.
Keller's valuation of the estimated pro forma market value of Home
City, as converted, is $7,200,000 as of September 6, 1996 (the "Pro Forma
Value"). HCFC will issue the Common Shares at a fixed price of $10 per share
and, by dividing the price per share into the Pro Forma Value, will determine
the number of shares to be issued. Applicable regulations also require, however,
that the appraiser establish the Valuation Range of 15% on either side of the
Pro Forma Value to allow for fluctuations in the aggregate value of the Common
Shares due to changes in the market for thrift shares and other factors from the
time of commencement of the Subscription Offering until the completion of the
Conversion.
As of September 6, 1996, the Valuation Range was from $6,120,000 to
$8,280,000, which, based upon a per share offering price of $10, will result in
the sale of between 612,000 and 828,000 Common Shares. In the event that Keller
determines at the close of the Conversion that the aggregate pro forma value of
Home City is higher or lower than the Pro Forma Value, but is nevertheless
within the Valuation Range, or is not more than 15% above the maximum of the
Valuation Range, HCFC will make an appropriate adjustment by raising or lowering
the total number of Common Shares sold in the Conversion consistent with the
final Valuation Range. The total number of Common Shares sold in the Conversion
will be determined in the discretion of the Boards of Directors of HCFC and Home
City consistent with the Valuation Range. If, due to changing market conditions,
the final valuation is not between the minimum of the Valuation Range and 15%
above the maximum of the Valuation Range, subscribers will be given a notice of
such final valuation and the right to affirm, increase, decrease or rescind
their subscriptions. Any person who does not affirmatively elect to continue his
subscription or elects to rescind his subscription before the date specified in
the notice will have all of his funds promptly refunded with interest. Any
person who elects to decrease his subscription will have the appropriate portion
of his funds promptly refunded with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES
OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND
STATISTICAL INFORMATION PROVIDED BY HOME CITY AND ITS INDEPENDENT AUDITORS.
KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER
INFORMATION
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PROVIDED BY HOME CITY AND ITS INDEPENDENT AUDITORS, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF HOME CITY OR HCFC. THE VALUATION
CONSIDERS HOME CITY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF HOME CITY. MOREOVER, BECAUSE SUCH
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING COMMON SHARES WILL THEREAFTER BE ABLE TO SELL
SUCH SHARES AT PRICES WITHIN THE ESTIMATED PRICE RANGE.
A copy of the complete appraisal is on file and open for inspection at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the
Central Regional Office of the OTS, 200 West Madison, Suite 1300, Chicago,
Illinois 60606, and at the office of Home City.
RESTRICTIONS ON REPURCHASE OF COMMON SHARES
Federal regulations prohibit HCFC from repurchasing, without approval
by the OTS, any of its capital stock for three years following the date of
completion of the Conversion, except as part of an open-market stock repurchase
program during the second and third years following the Conversion involving no
more than 5% of HCFC's outstanding capital stock during a twelve-month period.
In addition, after such a repurchase, Home City's regulatory capital must equal
or exceed all regulatory capital requirements. Before commencement of such a
program, HCFC must provide notice to the OTS, and the OTS may disapprove the
program if the OTS determines that it would adversely affect the financial
condition of Home City or if it determines that there is no valid business
purpose for such repurchase. Such repurchase restrictions would not prohibit the
ESOP or the RRP from purchasing Common Shares during the first year following
Conversion.
RESTRICTIONS ON TRANSFERABILITY OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors or executive officers of HCFC or
their Associates will be subject to the restriction that such shares may not be
sold for a period of one year following completion of the Conversion, except in
the event of the death of the shareholder. The certificates evidencing Common
Shares issued by HCFC to directors, executive officers and their Associates will
bear a legend giving appropriate notice of the restriction imposed upon the
transfer of such Common Shares. In addition, HCFC will give appropriate
instructions to the transfer agent (if any) for HCFC's Common Shares in respect
of the applicable restriction on transfer of any restricted shares. Any shares
issued as a stock dividend, stock split or otherwise in respect of restricted
shares will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following
the Conversion, no director or officer of HCFC or Home City, or any of their
Associates, may purchase any common shares of HCFC without the prior written
approval of the OTS, except through a broker-dealer registered with the SEC.
This restriction will not apply, however, to negotiated transactions involving
more than 1% of a class of outstanding common shares of HCFC or shares acquired
by any stock benefit plan of Home City or HCFC.
The Common Shares, like the stock of most public companies, are subject
to the registration requirements of the Securities Act of 1933 (the "Securities
Act"). Accordingly, the Common Shares may be offered and sold only in compliance
with such registration requirements or pursuant to an applicable exemption from
registration. Common Shares received in the Conversion by persons who are not
"affiliates" of HCFC may be resold without registration. Common Shares received
by affiliates of HCFC will be subject to resale restrictions. An "affiliate" of
HCFC, for purposes of Rule 144 under the Securities Act ("Rule 144"), is a
person who directly, or indirectly through one or more intermediaries, controls,
or is controlled by or is under common control with, HCFC. Rule 144 generally
requires that there be publicly available certain information concerning HCFC
and that sales subject to Rule 144 be made in routine brokerage transactions or
through a market maker. If the conditions of Rule 144 are satisfied, each
affiliate (or group of persons acting in concert with one or more affiliates) is
entitled to sell in the public market, without registration, in any three-month
period, a number of shares which does not exceed the greater of (i) 1% of the
number of outstanding shares of HCFC or (ii) if the shares are admitted to
trading on a national securities exchange or reported through the automated
quotation system of a registered securities association, the average weekly
reported volume of trading during the four weeks preceding the sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves the Plan may obtain review of such action
by filing in the Court of Appeals of the United States for the circuit in which
the principal office or residence of such person is located or in the United
States Court of Appeals for the District of Columbia, a written petition praying
that the final action of the OTS be modified, terminated or set aside. Such
petition must be filed within 30 days
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after the date of mailing of proxy materials to the Voting Members of Home City
or within 30 days after the date of publication in the Federal Register of
notice of approval of the Plan by the OTS, whichever is later.
RESTRICTIONS ON ACQUISITION OF HOME CITY AND HCFC
AND RELATED ANTI-TAKEOVER PROVISIONS
GENERAL
Federal law and regulation, Ohio law, the Articles of Incorporation and
Code of Regulations of HCFC, the Federal Stock Charter of Home City and certain
employee benefit plans to be adopted by Home City and HCFC contain certain
provisions which may deter or prohibit a change of control of Home City or HCFC.
Such provisions are intended to encourage any acquiror to negotiate the terms of
an acquisition with the Board of Directors of HCFC, thereby reducing the
vulnerability of HCFC to takeover attempts and certain other transactions that
have not been negotiated with and approved by the Board of Directors.
Anti-takeover devices and provisions may have the effect, however, of
discouraging sudden or hostile takeover attempts, even under circumstances in
which shareholders may deem such takeovers to be in their best interests or in
which shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders who might desire to participate
in such a transaction may not have an opportunity to participate because of such
devices and provisions. Moreover, such devices and provisions may also benefit
management by discouraging changes of control in which incumbent management
would be removed from office.
