U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT Pursuant to SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended June 30, 1997
Commission File Number 333-12501
_____________________
HOME CITY FINANCIAL CORPORATION
(name of small business issuer in its charter)
Ohio 34-1839475
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
63 West Main Street, Springfield, Ohio 45502
(Address of principal executive offices) (zip code)
Issuer's telephone number (937)324-5736
____________________
Securities registered under Section 12(b) of the Exchange Act:
not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Shares (No Par Value)
Preferred Shares (No Par Value)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES _X_ NO ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for the most recent fiscal year. $5,372,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of August 25, 1997, 904,590 common shares of the Registrant were
outstanding. The aggregate market value of the shares held by non-affiliates
was $11,371,684 based upon the closing price of $15.50 per share as quoted by
The Nasdaq Stock Market.
Documents Incorporated by Reference
The following sections of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of Home City Financial Corporation are
incorporated by reference into Part III of this Form 10-KSB:
1. Proposal One - Election of Directors
2. Compensation of Directors and Executive Officers
3. Voting Securities and Ownership of Certain Beneficial Owners and
Management
Transitional Small Business Disclosure Format YES ___ NO _X_
<PAGE>
PART I
ITEM 1. Description of Business
General
Home City Financial Corporation ("HCFC"), a unitary savings and loan
holding company incorporated under the laws of the State of Ohio, owns all of
the issued and outstanding common stock of Home City Federal Savings Bank of
Springfield ("Home City"), a savings association chartered under the laws of the
United States. In December 1996, HCFC acquired all of the common shares issued
by Home City upon its conversion from a mutual savings association to a stock
savings association (the "Conversion"). Since its formation, HCFC's activities
have been limited primarily to holding the common shares of Home City and
investing excess funds from the Conversion in investment securities and savings
deposits in Home City.
Home City is a stock savings bank 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 federal agency
obligations, interest-bearing deposits in other financial institutions and
mortgage-backed securities and municipal securities. Home City also originates
loans for the construction of residential real estate and 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.
Funds for lending and investment activities are obtained primarily from
deposits, which are insured up to applicable limits by the Federal Deposit
Insurance Corporation (the "FDIC"), and loans and mortgage-backed and related
securities repayments. Home City conducts business from its office located in
Springfield, Ohio. Home City's primary lending area consists of Clark County,
Ohio, and adjacent counties.
As a savings and loan holding company, HCFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings association
chartered under the laws of the United States, Home City is subject to
regulation, supervision and examination by the OTS and the FDIC. Home City is
also a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati.
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.
Forward-Looking Statements
When used in this Form 10-KSB, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated,"
"projected," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in Home City's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in Home City's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Factors listed above could affect HCFC's financial
performance and could cause HCFC's actual results for future periods to differ
materially from any statements expressed with respect to future periods. See
Exhibit 99.2 hereto "Safe Harbor Under the Private Securities Litigation
Reform Act of 1995," which is incorporated herein by reference.
HCFC does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
<PAGE>
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, secured and
unsecured consumer loans. Home City does not originate its loans in
accordance with traditional secondary market guidelines.
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,
___________________________________________________________________________
1997 1996 1995
__________________ __________________ __________________
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) $37,739 64.61% $31,580 64.89% $24,724 58.85%
Multifamily 2,774 4.75 3,233 6.64 3,288 7.82
Home equity (second mortgage) 452 0.77 313 0.64 232 0.55
Nonresidential real estate loans 8,127 13.91 7,255 14.91 7,309 17.39
Land loans 1,853 3.17 2,223 4.57 1,684 4.01
Construction loans 3,753 6.43 2,350 4.83 4,582 10.90
_______ ______ _______ ______ _______ ______
Total real estate loans 54,698 93.64 46,954 96.48 41,819 99.52
Commercial loans 464 0.79 73 0.15 -- --
Consumer loans:
Loans on deposits 235 0.40 160 0.33 201 0.48
Other consumer loans 3,018 0.17 1,481 3.04 -- --
_______ ______ _______ ______ _______ ______
Total consumer loans 3,253 5.57 1,641 3.37 201 0.48
_______ ______ _______ ______ _______ ______
Total loans 58,415 100.00% 48,668 100.00% 42,020 100.00%
______ ______ ______
Less:
Unearned and deferred (income)
expense, net (487) (447) (420)
Loans in process (1,448) (2,634) (2,321)
Allowance for loan losses (445) (362) (319)
_______ _______ _______
Net loans $56,035 $45,225 $38,960
_______ _______ _______
</TABLE>
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information as of June 30, 1997, 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>
During the Due 4-5 Due 6-10 Due 11-15 Due more than
year ending June 30, years after years after years after 15 years after
__________________________
1998 1999 2000 6/30/97 6/30/97 6/30/97 6/30/97 Total
____ ____ ____ _______ _______ _______ _______ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $ 785 $ 253 $ 317 $ 691 $3,004 $22,717 $12,187 $39,954
Nonresidential 684 256 376 154 2,499 6,621 2,219 12,809
Consumer loans 372 196 171 944 751 799 20 3,253
Commercial loans 45 7 13 90 309 -- -- 464
______ ______ ______ ______ ______ _______ _______ _______
Total loans $1,886 $ 712 $ 877 $1,879 $6,563 $30,137 $14,426 $56,480
______ ______ ______ ______ ______ _______ _______ _______
</TABLE>
Of the loans due more than one year after June 30, 1997, loans with
aggregate balances of $28.3 million have fixed rates of interest, and loans
with aggregate balances of $26.3 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-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 single-family or duplex, 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
single-family or duplex, owner occupied residences. Home Equity loans secured
by first or second mortgages are made with a maximum combined LTV for the
first and second mortgage of 100%. 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 loans in excess of 80% of
the value of the real estate securing such loans. 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%, 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 also offers ARMs on one- to four-family properties with a
margin of 3.75% over the index and 2% and 6% maximum adjustments at each
adjustment date and over the term of the loan, respectively. 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.
The aggregate amount of Home City's one- to four-family residential real
estate loans equaled approximately $37.7 million at June 30, 1997, and
represented 64.61% of loans at such date. The largest individual loan
balance on a one- to four-family loan at such date was $284,000. At such
date, loans secured by one- to four-family residential real estate with
outstanding balances of $215,000, or 0.57% of its one- to four-family
<PAGE>
residential real estate loan balance, were more than 90 days delinquent or
nonaccruing. See "Delinquent Loans, Non-performing 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, a maximum LTV of 75% and a maximum term 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 project to cover operating expenses and debt
service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. 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, 1997, loans secured by multifamily properties totaled
approximately $2.8 million, or 4.75% of Home City's total loan portfolio, 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, 1997,
of approximately $653,000.
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, 1997, home equity loans totaled approximately $452,000, or
0.77% 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 $120,000 at June 30, 1997.
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 terms of up to 15
years, a minimum loan amount of $10,000 and a maximum loan amount of $1.5
million. 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, 1997, Home City had a total of $8.1 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 13.91% of Home City's total loans at such date. At such date,
Home City had $171,000 in 90 days delinquent or non-accruing nonresidential
real estate loans, or 0.30% of total loans. See "Delinquent Loans,
Non-performing Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At June 30,
1997, Home City's nonresidential mortgage loans totaled 78.77% 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
<PAGE>
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, 1997, land loans totaled approximately $1.9 million, or 3.17%
of Home City's total loan portfolio. The largest land loan at June 30, 1997,
had a balance of approximately $421,000. All of such loans were secured by
property located within Home City's primary market area of which $30,000 were
more than 90 days delinquent or non-accruing. See "Delinquent Loans,
Non-performing Assets and Classified Assets."
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 historically were 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, 1997, a total of $3.8 million, or approximately 6.43% 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, and the economy of such lending area has been relatively stable.
At June 30, 1997, all of such loans were performing in accordance with their
terms.
Commercial Loans. Home City occasionally makes loans for commercial
purposes. Such loans may be secured by nonresidential real estate or by
assets of the borrower other than real estate, such as equipment or
receivables. At June 30, 1997, Home City had nine commercial loans in the
aggregate amount of $464,000, each of which was performing in accordance with
its terms.
Consumer Loans. Home City makes various types of loans, including
unsecured loans and loans secured by deposits. Such loans are made only at
fixed rates of interest for terms of up to 15 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS."
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, 1997, Home City had approximately $3.3 million, or 5.57% of
its total loans, invested in consumer loans, and none of such loans were more
than 90 days delinquent or nonaccruing .
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 35-42%.
An appraisal of the fair market value of the real estate on which Home City
<PAGE>
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 completed and satisfactorily
reviewed 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 offi
cials 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 specifications 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 prepayment penalties, but do provide 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 almost an
equal number of fixed-rate and adjustable-rate loans. See "DESCRIPTION OF
BUSINESS - Loan Maturity Schedule." Home City occasionally participates in
loans by other institutions.
<PAGE>
The following table presents Home City's mortgage loan origination and
participation activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
_________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family residential <F1> $14,872 $14,091 $ 9,269
Multifamily residential 325 280 1,468
Nonresidential 2,451 2,210 3,303
Commercial 546 133 --
Consumer 2,975 1,797 37
Loans Purchased 374 -- --
_______ _______ _______
Total loans originated 21,543 18,511 14,077
_______ _______ _______
Reductions:
Principal repayments (10,902) (9,287) (5,623)
Sales of loans 0 (2,760) (338)
Increase (decrease) in other items,
net <F2> 169 (199) (148)
_______ _______ _______
Net increase (decrease) $10,810 $ 6,265 $ 7,968
_______ _______ _______
<FN>
<F1>
Includes construction loans.
<F2>
Consists of unearned and deferred fees, costs and the allowance for loan losses.
</FN>
</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 the
association'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 $1,614,000
to one borrower at June 30, 1997. The largest amount Home City had outstanding
to one borrower at June 30, 1997, was $1,250,000. 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, 1997.
Delinquent Loans, Non-performing 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.
<PAGE>
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>
At June 30,
_____________________________________________________________________________________________
1997 1996 1995
___________________________ __________________________ __________________________
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: <F1>
30-59 days 26 $ 667 1.18% 17 $ 565 1.24% 11 $ 296 0.75%
60-89 days 5 133 0.23 4 170 0.37 4 83 0.21
90 days and over 20 416 0.74 14 247 0.54 14 207 0.53
__ ______ ____ __ ______ ____ __ ______ ____
Total delinquent loans 51 $1,216 2.15% 35 $ 982 2.15% 29 $ 586 1.49%
__ ______ ____ __ ______ ____ __ ______ ____
<FN>
<F1>
The number of days a loan is delinquent is measured from the day the payment
was due under the terms of the loan agreement.
</FN>
The following table sets forth information with respect to the nonaccrual
status of Home City's loans which are 90 days or more past due and other
non-performing assets at the dates indicated:
</TABLE>
<TABLE>
<CAPTION>
At June 30,
________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $245 $247 $207
Nonresidential 171 -- --
Commercial -- -- --
Consumer -- -- --
____ ____ ____
Total non-performing loans 416 247 207
Real estate owned -- -- --
____ ____ ____
Total non-performing assets $416 $247 $207
____ ____ ____
Total loan loss allowance $445 $362 $319
Total non-performing assets as
a percentage of total assets 0.59% 0.44% 0.43%
Loan loss allowance as a percent
of non-performing loans 106.97% 146.56% 154.11%
</TABLE>
During the year ended June 30, 1997, $2,000 in interest income was
recognized and an additional $29,000 would have been recorded as interest
income on nonaccruing loans had such loans been accruing pursuant to
contractual terms. During such period, Home City had no restructured loans
within the meaning of SFAS No. 115. There are no loans which are not
<PAGE>
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 the 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.