The following is a summary of certain provisions of such laws,
regulations and documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The FDIA provides that no person, acting
directly or indirectly or in concert with one or more persons, may acquire
control of any insured savings association or holding company unless both (i) 60
days' prior written notice has been given to the OTS and (ii) the OTS has not
issued a notice disapproving the proposed acquisition. Control, for purposes of
the FDIA, means the power, directly or indirectly, to direct the management or
policies of an insured institution or to vote 25% or more of any class of
securities of such institution. This provision of the FDIA is implemented by the
OTS in accordance with the Regulations for Acquisition of Control of an Insured
Institution, 12 C.F.R. Part 574 (the "Control Regulations"). Control, for
purposes of the Control Regulations, exists in situations in which either (a)
the acquiring party has direct or indirect voting control of at least 25% of the
institution's voting shares or controls in any manner the election of a majority
of the directors of such institution or (b) the Director of the OTS determines
that such person exercises a controlling influence over the management or
policies of such institution. In addition, control is presumed to exist, subject
to rebuttal, if the acquiring party (which includes a group "acting in concert")
has voting control of at least 10% of the institution's voting stock and any of
eight control factors specified in the Control Regulations exists. There are
also rebuttable presumptions in the Control Regulations concerning whether a
group "acting in concert" exists, including presumed action in concert among
members of an "immediate family." The Control Regulations apply to acquisitions
of Common Shares in connection with the Conversion and to acquisitions after the
Conversion.
CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. A regulation of the OTS
provides that, for a period of three years after the date of the completion of
the Conversion, no person shall, directly or indirectly, offer to acquire or
acquire beneficial ownership of more than 10% of any class of equity security of
Home City or HCFC without the prior written approval of the OTS. In addition to
the actual ownership of more than 10% of a class of equity securities, a person
is deemed to have acquired beneficial ownership of more than 10% of the equity
securities of HCFC or Home City if the person holds any combination of stock and
revocable and/or irrevocable proxies of HCFC under circumstances that give rise
to a conclusive control determination or rebuttable control determination under
the OTS's change of control regulations. Such circumstances include (i) holding
any combination of voting shares and revocable and/or irrevocable proxies
representing more than 25% of any class of voting stock of HCFC enabling the
acquirer (a) to elect one-third or more of the directors, (b) to cause HCFC's or
Home City's shareholders to approve the acquisition or corporate reorganization
of HCFC or Home City, or (c) to exert a controlling influence over a material
aspect of the business operations of HCFC or Home City, and (ii) acquiring any
combination of voting shares and irrevocable proxies representing more than 25%
of any class of voting shares.
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Such three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to Home City or HCFC or to any underwriter
or selling group acting on behalf of Home City or HCFC, (ii) unless made
applicable by the OTS by prior written advice, to any offer or announcement of
an offer which, if consummated, would result in the acquisition by any person,
together with all other acquisitions by any such person of the same class of
securities during the preceding 12-month period, of not more than 1% of the
class of securities, or (iii) to any offer to acquire or the acquisition of
beneficial ownership of more than 10% of any class of equity security of Home
City or HCFC by a corporation whose ownership is or will be substantially the
same as the ownership of Home City or HCFC if made more than one year following
the date of the Conversion. The foregoing restriction does not apply to the
acquisition of Home City or HCFC's capital stock by one or more tax-qualified
employee stock benefit plans of HCFC or Home City, provided that the plan or
plans do not have beneficial ownership in the aggregate of more than 25% of any
class of equity security of Home City or HCFC. See "Articles of Incorporation of
Home City" for a discussion of a five-year restriction on direct or indirect
beneficial ownership of 10% of the outstanding common shares of Home City.
HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings and
loan holding company, without prior approval of the Director of the OTS, from
(i) acquiring control of any other savings association or savings and loan
holding company, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary. Acquisitions under the Holding Company Act are
governed by the Control Regulations. See "Federal Deposit Insurance Act."
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director 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
holding company. Except with the prior approval of the Director 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 company's voting shares
may acquire control of any savings institution, other than a subsidiary
institution or any other savings and loan holding company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has adopted a merger moratorium statute
regulating certain takeover bids affecting certain public corporations with
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares that resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) an exception specifically enumerated in the statute is
applicable to the combination, (2) the combination is approved, at a meeting
held for such purpose, by the affirmative vote of the holders of the issuing
public corporation entitling them to exercise at least two-thirds of the voting
power of the issuing public corporation in the election of directors or of such
different proportion as the articles may provide, provided the combination is
also approved by the affirmative vote of the holders of at least a majority of
the disinterested shares, or (3) the business combination meets certain
statutory criteria designed to ensure that the issuing public corporation's
remaining shareholders receive fair consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. The
Articles of Incorporation of HCFC do not opt out of the protection afforded by
Chapter 1704. Therefore, the merger moratorium statute applies to HCFC.
CONTROL SHARE ACQUISITION STATUTE. Section 1701.831 of the Ohio Revised
Code (the "Control Share Acquisition Statute") requires that certain
acquisitions of voting securities that would result in the acquiring shareholder
owning 20%, 33 1/3%, or 50% of the outstanding voting securities of HCFC must be
approved in advance by the holders of at least a majority of the outstanding
voting shares represented at a meeting at which a quorum is present and a
majority of the portion of the
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outstanding voting shares represented at such a meeting, excluding the voting
shares owned by the acquiring shareholder. The Control Share Acquisition Statute
was intended, in part, to protect shareholders of Ohio corporations from
coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation. Such statute provides that no offeror
may make a takeover bid unless (i) at least 20 days prior thereto the offeror
announces publicly the terms of the proposed takeover bid and files with the
Ohio Division of Securities (the "Securities Division") and provides the target
company with certain information in respect of the offeror, his ownership of the
company's shares and his plans for the company, and (ii) within ten days
following such filing either (a) no hearing is required by the Securities
Division, (b) a hearing is requested by the target company within such time but
the Securities Division finds no cause for hearing exists, or (c) a hearing is
ordered and upon such hearing the Securities Division adjudicates that the
offeror proposes to make full, fair and effective disclosure to offerees of all
information material to a decision to accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
ARTICLES OF INCORPORATION OF HCFC
RESTRICTION ON ACQUISITION OF MORE THAN 10% OF THE COMMON SHARES. The
Articles of Incorporation of HCFC provide that for five years after the
effective date of the Conversion, no person, except the ESOP, may offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
outstanding equity securities of HCFC. If such a prohibited acquisition occurs,
the securities owned by such person in excess of the 10% limit may not be voted
on any matter submitted to the shareholders of HCFC. The term "person" is
defined as an individual, a group acting in concert, a corporation, a
partnership, an association, a joint stock company, a trust, an unincorporated
organization or similar company, a syndicate or any other group formed for the
purpose of acquiring, holding or disposing of the equity securities of HCFC, but
does not include an employee stock ownership plan for the benefit of the
employees of Home City or HCFC. The term "offer" includes every offer to buy or
otherwise acquire, solicitation of an offer to sell, tender offer for, or
request or invitation for tenders of HCFC's Common Shares. The ability of
management or any other person to solicit revocable proxies from shareholders
will not be restricted by such 10% limit.