The aggregate amount of Home City's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30,
__________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $438 $518 $349
Doubtful -- 19 --
Loss 81 102 106
____ ____ ____
Total classified assets $519 $639 $455
____ ____ ____
</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 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 non-performing 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 required down payments of 20%
of the lower of the sales price or appraisal value of the real estate. In
addition, these loans are secured by property in Home City's lending area of a
100-mile radius from Springfield, Ohio. Home City's practice of making loans
only in their 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.
<PAGE>
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.
The following table sets forth an analysis of Home City's allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended June 30,
__________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $362 $319 $229
Charge-offs (22) (7) (19)
Recoveries 48 -- --
Provision for loan losses (charged to operations) 57 50 109
____ ____ ____
Balance at end of period $445 $362 $319
____ ____ ____
Ratio of net charge-offs (recoveries) to average net
loans outstanding during the period (0.05)% 0.02% 0.05%
Ratio of allowance for loan losses to total loans 0.79% 0.79% 0.81%
</TABLE>
For the year ended June 30, 1997, $29,000 of the allowance for loan
losses was allocated to loans secured by nonresidential real estate, $72,000
was allocated to loans secured by one- to four-family real estate, and $48,000
was allocated to consumer loans. The allowance was unallocated for the years
ended June 30, 1996 and 1995. Home City's management anticipates that loan
losses will not exceed $30,000 during the fiscal year 1998 and that all such
losses will be experienced on loans secured by one- to four-family residential
real estate.
Mortgage-Backed and Related Securities
Home City maintains a portfolio of mortgage-backed securities in the form
of Federal Home Loan Mortgage Corporation ("FHLMC") and Government National
Mortgage Association ("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
the GNMA and backed by the full faith and credit of the U.S. Government.
The following tables set forth the composition of Home City's
mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
_____________________________________________
1997 1996
__________________ __________________
Amortized Fair Amortized Fair
cost value cost value
____ _____ ____ _____
<S> <C> <C> <C> <C>
GNMA certificates $ 754 $ 730 $3,020 $2,946
FHLMC certificates -- -- 26 29
______ ______ ______ ______
Total mortgage-backed
and related securities $ 754 $ 730 $3,046 $2,975
______ ______ ______ ______
</TABLE>
<PAGE>
The following table sets forth information regarding scheduled
maturities, amortized costs, market value and weighted average yields of Home
City's mortgage-backed and related securities at June 30, 1997. 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, 1997
____________________________________________________________________________________________________________________
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 $ -- -- % $ -- -- % $185 6.69% $545 6.85% $730 $730 6.81%
FHLMC
certificates -- -- -- -- -- -- -- -- -- -- --
____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____
Total $ -- -- % $ -- -- % $185 6.69% $545 6.85% $730 $730 6.81%
____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____
</TABLE>
For additional information, see Note C of the Notes to Consolidated
Financial Statements.
<PAGE>
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 OR PLAN OF OPERATIONS."
The following table sets forth information concerning Home City's
investments at the dates indicated:
<TABLE>
<CAPTION>
At June 30,
_____________________________________________________________________________________________________
1997 1996 1995
_______________________________ _______________________________ ______________________________
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
financial institutions $ 1,397 13.19% $ 1,397 13.20% $ 588 12.70% $ 588 12.72% $ 307 6.65% $ 307 6.64%
Federal funds sold 200 1.89 200 1.89 400 8.64 400 8.65 1,500 32.50 1,500 32.45
Time deposits in other
financial institutions 361 3.41 353 3.33 1,061 22.91 1,053 22.78 360 7.80 360 7.79
Investment securities:
U.S. government and
federal agency
securities 6,993 66.02 6,993 66.07 997 21.53 997 21.57 1,496 32.42 1,496 32.36
Municipal securities<F1> 749 7.07 749 7.08 883 19.07 883 19.10 405 8.78 413 8.93
Equity securities:
FHLMC stock 420 3.97 420 3.97 270 5.83 270 5.84 221 4.79 221 4.78
Investment in joint
venture <F2> 29 0.27 29 0.27 18 0.39 18 0.39 18 0.39 18 0.39
Service corporation<F3> 20 0.19 20 0.19 20 0.43 20 0.43 20 0.43 20 0.43
FHLB stock 423 3.99 423 4.00 394 8.51 394 8.52 288 6.24 288 6.23
_______ ______ _______ ______ ______ ______ ______ ______ ______ ______ ______ ______
Total investments $10,592 100.00% $10,584 100.00% $4,631 100.00% $4,623 100.00% $4,615 100.00% $4,623 100.00%
_______ ______ _______ ______ ______ ______ ______ ______ ______ ______ ______ ______
<FN>
<F1>
Bonds issued by local school districts.
<F2>
Home City has a 50% ownership interest in a joint venture that is primarily
involved in the development of low income housing.
<F3>
Home City owns 100% of Homciti Service Corp., whose assets consist of common
shares of Intrieve, Incorporated, a data service provider, and a 0.875%
ownership in a joint venture which owns The Springfield Inn, a hotel in
Springfield, Ohio.
</FN>
</TABLE>
<PAGE>
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Home City's investment securities
at June 30, 1997:
<TABLE>
<CAPTION>
At June 30, 1997
___________________________________________________________________
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>
Investment securities:
U.S. government and federal
agency securities $1,501 5.38% $5,492 5.96% $ -- --%
Municipal securities 205 4.25 387 4.47 157 5.30
Equity securities:
FHLMC stock -- -- -- -- 420 1.50
Investment in joint venture -- -- -- -- 29 --
Service corporation -- -- -- -- 20 --
FHLB stock -- -- -- -- 423 7.05
______ ____ ______ ____ ______ ____
Total investments $1,706 5.24% $5,879 5.86% $1,049 4.24%
______ ____ ______ ____ ______ ____
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
_____________________________________________
Average Weighted-
life Carrying Market average
in years value value yield
________ _____ _____ _____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
agency securities 1.18 $6,993 $6,993 5.84%
Municipal securities 3.25 749 749 4.58
Equity securities -- 892 892 4.05
______ ______
Total $8,634 $8,634
______ ______
</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 and related securities,
income on earning assets, service charges and gains on the sale of assets.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." 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.
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, statement savings
accounts, passbook savings accounts and term certificate accounts. Home City
also offers individual retirement accounts ("IRA"), both in passbook and
certificate 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, 1997, Home City's certificates of deposit totaled $41.1
million, or 81.92% of total deposits. Of such amount, approximately $26.3
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.
<PAGE>
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
____________________________________________________________________________
1997 1996 1995
____________________ ____________________ ____________________
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 $ 540 1.08% $ 302 0.64% $ -- --%
NOW accounts <F1> 675 1.34 395 0.84 -- --
Passbook savings accounts <F2> 7,863 15.66 9,561 20.27 10,500 25.65
_______ ______ _______ ______ _______ ______
Total transaction accounts 9,078 18.08 10,258 21.75 10,500 25.65
Certificates of deposit:
________________________
2.01 - 4.00% -- -- -- -- 600 1.47
4.01 - 6.00% 16,027 31.91 15,810 33.51 13,287 32.46
6.01 - 8.00% 25,120 50.01 21,106 44.74 16,549 40.42
_______ ______ _______ ______ _______ ______
Total certificates of deposit 41,147 81.92 36,916 78.25 30,436 74.35
_______ ______ _______ ______ _______ ______
Total deposits <F3> $50,225 100.00% $47,174 100.00% $40,936 100.00%
_______ ______ _______ ______ _______ ______
<FN>
<F1>
Home City's weighted-average interest rate paid on NOW accounts fluctuates with
the general movement of interest rates. At June 30, 1997, 1996 and 1995, the
weighted-average rates on NOW accounts were 1.73%, 1.71%, and 0%, respectively.
<F2>
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 2.45%, 2.58%, and 3.12%, at June 30, 1997, 1996 and 1995,
respectively.
<F3>
IRAs are included in the various certificates of deposit balances. IRAs totaled
$6.0 million, $5.5 million, and $4.4 million as of June 30, 1997, 1996 and 1995.
</FN>
</TABLE>
The following table shows rate and maturity information for Home City's
certificates of deposit as of June 30, 1997:
<TABLE>
<CAPTION>
Amount Due
________________________________________________________
Over Over
Up to 1 year to 2 years to Over
Rate 1 year 2 years 3 years 3 years Total
____ ______ _______ _______ _______ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00% $ -- $ -- $ -- $ -- $ --
4.01 - 6.00% 12,090 3,715 50 172 16,027
6.01 - 8.00% 14,249 6,433 3,946 492 25,120
_______ _______ _______ _______ _______
Total certificates
of deposit $26,339 $10,148 $ 3,996 $ 664 $41,147
_______ _______ _______ _______ _______
</TABLE>
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
Maturity Amount
________ ______
(Dollars in thousands)
<S> <C>
Three months or less $3,194
Over 3 months to 6 months 1,241
Over 6 months to 12 months 1,614
Over 12 months 1,598
______
Total $7,647
______
</TABLE>
The following table sets forth Home City's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
For the Year ended June 30,
_________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $47,174 $40,936 $34,816
Deposits 28,783 42,110 24,327
Withdrawals (28,418) (38,242) (20,052)
_______ _______ _______
Net increases before interest credited 365 3,868 4,275
Interest credited 2,686 2,370 1,845
_______ _______ _______
Ending balance $50,225 $47,174 $40,936
_______ _______ _______
Net increase $ 3,051 $ 6,238 $ 6,120
Percentage increase 6.47% 15.24% 17.58%
</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 credit
worthiness 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 on whether it meets
the Qualified Thrift Lender Test (the "QTL Test"). See "REGULATION - OTS
Regulations -- Qualified Thrift Lender Test." If an association meets the QTL
Test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, it will be
eligible for such advances only to the extent it holds specified QTL Test
assets. At June 30, 1997, 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>
Year ended June 30,
________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Average balance outstanding $3,564 $2,582 $1,628
Maximum amount outstanding at
any month end during the period 5,108 3,564 2,715
_________
Balance outstanding at end of period 5,108 2,903 2,618
Weighted average interest rate
during the period 6.50% 6.66% 6.57%
Weighted average interest rate
at end of period 6.29% 6.49% 6.69%
</TABLE>
<PAGE>
Subsidiaries
Home City owns all of the outstanding shares of Homciti Service
Corp., an Ohio corporation ("Homciti"). Homciti owns common stock in
Intrieve, Incorporated ("Intrieve"), a data processing company which services
Home City, and an 0.875% ownership interest in a joint venture which owns the
Springfield Inn, a local hotel. At June 30, 1997, the aggregate value of the
Intrieve stock and the joint venture investment equaled approximately $49,000.
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, 1996, Home City had approximately 3.62% 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.
Personnel
As of June 30, 1997, Home City had fourteen full-time employees and one
part-time employee. 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 is represented by a collective bargaining unit.