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The
Articles of Incorporation of HCFC permit the Board of Directors of HCFC to issue
additional common shares and preferred shares. See "DESCRIPTION OF AUTHORIZED
SHARES - General." The ability of the Board of Directors to issue such
additional shares may create impediments to gaining, or otherwise discourage
persons from attempting to gain, control of HCFC.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Generally, matters
requiring a vote of the shareholders of HCFC may be approved by the holders of a
majority of the voting shares of HCFC. Article Sixth of the Articles of
Incorporation of HCFC provides, however, that, in the event the Board of
Directors recommends against the approval of any of the following matters, the
holders of at least 75% of the voting shares of HCFC are required to adopt any
such matters.
(1) A proposed amendment to the Articles of Incorporation of HCFC;
(2) A proposed amendment to the Code of Regulations of HCFC;
(3) A proposal to change the number of directors by action of the
shareholders;
(4) An agreement of merger or consolidation providing for the
proposed merger or consolidation of HCFC with or into one or more
other corporations;
(5) A proposed combination or majority share acquisition involving
the issuance of shares of HCFC and requiring shareholder
approval;
(6) A proposal to sell, exchange, transfer or otherwise dispose of
all, or substantially all, of the assets, with or without the
goodwill of HCFC; or
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(7) A proposed dissolution of HCFC.
Officers and directors of HCFC are expected to purchase approximately
10.4% of the Common Shares at the mid-point of the Valuation Range. In addition,
the ESOP intends to purchase approximately 8% of the Common Shares, and it is
anticipated that upon shareholder approval of the RRP, the RRP will purchase 4%
of the outstanding Common Shares. The ESOP trustee must vote shares allocated
under the ESOP as directed by the participants to whom the shares are allocated
and vote unallocated shares in his sole discretion on mergers, sales of
substantially all of HCFC's assets and similar transactions. The RRP trustees,
who are expected to be two directors of HCFC, will vote shares held by the RRP
Trust in their discretion. Thus, officers and directors will have a significant
influence over the vote on such a transaction and may be able to defeat such a
proposal.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides in substance and effect that shareholders of a for profit
corporation which is not a savings and loan association and which is
incorporated under Ohio law must initially be granted the right to cumulate
votes in the election of directors. The right to cumulate votes in the election
of directors will exist at a meeting of shareholders if notice in writing is
given by any shareholder to the President, a Vice President or the Secretary of
an Ohio corporation, not less than 48 hours before a meeting at which directors
are to be elected, that the shareholder desires that the voting for the election
of directors shall be cumulative and if an announcement of the giving of such
notice is made upon the convening of such meeting by the Chairman or Secretary
or by or on behalf of the shareholder giving such notice. If cumulative voting
is invoked, each shareholder would have a number of votes equal to the number of
directors to be elected, multiplied by the number of shares owned by him, and
would be entitled to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio
corporation may eliminate cumulative voting in the election of directors after
the expiration of 90 days after the date of initial incorporation by filing with
the Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of HCFC have been
amended to eliminate cumulative voting. The elimination of cumulative voting may
make it more difficult for shareholders to elect as directors persons whose
election is not supported by the Board of Directors.
FEDERAL STOCK CHARTER OF HOME CITY
For a five-year period following the date of the completion of the
Conversion, no person may, directly or indirectly, acquire or offer to acquire
the beneficial ownership of more than 10% of Home City's outstanding common
shares. The acquisition of more than 10% of the common shares of HCFC would
constitute an indirect acquisition of the common shares of Home City and would,
therefore, be prohibited by the Federal Stock Charter of Home City. The
beneficial ownership limitation prohibition does not apply, however, to
purchases of Home City's common shares by one or more tax-qualified employee
stock benefit plans of Home City. Any holder of shares of HCFC or Home City
beneficially owned in violation of such prohibition will not be entitled to vote
on matters submitted to a vote of shareholders, and such shares shall not be
voted by any person or be counted as voting shares in connection with any matter
submitted to shareholders for a vote. The term "person" includes an individual,
a group acting in concert, a corporation, a partnership, an association, a joint
stock company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of the equity securities of HCFC or Home City. The term "offer"
includes every offer to buy or otherwise acquire, solicitation of an offer to
sell, tender offer for, or request or invitation for tenders of HCFC's common
shares or Home City's common shares.
EMPLOYEE BENEFIT PLANS
Adoption of the ESOP may also have an anti-takeover effect. The ESOP
may become the owner of a sufficient percentage of the total outstanding common
shares of HCFC that the decision whether to tender the shares held by the ESOP
to a potential acquirer may prevent a takeover. See "DESCRIPTION OF AUTHORIZED
SHARES" and "MANAGEMENT OF HOME CITY - Employee Stock Ownership Plan."
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DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of HCFC authorize the issuance of five
million common shares and one million preferred shares. The common shares and
the preferred shares authorized by HCFC's Articles of Incorporation have no par
value. Upon receipt by HCFC of the purchase price therefor and subsequent
issuance thereof, each Common Share will be fully paid and nonassessable. The
Common Shares of HCFC will represent nonwithdrawable capital and will not and
cannot be insured by the FDIC. Each Common Share will have the same relative
rights and will be identical in all respects to every other Common Share.
None of the preferred shares of HCFC will be issued in connection with the
Conversion. The Board of Directors of HCFC is authorized, without shareholder
approval, to issue preferred shares and to fix and state the designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The preferred shares may rank prior to the
common shares as to dividend rights, liquidation preferences or both. Each
holder of preferred shares will be entitled to one vote for each preferred share
held of record on all matters submitted to a vote of shareholders. The issuance
of preferred shares and any conversion rights which may be specified by the
Board of Directors for the preferred shares could adversely affect the voting
power of holders of the common shares. The Board of Directors has no present
intention to issue any of the preferred shares.
The following is a summary description of the rights of the common shares
of HCFC, including the material express terms of such shares as set forth in
HCFC's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of HCFC, the
holders of HCFC's common shares will be entitled to receive all assets of HCFC
available for distribution, in cash or in kind, after payment or provision for
payment of (i) all debts and liabilities of HCFC, (ii) any accrued dividend
claims, and (iii) any interests in the Liquidation Account.
VOTING RIGHTS
The holders of the common shares of HCFC will possess exclusive voting
rights in HCFC, unless preferred shares are issued. Each holder of common shares
will be entitled to one vote for each share held of record on all matters
submitted to a vote of holders of common shares.
Section 1701.55 of the Ohio Revised Code provides in substance and effect
that shareholders of a for profit corporation which is not a savings and loan
association and which is incorporated under Ohio law must initially be granted
the right to cumulate votes in the election of directors. Section 1701.69 of the
Ohio Revised Code provides that an Ohio corporation may eliminate cumulative
voting in the election of directors after the expiration of 90 days after the
date of initial incorporation by filing with the Ohio Secretary of State an
amendment to the articles of incorporation eliminating cumulative voting. The
Articles of Incorporation of HCFC have been amended to eliminate cumulative
voting. See "RESTRICTIONS ON ACQUISITION OF HOME CITY AND HCFC AND RELATED
ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of HCFC -- Elimination of
Cumulative Voting."
DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state statutory
and regulatory restrictions. See "DIVIDEND POLICY" and "TAXATION - Federal
Taxation" for a description of restrictions on the payment of cash dividends.