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 is also subject to regulation, examination and oversight by the
OTS as the holding company of Home City and is required to submit periodic
reports to the OTS.
Legislation to recapitalize the Savings Association Insurance Fund
("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.
<PAGE>
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 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, 1997, was 15.5%. For information concerning Home
City's capital, see "ITEM SIX. Management's Discussion and Analysis or Plan of
Operation - Liquidity an Capital Resources."
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, 1997, met the standards for
a well-capitalized association.
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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 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 is 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.
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, 1997, was approximately $5.9
million, or 11.5%.
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, 1997,
Home City had QTIs equal to approximately 78.4% of its total portfolio assets.
<PAGE>
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 was able to lend
up to $1,614,000 to one borrower at June 30,1997. Notwithstanding the specified
limits, an association may lend to one borrower up to $500,000 "for any
purpose." See "Description of Business - Lending Activities."
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 deposits). Most loans to directors, executive officers and
principal shareholders must be approved in advance by a majority of the
"disinterested" members of the board of directors of the association with any
"interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the
same as offered in comparable transactions to the general public or as offered
to all employees in a company-wide benefit program, and loans to executive
officers are subject to additional limitations. Home City was in
compliance with such restrictions at June 30, 1997.
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. HCFC
is 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, 1997.
Holding Company Regulation. HCFC is a savings and loan holding company
within the meaning of the Home Owners' Loan Act (the "HOLA"). As such, HCFC
has registered with the OTS and is 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.
HCFC is 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
<PAGE>
cannot predict if and in what form these proposals might become law. The 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, 1997, 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.
Prior to October 1, 1996, the reserves of the SAIF were below the level
required by law because a significant portion of the assessments paid into the
fund have been and are being used to pay the cost of prior thrift failures,
while the reserves of the BIF met the level required by law in May 1995. This
resulted in a significant disparity between BIF and SAIF assessments during
1996.
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.
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
<PAGE>
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.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effecitve in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in lat 1995. Such
excess equaled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on institutions insured in
the SAIF.
Federal legislation, which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves
to the level required by law. Certain banks holding SAIF deposits were required
to pay the same special assessment on 80% of deposits at March 31, 1995. In
addition, the cost of prior thrift failures will be shared by both the SAIF and
the BIF. As a result of such cost sharing, BIF assessments for healthy banks
in 1997 are $.013 per $100 in deposits and SAIF assessments for healthy
institutions in 1997 are $.064 per $100 in deposits.
Home City had $40.1 million in deposits at March 31, 1995. Home City paid
a special assessment of $263,000 on November 27, 1996, which was recorded as of
September 30, 1996. This assessment is tax-deductible and reduced income by
$174,000 for the year ended June 30, 1997.
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
up to $49.3 million (subject to an exemption of up to $4.4 million), and to
maintain reserves of 10% of deposits in net transaction accounts against that
portion of total transaction accounts in excess of $49.3 million. These
percentages are subject to adjustment by the FRB. At June 30, 1997, 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 $423,000 at June 30, 1997.
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 or (ii) 20
times the member's investment in FHLB stock. At June 30, 1997, Home City's
maximum limit on advances was approximately $8.5 million. The granting of
advances is subject also to the FHLB's collateral and credit underwriting
guidelines.
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.
<PAGE>
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.
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. In addition to the regular
income tax, HCFC and Home City are subject to a minimun 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. However, the Taxpayer Relief Act of 1997 repealed the alternative
minimum tax for certain "small corporations" for tax years beginning after
December 31, 1997. A corporation initially qualifies as a small corporation
if it had average gross receipts of $5 million or less for the three tax years
ending with its first tax year beginning after December 31, 1996. Once a
corporation is recognized as a small corporation, it will continue to be exempt
from the alternative minimum tax for as long as its average gross receipts for
the prior three-year period does not exceed $7.5 million. In determining if a
corporation meets this requirement, the first year that it achieved small
corporation status is not taken into consideration.
Home City's average gross receipts for the tax years ending on December
31, 1996, is $4.3 million, and as a result, Home City does qualify as a small
corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act, which
was signed into law on August 21, 1996, certain institutions, such as Home City,
were 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.
The reserve methods under Section 593 of the Code permitted 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.
The Act eliminated the percentage of taxable income method of accounting
for bad debts by thrift institutions, effective for taxable years beginning
after 1995. Thrift institutions that are trreated as small banks are allowed
to utilize the experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires amounts to be
recaptured with respect to such change. Generally, the amounts to be
recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will
be taken into account ratably over a six-taxable-year period, beginning with
the first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that 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 losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case
of a thrift institution that is treated as a small bank, like 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
<PAGE>
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.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the 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 share-
holder (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
the income of Home City 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, the pre-1988 reserves of Home City for tax
purposes totaled approximately $1.1 million. Home City believes it had
approximately $4.4 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 1993. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of 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. For tax year beginning after December 31, 1998,
the rate of tax is the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 of (ii) 0.4000% time taxable net worth.
In computing its tax under the net worth method, HCFC may exclude 100% of
its investment in the capital stock of Home City, 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
<PAGE>
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. For tax year 1999, however,
the franchise tax on financial institutions will be 1.4% of the book net worth
and for tax year 2000 and years thereafter the tax will be 1.3% of the book net
worth. As a "financial institution," Home City is not subject to any tax based
upon net income or net profits imposed by the State of Ohio.
Impact of Recent Accounting Pronouncements
SFAS No. 128, "Earnings Per Share." In February 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share." This statement established standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This statement simplifies the standards for
computing earnings per share previously in APB Opinion No. 15, "Earnings Per
Share", and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior period EPS data
presented. HCFC has not yet determined the effect, if any, the adoption of
this statement will have on its EPS disclosure.
SFAS No. 130, "Reporting Comprehensive Income." In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement does
not require a specific format for the financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
The statement also requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of
statements of financial position.
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
This statement requires that a public business enterprise report
financial and descriptive information about its reportable segments and
requires that a public business enterprise report a measure of segment profit
or loss, certain specific revenue and expense items, and segment assets. It
also requires a reconciliation of segment information presented to
corresponding amounts in the enterprise's general-purpose financial
statements.
This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application.
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein
have been prepared in accordance with GAAP, which requires HCFC to measure
financial position and operating results in terms of historical dollars, with
the exception of investment securities available-for-sale, which are carried
at fair value. 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 rate of inflation. While interest rates are greatly influenced by changes
in the rate of inflation, they do not change at the same rate or in the same
magnitude as the rate of inflation. Rather, interest rate volatility is based
on changes in the expected rate of inflation, as well as changes in monetary
and fiscal policies.
ITEM 2. Properties
Home City's office is located at 63 West Main Street, Springfield, Ohio
45502. Such property is owned by Home City. HCFC operates out of Home City's
office. HCFC reimburses Home City for the fair value of the space occupied.
The following table sets forth certain information at June 30, 1997,
regarding the ownership by Home City of the land, building, and improvements
at 63 West Main Street, Springfield, Ohio, the office of Home City:
<TABLE>
<CAPTION>
Year Square Net
acquired footage book value <F1>
________ _______ _______________
<S> <C> <C> <C>
1975 5,839 $366,000
<FN>
<F1>
At June 30, 1997, Home City's properties and equipment had a total net book
value of $488,000. For additional information regarding Home City's properties
and equipment, see Notes A and E of Notes to Financial Statements.
</FN>
ITEM 3. 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.
Neither Home City nor HCFC is not presently involved in any other legal
proceedings of a material nature. From time to time, Home City is party to
legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by Home City.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
There were 904,590 common shares of HCFC outstanding on August 31, 1997,
held of record by approximately 364 shareholders. Price information with
respect to HCFC's common shares is quoted on The Nasdaq Small Cap Market
("Nasdaq") under the symbol "HCFC." The high and low trading prices for the
common shares of HCFC, as quoted by Nasdaq, by quarter are shown below. HCFC
declared a cash dividend of $0.08 per share on each of March 18, 1997, and
May 20, 1997.
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997 June 30, 1997
_________________ ______________ _____________
<S> <C> <C> <C>
High $13.250 $14.250 $14.438
Low $12.000 $12.000 $12.750
</TABLE>
The income of HCFC consists of dividends that may periodically be
declared and paid by the Board of Directors of Home City on the common shares
of Home City held by HCFC and earnings on the $3.8 million in net proceeds
retained by HCFC from the sale of HCFC's common shares in connection with the
Conversion. In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations.
Under OTS regulations applicable to converted savings associations, Home
City is not permitted to pay a cash dividend on its common shares if the
regulatory capital of Home City would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Home City, in the event of a complete liquidation, to those
members of Home City before the Conversion who maintain a savings account at
Home City after the Conversion) or applicable regulatory capital requirements
prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a
savings association that immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital
to assets ratio exceeded its required capital to assets ratio at the beginning
of the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need
of more than normal supervision will be subject to restrictions on dividends.
A savings association that fails to meet current minimum capital requirements
is prohibited from making any capital distributions without prior approval
of the OTS. Home City currently meets all of its regulatory capital
requirements and, unless the OTS determines that Home City is an institution
requiring more than normal supervision, Home City may pay dividends in
accordance with the foregoing provisions of the OTS regulations.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
General
Home City Federal Savings Bank of Springfield ("Home City" or the
"Company") converted from a federally insured mutual federal savings bank to a
federally insured stock federal savings bank (the "Conversion") on December
30, 1996. In connection with the Conversion, 952,200 common shares of Home
City Financial Corporation ("HCFC" or the "Corporation") were sold, generating
net proceeds of $8.3 million after conversion expenses. Of this amount, $4.6
million was utilized to purchase 100% of the common stock of the Company, and
the balance was utilized to purchase investments, loan funds to the Home City
Financial Corporation Employee Stock Ownership Plan (the "ESOP"), and for
other purposes.
The following discussion and analysis of the financial condition and
results of operations of HCFC and Home City should be read in conjunction with
and with reference to the consolidated financial statements, and the notes
thereto, presented in the Annual Report.
<PAGE>
HCFC was incorporated for the purpose of owning all of the outstanding
common shares of Home City following the Conversion. As a result, the
discussion and analysis that follows pertains primarily to the financial
condition of HCFC on a consolidated basis and to the results of operations of
Home City.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Home City, and
HCFC's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include changes
in the economy and changes in interest rates in the nation and HCFC's primary
market area.
Without limiting the generality of the foregoing, some of the statements
in the referenced sections of this discussion and analysis are forward-looking
and are, therefore, subject to such risks and uncertainties:
1.Management's determination of the amount of the allowance for loan
losses as set forth under the captions "Financial Condition," "Comparison of
Results of Operations for the Years Ended June 30, 1997 and 1996," and
"Comparison of Results of Operations for the Years Ended June 30, 1996 and
1995;"
2.Management's discussion of the liquidity of Home City's assets and the
regulatory capital of Home City as set forth under "Liquidity and Capital
Resources;"
3.Management's analysis of the interest rate risk of Home City as set
forth under "Asset and Liability Management;" and
4.The discussion of the anticipated effect of legislation that may be
enacted as set forth under "Impact of Pending Legislation."