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of HCFC will have,
as a matter of right, the preemptive right to purchase or subscribe for shares
of any class, now or hereafter authorized, or to purchase or subscribe for
securities or other obligations convertible into or exchangeable for such shares
or which by warrants or otherwise entitle the holders thereof to subscribe for
or purchase any such share.
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RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for
a description of the limitations on the repurchase of shares by HCFC; "THE
CONVERSION - Restrictions on Transferability of Common Shares by Directors and
Officers" for a description of certain restrictions on the transferability of
Common Shares purchased by officers and directors; and "RESTRICTIONS ON
ACQUISITION OF HOME CITY AND HCFC AND RELATED ANTI-TAKEOVER PROVISIONS" for
information regarding regulatory restrictions on acquiring Common Shares.
REGISTRATION REQUIREMENTS
HCFC will register its common shares with the SEC pursuant to Section
12(g) of the Exchange Act prior to or promptly upon completion of the Conversion
and will not deregister such shares for a period of three years following the
completion of the Conversion. Upon such registration, the proxy and tender offer
rules, insider trading restrictions, annual and periodic reporting and other
requirements of the Exchange Act will apply.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal
and Ohio tax consequences of the Conversion will be passed upon for Home City by
Vorys, Sater, Seymour and Pease, 221 E. Fourth Street, Cincinnati, Ohio 45202.
The validity of the Common Shares to be issued in connection with the Conversion
will be passed upon for Webb by its counsel, Silver, Freedman, & Taff, L.L.P.,
1100 New York Avenue, N.W., Washington, D.C. 20005.
EXPERTS
The consolidated financial statements of Home City as of June 30, 1996
and 1995, and for the years ended June 30, 1996, 1995 and 1994, included in this
Prospectus have been audited by Robb, Dixon, Francis, Davis, Oneson & Company,
certified public accountants, as stated in their report appearing herein and
have been so included in reliance upon such report given upon the authority of
that firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
letter to Home City setting forth its opinion as to the estimated pro forma
market value of Home City as converted and to the use of its name and statements
with respect to it appearing herein.
ADDITIONAL INFORMATION
HCFC has filed with the SEC a Registration Statement on Form S-1 (File
No. 333-12501) under the Securities Act with respect to the Common Shares
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. Such information may be
inspected at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC at
prescribed rates.
Home City has filed an Application for Approval of Conversion (the
"Application") with the OTS. This document omits certain information contained
in the Application. The Application, the exhibits and the financial statements
that are part thereof may be inspected at the offices of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552, and the Central Regional Office, 200 W. Madison
Street, Suite 1300, Chicago, Illinois 60606.
The SEC maintains a World Wide Web site, (http://www.sec.gov), that
contains reports, proxy and information statements and other information
regarding registrants that file with the SEC, including HCFC.
-82-
<PAGE> 86
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-3
(As of June 30, 1996 and 1995)
CONSOLIDATED STATEMENTS OF INCOME F-4
(For the years ended June 30, 1996, 1995 and 1994)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY F-5
(For the years ended June 30, 1996, 1995 and 1994)
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
(For the years ended June 30, 1996, 1995 and 1994)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
</TABLE>
SCHEDULES: All schedules are omitted, as the information is either not
applicable or is included in the consolidated financial statements.
FINANCIAL STATEMENTS OF HOME CITY FINANCIAL CORPORATION: Financial statements of
Home City Financial Corporation are not presented, as that corporation was not
active during any of the periods presented.
F-1
<PAGE> 87
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Home City Federal Savings Bank of Springfield
Springfield, Ohio
We have audited the accompanying consolidated balance sheets of Home
City Federal Savings Bank of Springfield as of June 30, 1996 and 1995, and the
related statements of income, changes in equity and cash flows for the years
ended June 30, 1996, 1995 and 1994. These financial statements are the
responsibility of the Bank'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 statements 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 Home City Federal
Savings Bank of Springfield as of June 30, 1996 and 1995, and the results of its
operations and its cash flows for the years ended June 30, 1996, 1995 and 1994,
in conformity with generally accepted accounting principles.
ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
July 17, 1996, except as to Note S and Note T,
which are as of September 30, 1996.
F-2
<PAGE> 88
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
SPRINGFIELD, OHIO
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,
1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 855 $ 570
Interest-bearing deposits in other banks 588 307
Federal Funds sold 400 1,500
------- -------
Total cash and cash equivalents 1,843 2,377
Time deposits with original maturities of 90 days or more 1,061 360
Investment securities
Securities held-to-maturity (fair value of $0 in 1996 and $1,909 in 1995) -- 1,901
Securities available-for-sale, at fair value 2,188 259
Mortgage-backed securities
Securities held-to-maturity (fair value of $0 in 1996 and $3,603 in 1995) -- 3,667
Securities available-for-sale, at fair value 2,975 --
Loans, net 45,225 38,960
Accrued interest receivable 273 169
Premises and equipment, net 488 468
Investment required by law - stock in Federal Home Loan Bank 394 288
Deferred income taxes -- 21
Cash surrender value of life insurance 1,044 --
Other assets 237 108
------- -------
TOTAL ASSETS $55,728 $48,578
======= =======
LIABILITIES AND EQUITY
Deposits $47,174 $40,936
Advances from Federal Home Loan Bank 2,903 2,618
Accrued interest payable 49 42
Advance payments by borrowers for taxes and insurance 20 34
Deferred income taxes 68 --
Other liabilities 116 63
------- -------
TOTAL LIABILITIES 50,330 43,693
COMMITMENTS AND CONTINGENCIES -- --
EQUITY
Retained earnings, substantially restricted 5,271 4,757
Unrealized gain on securities available-for-sale, net of applicable deferred
income taxes 127 128
------- -------
TOTAL EQUITY 5,398 4,885
------- -------
TOTAL LIABILITIES AND EQUITY $55,728 $48,578
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 89
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended June 30,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,094 $3,344 $3,074
Interest on investment securities 143 145 103
Interest on mortgage-backed securities 209 274 314
Interest on deposits in banks and federal funds sold 61 72 51
------ ------ ------
TOTAL INTEREST INCOME 4,507 3,835 3,542
------ ------ ------
INTEREST EXPENSE
Interest on interest-bearing checking accounts 3 -- 1
Interest on savings accounts 251 395 608
Interest on certificates of deposits 2,116 1,440 799
Interest on advances from Federal Home Loan Bank 172 107 38
------ ------ ------
TOTAL INTEREST EXPENSE 2,542 1,942 1,446
------ ------ ------
NET INTEREST INCOME 1,965 1,893 2,096
Provision for loan losses 50 109 113
------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,915 1,784 1,983
OTHER INCOME
Service charges 9 2 1
Life insurance 46 -- --
Other 3 7 11
------ ------ ------
TOTAL OTHER INCOME 58 9 12
------ ------ ------
OTHER EXPENSES
Salaries and employee benefits 532 398 311
Supplies, telephone and postage 44 29 28
Occupancy and equipment 102 104 120
Deposit insurance 96 83 83
Data processing 54 47 63
Legal, accounting and exam 110 83 70
Franchise tax 72 63 53
Other 206 191 195
------ ------ ------
TOTAL OTHER EXPENSES 1,216 998 923
------ ------ ------
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 757 795 1,072
Federal income tax expense 243 240 367
------ ------ ------
NET INCOME $ 514 $ 555 $ 705
====== ====== ======
</TABLE>
See accompanying notes.