Financial Condition
The Corporation's consolidated total assets amounted to $70.0 million at
June 30, 1997, an increase of $14.2 million, or 25.55%, over the $55.7 million
in total assets at June 30, 1996. Such increase in assets was funded
primarily by the $8.3 million in net proceeds from the Corporation's offering
of common shares in connection with the Conversion, $3.1 million net increase
in deposits, $2.2 million increase in advances from the Federal Home Loan Bank
(the "FHLB"), and undistributed net earnings of $358,000.
Cash and cash equivalents, time deposits and investment securities
totaled $11.1 million at June 30, 1997, an increase of $5.6 million, or
101.48%, over June 30, 1996, levels. During the fiscal year ended June 30,
1997, $7.0 million of investment securities were purchased, which consisted
primarily of U.S. government obligations totaling $1.5 million, U. S. federal
agency obligations totaling $5.5 million, and equity securities totaling
$28,000. These purchases were funded primarily with the proceeds from the
Conversion and $1.1 million from maturing investment securities.
Mortgage-backed securities totaled $730,000 at June 30, 1997, a decrease
of $2.2 million from June 30, 1996. Due to the composition of the
mortgage-backed securities portfolio, a large number of issues with a
relatively small dollar value, the majority of the issues were sold and the
proceeds utilized to fund current loan demand.
Loans receivable totaled $56.0 million at June 30, 1997, an increase of
$10.8 million, or 23.90%, from the $45.2 million total at June 30, 1996.
During fiscal 1997, loan disbursements amounted to $21.5 million. Such
disbursements were partially offset by principal repayments of $10.9 million.
Home City's allowance for loan losses totaled $445,000 at June 30, 1997,
which represented 0.79% of total loans and 106.97% of non-performing loans.
At June 30, 1996, the allowance for loan losses totaled $362,000, which
represented 0.79% of total loans and 146.56% of non-performing loans.
Non-performing loans amounted to $416,000 and $247,000 at June 30, 1997
and 1996, respectively, and represent 0.59% and 0.44% of total assets at each
date. The increase in fiscal 1997 was due primarily to $325,000 in loans that
became classified as non-performing, less $100,000 in loans that were paid
off, $52,000 in loans that became classified as performing and $4,000 in
principal reductions, for a net of $169,000. All loans classified as
non-performing at June 30, 1997, were either under a workout plan or being
refinanced elsewhere, the underlying collateral was in the process of being
<PAGE>
sold or foreclosure action was being initiated. Although management believes
that its allowance for loan losses at June 30, 1997, was adequate based upon
the facts and circumstances available to it, there can be no assurance that
additions to such allowance will not be necessary in future periods, which
could affect the Corporation's results of operations.
Deposits totaled $50.2 million at June 30, 1997, an increase of $3.1
million, or 6.47%, from $47.2 million at June 30, 1996. The increase is
consistent with the deposit growth trends that the Company has been
experiencing over the past several years net of the funds on deposit utilized
by customers to purchase common shares of HCFC in the Conversion. Home City
has generally not engaged in sporadic increases or decreases in interest rates
paid or offered the highest rates available in its deposit market.
Comparison of Results of Operations for the Years Ended June 30, 1997 and 1996
General . Net income for the fiscal year ended June 30, 1997, amounted
to $577,000, an increase of $63,000, or 12.26%, over the $514,000 in net
income recorded in fiscal 1996. The overall increase in net interest income
reflects primarily management's deployment of the net proceeds from the
Conversion. The increase in net income resulted primarily from a $428,000
increase in net interest income, a $3,000 increase in noninterest income and a
$31,000 decrease in federal income tax expense, which was partially offset by
a $392,000 increase in noninterest expense.
Net Interest Income. Net interest income totaled $2.4 million for the
fiscal year ended June 30, 1997, an increase of $428,000, or 21.78%, over the
$2.0 million recorded in fiscal 1996. Interest income on loans increased by
$640,000, or 15.63%, during fiscal 1997 due primarily to an increase in the
average balance of the loans outstanding of $7.7 million, or 17.55%, coupled
with a 15 basis point (100 basis points equals one percent) decrease in yield
from 9.37% in fiscal 1996 to 9.22% in fiscal 1997. Interest income on
mortgage-backed securities decreased by $75,000, or 35.89%, due primarily to a
$1.4 million, or 40.94%, decrease in the average balance of mortgage-backed
securities outstanding, coupled with an increase in the weighted-average yield
year-to-year, from 6.19% in fiscal 1996 to 6.74% in fiscal 1997. Interest
income on investment securities increased by $148,000, or 133.33%, for the
fiscal year ended June 30, 1997, compared to fiscal 1996, as the average
balance increased by $2.8 million year to year and the related yield decreased
by 41 basis points to 5.55% in fiscal 1997. Interest income on
interest-bearing deposits, federal funds sold, and time deposits increased by
$11,000, $2,000, and $78,000, respectively, for the fiscal year ended June 30,
1997, compared to 1996. The average balance of interest-bearing demand
deposits increased $251,000, or 38.73%. The average balance invested in
federal funds sold increased by $81,000, or 11.88%, compared to fiscal 1996,
while the average balance of time certificates increased $1.1 million, or
158.32%. The yield on interest-bearing deposits decreased 11 basis points to
4.78%, while the yield on federal funds sold decreased 26 basis points to
5.13% and the time deposit yield increased 224 basis points to 5.72%.
Interest expense on deposits increased by $316,000, or 13.33%, during
fiscal 1997, due primarily to an increase in the average balance of deposits
outstanding of $4.8 million, or 10.79%, coupled with an increase in the
weighted-average rate from 5.37% in fiscal 1996 to 5.50% in fiscal 1997.