F-4
<PAGE> 90
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
SPRINGFIELD, OHIO
STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized gain
(loss) on securities
available-for-sale
Retained net of applicable Total
earnings deferred income taxes equity
-------- --------------------- ------
<S> <C> <C> <C>
Balances at June 30, 1993 $ 3,497 $ -- $ 3,497
Net income 705 -- 705
Change in accounting principle to adopt SFAS 115,
net of applicable deferred income taxes of $47 -- 91 91
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable deferred
income taxes of $11 -- 22 22
------- ------- -------
Balances at June 30, 1994 4,202 113 4,315
Net income 555 -- 555
Change in unrealized gain on securities available-for-
sale, net of applicable deferred income taxes of $8 -- 15 15
------- ------- -------
Balances at June 30, 1995 4,757 128 4,885
Net income 514 -- 514
Change in unrealized gain on securities available-for-
sale, net of applicable deferred income taxes -- (1) (1)
------- ------- -------
Balance of June 30, 1996 $ 5,271 $ 127 $ 5,398
======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 91
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ending June 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 514 $ 555 $ 705
Adjustments to reconcile net income to net cash provided by
operating activities:
Premium amortization, net of discount accretion 42 (17) (34)
Provision for loan losses 50 109 113
Gain on sale of real estate owned -- -- 1
Depreciation 39 33 32
Deferred income taxes 89 7 (12)
Life insurance income, net of expenses (19) -- --
Changes in operating assets and liabilities:
Increase in accrued income receivable (103) (52) (47)
Increase in other assets (129) (66) (4)
Increase in accrued interest payable 7 25 8
Increase in other liabilities 53 4 (7)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 543 598 755
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in time deposits (700) (361) --
Purchases of held-to-maturity securities -- (3,880) (3,293)
Proceeds from maturities of held-to-maturity securities 500 4,121 3,750
Purchases of available-for-sale securities (496) (3) (10)
Proceeds from sales of available-for-sale securities -- 78 1,129
Proceeds from maturities of available-for-sale securities 20 -- --
Payments on held-to-maturity mortgage backed securities 278 564 1,009
Payments on available-for-sale mortgage backed securities 319 -- --
Proceeds for sales of loans 2,760 338 131
Net increase in loans (9,075) (8,306) (2,699)
Purchases of premises and equipment (60) (35) (88)
Proceeds from sale of real estate held for investment -- 3 (19)
Proceeds from sale of real estate owned -- -- 25
Purchase of Federal Home Loan Bank stock (106) (41) (32)
Purchase of life insurance contracts (1,025) -- --
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (7,585) (7,522) (97)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 6,238 6,120 (1,872)
Proceeds from advances from Federal Home Loan Bank 500 2,310 2,200
Payments on advances from Federal Home Loan Bank (216) (116) (2,236)
Net decrease in advance payments by borrowers for tax and
insurance (14) -- --
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 6,508 8,314 (1,908)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (534) 1,390 (1,250)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,377 987 2,237
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,843 $ 2,377 $ 987
======= ======= =======
</TABLE>
See accompanying notes
F-6
<PAGE> 92
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD
SPRINGFIELD, OHIO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Home City
Federal Savings Bank of Springfield (the Bank) and its subsidiary, Homciti
Service Corp. All material intercompany balances and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS
The Bank provides a variety of financial services to individuals and
corporate customers, through its one office in Springfield, Ohio, which is
primarily a small industrial area. The Bank's primary deposit products are
savings accounts and certificates of deposit. Its primary lending products are
single-family residential loans. Homciti Service Corp. invests in stock of the
Bank's data service provider and a local joint venture. Both of such interests
are minority interests.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals 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.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans. In
connection with the determination of the allowances for losses on loans,
management obtains independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of single-family
residential loans in the Springfield, Ohio area. The regional economy depends
heavily on some 200 diversified industries. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio are
susceptible to changes in local market conditions.
While management uses available information to recognize losses on
loans, future additions to the allowances may be necessary based on changes in
local economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowances for
losses on loans. Such agencies may require the Bank to recognize additions to
the allowances based on their judgments about information available to them at
the time of their examination. Because of these factors, it is reasonably
possible that the allowances for losses on loans may change materially in the
near term.
INVESTMENT SECURITIES
SECURITIES HELD TO MATURITY: Government, federal agency and municipal
debt securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity.
SECURITIES AVAILABLE FOR SALE: Available-for-sale securities consist of
investment securities not classified as held-to-maturity. Unrealized holding
gains and losses, net of tax, on available-for-sale securities are reported as a
net amount in a separate component of equity until realized. Gains and losses on
the sale of available-for-sale securities are determined using the
specific-identification method. The amortization of premiums and the accretion
of discounts are recognized in interest income using methods approximating the
interest method over the period to maturity.
F-7
<PAGE> 93
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried as available-for-sale and are
carried at fair value. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in equity.
Cost of securities sold is recognized using the specific identification method.
LOANS
Loans are stated at unpaid principal balances, less the allowance for
loan losses, net deferred loan fees and loans-in-process.
Loan origination fees, as well as certain direct origination costs, are
deferred and amortized as a yield adjustment over the contractual lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when principal or interest is delinquent
for 90 days or more. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income on nonaccrual loans is recognized only to
the extent of interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation of property and equipment is computed principally on
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 10-50
Furniture and equipment 5-25
</TABLE>
INCOME TAXES
The Bank files a consolidated federal income tax return on a calendar
year basis. Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
available-for-sale securities, allowance for loan losses, accumulated
depreciation, partnership income, deferred loan fees, accrued pension expenses,
and non-accrual loans for financial and income tax reporting. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
PENSION PLAN
The Bank has a pension plan covering substantially all employees. It is
the policy of the Bank to fund the maximum amount that can be deducted for
federal income tax purposes but in amounts not less than the minimum amounts
required by law.
STATEMENTS OF CASH FLOWS
The Bank considers all cash and amounts due from depository
institutions, interest-bearing deposits in other banks, and federal funds sold
to be cash equivalents for purposes of the statements of cash flows. Only
investments with original maturities under 90 days are considered cash
equivalents.
F-8
<PAGE> 94
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excluded certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents approximate those
assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real estate
and rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future expected
loss experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
Advances from Federal Home Loan Bank: The fair value for FHLB advances
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on FHLB advances of aggregated contractual
maturities of such advances.
RECLASSIFICATIONS
Certain amounts in 1995 have been reclassified to conform with the 1996
presentation.
F-9
<PAGE> 95
NOTE B - INVESTMENT SECURITIES
Securities held-to-maturity consist of the following at June 30, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government & federal agencies $1,496 $- $- $1,496
State & local governments 405 8 - 413
------ -- -- ------
$1,901 $8 $- $1,909
====== == == ======
</TABLE>
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
June 30. 1996 June 30.1995
-------------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------ ------- -------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government &
federal agencies $1,001 $ - $(4) $ 997 $ - $ - $ - $ -
State & local
governments 879 6 (2) 883 - - - -
Equity
securities 65 243 - 308 65 194 - 259
------ ------ --- ------ ---- ----- --- ---
$1,945 $ 249 $(6) $2,188 $ 65 $ 194 $- $259
====== ====== === ====== ==== ====== = ====
</TABLE>
The following is a summary of maturities of securities
available-for-sale as of June 30, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
Securities available-for-sale
Amortized Fair
Cost Value
<S> <C> <C>
AMOUNTS MATURING IN:
One year or less $ 134 $ 134
After one year through five years 1,569 1,565
After five years through ten years 177 181
After ten years 65 308
------ ------
$1,945 $2,188
====== ======
</TABLE>
During the year ended June 30, 1996, the Bank sold no securities.
During the year ended June 30, 1995, the Bank sold securities available-for-sale
for total proceeds of approximately $78,000, resulting in no gross realized
gains and no gross realized losses. During the year ended June 30, 1994, the
Bank sold securities for total proceeds of approximately $1,129,000, resulting
in no gross realized gains and no gross realized losses.
F-10
<PAGE> 96
On December 31, 1995, debt securities with an amortized cost of
$1,405,000 were transferred from held- to-maturity to available-for-sale to
potentially reduce the Bank's state franchise tax expense. The securities had an
unrealized gain of approximately $6,000. There were no securities transferred
between classifications during the year ended June 30, 1995 and 1994.
No investment securities were pledged to secure deposits as required or
permitted by law.
NOTE C - MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
Available-for-sale Held-to-maturity
June 30, 1996 June 30, 1995
------------------------------------------------ ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------ ------- -------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA $3,020 $ 2 $(76) $2,946 $3,635 $ 9 $(77) $3,567
FHLMC 26 3 - 29 32 4 - 36
------ --- ----- ------ ------ --- ----- ------
$3,046 $ 5 $(76) $2,975 $3,667 $13 $(77) $3,603
====== === ==== ====== ====== === ==== ======
</TABLE>
The amortized cost and fair value of mortgage-backed securities at June
30, 1996 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
(Dollars in thousands)
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Mortgage-backed securities:
After five years through ten years $ 915 $ 903
After ten years 2,131 2,072
------ ------
$3,046 $2,975
====== ======
</TABLE>
During the years ended June 30, 1996, 1995 and 1994, the Bank sold no
mortgage-backed securities.
On December 31, 1995, mortgage-backed securities with an amortized cost
of $3,358,000 were transferred from held-to-maturity to available-for-sale to
potentially reduce the Bank's state franchise tax expense. The mortgage-backed
securities had an unrealized gain of approximately $38,000. There were no
securities transferred between classifications during the year ended June 30,
1995.
Investment securities with a carrying amount of approximately $906,000
and $500,000 were pledged to secure deposits as required or permitted by law as
of June 30, 1996 and 1995, respectively.
F-11
<PAGE> 97
NOTE D - LOANS
Loans at June 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
---- ----
<S> <C> <C>
Loans secured by first mortgages on real estate:
1-4 family dwelling units $ 31,893 $ 24,956
5 or more dwelling units 3,233 3,288
Non-residential properties 7,255 7,309
Land 2,223 1,684
Construction 2,350 4,582
Consumer 1,641 201
Commercial 73 --
-------- --------
48,668 42,020
-------- --------
Allowance for loan losses (362) (319)
Net deferred loan origination fees (447) (420)
Loans in process (2,634) (2,321)
-------- --------
Total $ 45,225 $ 38,960
======== ========
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 319 $ 229 $ 198
Provision for losses 50 109 113
Loans charged off (7) (19) (107)
----- ----- -----
Recoveries -- -- 25
----- ----- -----
Balance, end of year $ 362 $ 319 $ 229
===== ===== =====
</TABLE>
At June 30, 1996 and 1995, the Bank had loans amounting to
approximately $72,000 and $17,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $104,000 and $16,000 for the years ended June 30, 1996 and 1995,
respectively. The allowance for loan losses related to impaired loans amounted
to approximately $2,000 at June 30, 1996. No portion of the allowance for loan
loss related to impaired loans at June 30, 1995.
In addition, at June 30, 1996 and 1995, the Bank had other nonaccrual
loans of approximately $175,000 and $190,000, respectively, for which impairment
had not been recognized. Interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized for
such loans are set forth in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
---- ----
<S> <C> <C>
Interest income that would have
been recorded $16 $12
Interest income actually recognized 8 2
--- ---
Interest income foregone $ 4 $10
=== ===
</TABLE>
F-12
<PAGE> 98
The Bank has no commitments to loan additional funds to the borrowers
of impaired or nonaccrual loans.
At June 30, 1996, 1995 and 1994, the Bank serviced loans for others
with principal balances of $3,358,000, $2,797,000 and $684,000, respectively.
In the ordinary course of business, the Bank has and expects to
continue to have transactions, including borrowings, with its officers,
directors, and their affiliates. In the opinion of management, such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other persons
and did not involve more than a normal risk of collectibility or present any
other unfavorable features to the Bank. All loans to such borrowers are
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Balance, at June 30, 1995 $ 1,085
New loans --
Payments (23)
-------
Balance, at June 30, 1996 $ 1,062
=======
</TABLE>
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
---- ----
<S> <C> <C>
Loans $246 $143
Mortgage-backed securities 19 23
Investments and other 8 3
---- ----
Totals $273 $169
==== ====
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
A summary of premises and equipment at June 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C>
Land $ 113 $ 113
Buildings and improvements 424 392
Furniture, fixtures, and equipment 275 249
----- -----
812 754
Accumulated depreciation (324) (286)
----- -----
Totals $ 488 $ 468
===== =====
</TABLE>
F-13
<PAGE> 99
NOTE G - SUPPLEMENTAL DISCLOSURES
The following are supplemental disclosures for the Statement of Cash
Flows for the years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for interest $ 2,535 $ 1,927 $ 1,438
Cash paid during the year for income taxes 283 272 379
Total change in unrealized gain on securities available-for-sale (1) 23 124
</TABLE>
NOTE H - CASH SURRENDER VALUE OF LIFE INSURANCE
In September 1995, the Bank purchased life insurance policies on each
of its directors other than Douglas L. Ulery. The Bank is the beneficiary of
such policies. At June 30, 1996 there were no notes payable to the insurance
company.
NOTE I - DEPOSITS
Deposit account balances at June 30, 1996 and 1995, are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non-interest bearing checking accounts $ 302 0.6% $ -- -%
Now and money market accounts 395 0.8% -- -%
Passbook savings accounts 9,561 20.3% 10,500 25.6%
Certificates of deposit 36,916 78.3% 30,436 74.4%
------- ------ ------- ------
Totals $47,174 100.00% $40,936 100.00%
======= ====== ======= ======
</TABLE>
The aggregate amount of short-term jumbo CD's, each with a minimum
denomination of $100,000, was approximately $7,216,000 and $4,061,000 at June
30, 1996 and 1995, respectively. Deposits in excess of $100,000 are not insured
by the FDIC.
At June 30, 1996, the scheduled maturities of CD's are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
July 1,1996 to June 30,1997 $15,409
July 1, 1997 to June 30, 1998 16,573
July 1, 1998 to June 30, 1999 4,254
July 1,1999 to June 30,2000 403
After June 30, 2000 277
-------
Totals $36,916
=======
</TABLE>
The Bank held deposits of approximately $806,000 for related parties at
June 30, 1996.
F-14
<PAGE> 100
NOTE J - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following at
June 30, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current interest Balance
Rate 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed rate advance, with monthly interest payments:
Advance due September 25, 1996 5.80% $ 500 $ --
Fixed rate advances, with monthly principal and
interest payments:
Advance due February 1, 2003 6.05% 110 122
Advance due March 1, 2003 5.85% 236 263
Advance due December 31, 2004 8.35% 510 570
Advance due January 1, 2005 8.35% 303 326
Advance due January 1, 2005 8.30% 601 671
Advance due February 1, 2010 3.30% 643 666
------ ------
Totals $2,903 $2,618
====== ======
</TABLE>
Federal Home Loan Bank ("FHLB") advances are collateralized by all
shares of FHLB stock owned by the Bank (totaling $394,000) and by 100% of the
Bank's qualified mortgage loan portfolio (totaling approximately $21,759,000).
Based on the carrying amount of FHLB stock owned by the Bank, total FHLB
advances are limited to approximately $7,882,000.
The aggregate minimum future principal payments on borrowings are as
follows:
<TABLE>
<CAPTION>
<S> <C>
July 1, 1996 to June 30, 1997 $ 719
July 1,1997 to June 30,1998 221
July 1,1998 to June 30,1999 224
July 1, l999 to June 30, 2000 227
After June 30, 2000 1,512
------
Totals $2,903
======
</TABLE>
NOTE K - FEDERAL INCOME TAXES
The consolidated provision for income taxes for the years ended June
30, 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current federal tax expense $154 $233 $379
Deferred federal tax expense 89 7 (12)
---- ---- ----
$243 $240 $367
==== ==== ====
</TABLE>
F-15
<PAGE> 101
The provision for federal income taxes differs from that computed by
applying federal statutory rates to income (loss) before federal income tax
expense, as indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax provision at a 34% rate $ 257 $ 268 $ 364
Effect of tax-exempt income (31) (11) --
Other 17 (17) 3
----- ----- -----
$ 243 $ 240 $ 367
===== ===== =====
Effective tax rate 32.1% 30.2% 34.2%
</TABLE>
Deferred tax assets and liabilities in other liabilities at June 30,
1996, and in other assets at June 30, 1995, consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 5 $ 76
Nonaccrual loan interest 6 2
Allowance for loan loss 6 7
Other 3 9
---- ----
20 94
---- ----
Deferred tax liabilities
Accumulated depreciation (19) (8)
Net unrealized appreciation on
available-for-sale securities (69) (65)
---- ----
(88) (73)
---- ----
Net deferred tax assets (liabilities) $(68) $ 21
==== ====
</TABLE>
Included in retained earnings at June 30, 1996 and 1995 is
approximately $1,084,000 in bad debt reserves for which no deferred federal
income tax liability has been recorded. These amounts represent allocations of
income to bad debt deductions for tax purposes only. Reduction of these reserves
for purposes other than tax bad-debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes, which
would be subject to the then-current corporate income tax rate. The unrecorded
deferred liability on these amounts was approximately $369,000.
NOTE L - PENSION PLAN
In connection with the Financial Institutions' Retirement Fund, the
Bank participates with other companies in the financial institution industry in
a defined benefit plan. The plan covers all of the Bank's employees who are over
21 years old with at least one year of service. Pension expense amounted to
$25,000, $8,000 and $6,000 for the years ended June 30, 1996, 1995 and 1994,
respectively. Because the Bank participates in a group plan, separate
disclosures for the Bank pursuant to SFAS No. 87 are not available.
In 1994, the Bank also initiated a 401K Profit Sharing Plan. The plan
covers all of the Bank's employees who are over 21 years old with at least one
year of service. Participants may make salary savings contributions up to 15% of
their compensation, 50% of which will be matched by the Bank, up to 6% of each
employee's salary. Contributions charged to operations for the years ended June
30, 1996, 1995 and 1994 were $8,000, $5,000 and $0, respectively.
F-16
<PAGE> 102
NOTE M - INCENTIVE COMPENSATION PLAN
The Bank has an incentive compensation plan that covers all employees
who are normally scheduled to work 1,040 hours or more per year. The Bank's
contributions pursuant to the plan are based on a formula contained in the plan
which incorporates factors relating to the Bank's performance and are contingent
upon the Bank's attainment of certain levels of earnings, as defined in the
plan. During the years ended June 30, 1996, 1995 and 1994, contributions to the
plan charged to operations were $56,000, $38,000 and $0, respectively.
NOTE N - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework from prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of June 30, 1996, that the Bank
meets all adequacy requirements to which it is subject.
As of June 30, 1996, the most recent notification from the Bank's
regulators categorized the Bank as adequately capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The following reconciliation compares the Bank's capital under GAAP to
its regulatory capital:
<TABLE>
<CAPTION>
(Dollars in thousands)
Total Tier I
Capital Capital
------- -------
<S> <C> <C>
Equity per GAAP $ 5,398 $ 5,398
Less unrealized gain on securities available-
for-sale, net of applicable income taxes (127) (127)
Plus allowance for loan loss 362 --
------- -------
Regulatory capital $ 5,633 $ 5,271
======= =======
</TABLE>
F-17
<PAGE> 103
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
(Dollars in thousands)
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes: action provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996:
Total Capital
(to Risk Weighted Assets) $5,633 18.8% $2,400 8.0% $2,999 10.0%
Tier I Capital
(to Risk Weighted Assets) 5,271 17.6% 900 3.0% 1,800 6.0%
Tier I Capital
(to Average Assets) 5,271 9.5% 834 1.5% 2,779 5.0%
As of June 30, 1995:
Total Capital
(to Risk Weighted Assets) 5,076 19.2% 2,117 8.0% 2,646 10.0%
Tier I Capital
(to Risk Weighted Assets) 4,757 18.0% 794 3.0% 1,587 6.0%
Tier I Capital
(to Average Assets) 4,757 9.8% 729 1.5% 2,430 5.0%
</TABLE>
NOTE O - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Bank are as follows:
The Bank had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1996 June 30, 1995
------------------------------------------- -------------------------------------------
Fixed-rate Variable-rate Total Fixed-rate Variable-rate Total
<S> <C> <C> <C> <C> <C> <C>
First mortgage $ 837 $169 $1,006 $50 $510 $560
Consumer and other loans 292 - 292 - - -
------- ---- ------ --- ---- ----
$ 1,129 $169 $1,298 $50 $510 $560
======= ==== ====== === ==== ====
</TABLE>
Interest rates on commitments at June 30, 1996, ranged from 7.75% to
10.00%. Interest rates on commitments at June 30, 1995, ranged from 7.125% to
11.00%. Loan commitments generally expire after 30 days.
In addition, the Bank is periodically a defendant in various legal
proceedings arising in connection with its business. It is the best judgment of
management that neither the financial position nor results of operations of the
Bank will be materially affected by the final outcome of these legal proceeding.
F-18
<PAGE> 104
NOTE P- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the statements of financial
condition.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments (see NOTE
O). The Bank uses the same credit policies in making commitments as it does for
on-balance-sheet-instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount and type of collateral obtained, if deemed
necessary by the Bank upon extension of credit, varies and is based on
management's credit evaluation of the counterparty.
At June 30, 1996, the Bank had deposits with the following banks in
excess of FDIC insurance of $100,000:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Huntington National Bank $ 705
Federal Home Loan Bank 1,288
Springfield Federal Savings Bank 700
</TABLE>
NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1996 June 30, 1995
------------- -------------
Carrying Carrying
amount Fair value amount Fair value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,843 $ 1,843 $ 2,377 $2,377
Time deposits 1,061 1,053 360 352
Investment securities 2,188 2,188 2,160 2,168
Mortgage-backed securities 2,975 2,975 3,667 3,603
Loans, net of allowance 45,225 45,364 38,960 Not available
Financial liabilities:
Deposits 47,174 47,311 40,936 Not available
Advances from FHLB 2,903 2,954 2,618 Not available
</TABLE>
The carrying amounts in the preceding table are included in the balance
sheet under the applicable captions. The Bank adopted SFAS No. 107 on June 30,
1996. Fair values for loans, deposits and borrowed funds before June 30, 1996,
are not available because the maintenance of such information was not required
for fiscal years which ended before December 15, 1995.
F-19
<PAGE> 105
NOTE R - SELECTED QUARTERLY FINANCIAL INFORMATION
The following table shows quarterly income and expense amounts
<TABLE>
<CAPTION>
(Dollars in thousands)
6/30/96 3/31/96 12/31/95 9/30/95
------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income $1,102 $1,094 $1,057 $1,027
Interest expense 662 653 633 600
Net interest income 440 441 424 427
Provision for loan loss 50 -- -- --
Security gains, net -- -- -- --
Net income 121 149 119 125
6/30/95 3/31/95 12/31/94 9/30/94
------- ------- -------- -------
Interest income $1,007 $ 943 $ 911 $ 852
Interest expense 577 516 453 396
Net interest income 430 427 458 456
Provision for loan loss 22 15 63 9
Security gains, net -- -- -- --
Net income 142 151 113 116
</TABLE>
NOTE S - SUBSEQUENT EVENT - ONE-TIME SAIF ASSESSMENT
The Bank, a SAIF-insured institution, is subject to regulation by the
OTS and the FDIC. The FDIC is authorized to establish different annual
assessment rates for deposit insurance for members of the BIF and the SAIF.
Legislation to recapitalize the SAIF and eliminate the significant premium
disparity between the SAIF and the BIF became effective September 30, 1996. The
recapitalization plan provides for the payment of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995. Based on its $40.4 million in
deposits at March 31, 1995, the Bank will pay an additional assessment of
$265,000 by November 29, 1996.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming all savings associations have become
banks. As a result, it is expected that the thrift charter or the separate
regulation of thrifts will be eliminated. As a result, the Bank would be
regulated under federal law as a bank, and, as a result, would become subject to
the more restrictive activity limitations imposed on national banks.
NOTE T - SUBSEQUENT EVENT - PLAN FOR STOCK CONVERSION
On September 3, 1996, the board of directors of the Bank adopted a Plan
of Conversion, whereby the Bank will be converted from a mutual federal savings
bank to a permanent stock federal savings bank with the concurrent formation of
a holding company. Pursuant to the Plan of Conversion, shares of capital stock
of the holding company will be offered to eligible account holders and such
other persons as defined by the plan. The number of shares sold will be
determined by reference to an independent appraisal of the Bank and will reflect
its estimated pro forma market value, as converted. The plan provides that
nontransferable subscription rights to purchase stock will be offered first to
the Bank's eligible savings account holders; then to the Bank's tax-qualified
employee plans; then to supplemental eligible account holders; and then, to the
extent shares of the stock remain available, to other members of the Bank.
Concurrently, or promptly after the subscription offering, and on a lowest
priority basis, an opportunity to subscribe may also be offered to the general
public in a direct community offering.
Subsequent to the conversion, savings account holders and borrowers
will have no voting rights in the Bank. Voting rights will be vested exclusively
in the stockholders of the holding company. Savings deposits will continue to be
insured to the permissible extent in the Savings Association Insurance Fund; see
Note S.
F-20
<PAGE> 106
All costs associated with the conversion will be deferred and deducted
from the proceeds of the sale of stock. If the conversion is not completed, such
costs will be charged to expense. As of June 30, 1996, the Bank has incurred no
such costs.
At the time of the conversion, the Bank will establish a "Liquidation
Account" in an amount equal to the Bank's net worth as of the latest date of the
financial statements. The Liquidation Account will be maintained for the benefit
of depositors who continue to maintain their deposits in the Bank after the
conversion. In the event of a complete liquidation (and only in such event),
each eligible depositor will be entitled to receive a liquidation distribution
from the liquidation account in the proportionate amount of the then-current
adjusted balance for deposits then held, before any liquidation distribution may
be made with respect to the stockholders. The Bank may not declare or pay a cash
dividend on its common shares or repurchase any of its common shares if after
the payment of such dividend or the repurchase of such shares the Bank's
shareholders' equity would be reduced below the amount required for the
liquidation account or the Bank's regulatory capital would fail to satisfy
applicable regulatory requirements.
F-21
<PAGE> 107
================================================================================
No person has been authorized to give any information or to make any
representations other than as contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by HCFC. This Prospectus does not constitute an offer to sell, or the
solicitation of an offer to buy, any security, other than the Common Shares
offered hereby, to any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom delivery of this
Prospectus would be unlawful. Neither the delivery of this Prospectus nor any
sale hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as to any time subsequent to the date
hereof.
================================================================================
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY..................................1
SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA .........................6
REGULATORY CAPITAL COMPLIANCE.......................8
RISK FACTORS........................................9
HOME CITY FINANCIAL CORPORATION....................13
HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD......13
USE OF PROCEEDS....................................14
MARKET FOR COMMON SHARES...........................15
DIVIDEND POLICY....................................15
CAPITALIZATION.....................................16
PRO FORMA DATA.....................................18
SUMMARY CONSOLIDATED STATEMENTS OF INCOME..........21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF HOME CITY .....................................22
RECENT DEVELOPMENTS................................33
THE BUSINESS OF HOME CITY..........................35
MANAGEMENT OF HCFC.................................52
MANAGEMENT OF HOME CITY............................53
REGULATION.........................................57
TAXATION...........................................63
THE CONVERSION.....................................65
RESTRICTIONS ON ACQUISITION OF HOME CITY AND
HCFC AND RELATED ANTI-TAKEOVER PROVISIONS ........77
DESCRIPTION OF AUTHORIZED SHARES...................81
REGISTRATION REQUIREMENTS..........................82
LEGAL MATTERS......................................82
EXPERTS............................................82
ADDITIONAL INFORMATION.............................82
FINANCIAL STATEMENTS..............................F-1
================================================================================
Up to 828,000 Common Shares
HOME CITY FINANCIAL CORPORATION
(Holding Company for Home City Federal Savings
Bank of Springfield)
------------
PROSPECTUS
-------------
CHARLES WEBB & COMPANY
A Division of
Keefe, Bruyette & Woods, Inc.
November 12, 1996
================================================================================
-83-