Interest expense on FHLB advances increased by $60,000, or 34.88%, primarily
due to an increase in the average balance of advances outstanding of $978,000,
or 37.82%, coupled with a decrease in weighted-average rate from 6.64% in
fiscal 1996 to 6.50% in fiscal 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $428,000, or 21.78%, during fiscal
1997, as compared to fiscal 1996. The interest rate spread decreased by 32
basis points, to 3.08% for fiscal 1997, as compared to 3.40% for fiscal 1996,
while the net interest margin increased by 3 basis points to 3.89% for fiscal
year ended June 30, 1997.
Provision for Loan Losses. Home City maintains an allowance for loan
losses in an amount which, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. 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 practices ("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, generally 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. Although 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
<PAGE>
requirements regarding asset classifications. As a result of its analysis,
management concluded that the allowance was adequate as of June 30, 1997.
There can be no assurance that the allowance will be adequate to cover future
losses on non-performing assets.
Home City had net recoveries of $26,000 during the fiscal year ended June
30, 1997, and net charge-offs of $7,000 and $19,000 during the fiscal years
ended June 30, 1996 and 1995, 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 95% of Home City's loan portfolio, and loans secured by first
mortgages on one- to four-family residential real estate make up 65% of total
loans at June 30, 1997. 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 $57,000, $50,000 and $109,000 for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively. The ratio of
non-performing loans to total loans increased to 0.74% in fiscal 1997 from
0.54% in fiscal 1996, and from 0.53% in fiscal 1995. At June 30, 1997, 1996
and 1995, respectively, Home City had ratios of allowance for loan losses to
total loans of 0.79%, 0.79%, and 0.81% and ratios of allowance for loan losses
to non-performing loans of 106.97%, 146.56%, and 154.11%. Due to such ratios
of non-performing loans to total loans, historical charge-offs, delinquency
history, and the addition of consumer installment lending the provisions of
$57,000, $50,000 and $109,000 made in 1997, 1996 and 1995, were deemed
appropriate by management to absorb reasonably foreseeable loan losses.
Noninterest Income. Noninterest income totaled $61,000 for the fiscal
year ended June 30, 1997, an increase of $3,000, or 5.17%, from the $58,000
recorded in fiscal 1996. The increase resulted primarily from increases of
$15,000 in income from life insurance policies, $3,000 in service charges on
deposit accounts, and $4,000 of other miscellaneous fee income offset by an
increase of $19,000 in losses recognized on the sale of mortgage-backed
securities.
Noninterest Expense. Noninterest expense increased by $392,000, or
32.24%, to a total of $1.6 million for the fiscal year ended June 30, 1997, as
compared to fiscal 1996. The increase resulted primarily from a $263,000
deposit insurance assessment paid as a result of legislation enacted to
recapitalize the Savings Association Insurance Fund, coupled with an $88,000,
or 16.54%, increase in salaries and employee benefits, a $54,000, or 75.00%,
increase in franchise taxes, and a $44,000, or 40.00%, increase in legal,
accounting and examination expenses. The increase in salaries and employee
benefits resulted primarily from costs associated with staff additions, the
Home City Financial Corporation Employee Stock Ownership Plan, and normal
merit increases for existing employees. The increase in noninterest expense
was due primarily to additional taxes, professional fees and printing, and
other expenses related to the reporting requirements of a public company.
Federal Income Taxes. The provision for federal income taxes totaled $
212,000 for the fiscal year ended June 30, 1997, a decrease of $31,000, or
12.76%, from the $243,000 provision recorded in fiscal 1996. HCFC's effective
tax rate declined from 32.10% in 1996 to 26.66% in 1997 which was primarily
the result of tax-exempt income from investments and deferred loan costs.
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
General . Home City's net income for the fiscal year ended June 30,
1996, amounted to $514,000, a decrease of $41,000, or 7.39%, from the $555,000
in net income recorded in fiscal 1995, reflecting primarily increases in
loans, deposits and the weighted average rate paid on deposits. The decrease
in net income resulted primarily from a $218,000 increase in noninterest
expense, which was partially offset by a $72,000 increase in net interest
income and a $59,000 decrease in provision for loan losses.
Net Interest Income. Net interest income totaled $2.0 million for the
fiscal year ended June 30, 1996, an increase of $72,000, or 3.80%, over the
$1.9 million recorded in fiscal 1995, reflecting primarily an increase in
loans and an increase in deposits and an increase in the weighted-average
rates paid on deposits. Interest income on loans increased by $750,000, or
22.43%, during fiscal 1996 due primarily to an increase in the average balance
of the loans outstanding of $8.6 million, or 24.37%, coupled with a 15 basis
point decrease in yield from 9.52% in fiscal 1995 to 9.37% in fiscal 1996.
Interest income on mortgage-backed securities decreased by $65,000, or 23.72%,
due primarily to a $579,000, or 14.67%, decrease in the average balance of
mortgage-backed securities outstanding, coupled with a decrease in the
weighted-average yield year-to-year, from 6.94% in fiscal 1996 to 6.19% in
fiscal 1996. Interest income on investment securities decreased $20,000, or
15.27%, as the average balance decreased by $810,000, or 30.25%, being offset
by the increase in yield of 107 basis points to 5.96% from 4.89 %. Time
deposit income increased by $18,000, or 300.00%, as a result of the average
balance increase of $507,000, or 275.54%, and the yield on time deposits also
<PAGE>
increased by 20 basis points to 3.48%. The average balance of federal funds
sold decreased by $478,000, or 41.21%, with the yield on federal funds sold
decreased by 2 basis points to 5.39%. The average balance of
interest-bearing demand deposits increased by $330,000, or 103.77%, for the
fiscal year ended June 30, 1996, compared to fiscal 1995, as the yield
declined to 4.89% from 5.35%.
Interest expense on deposits increased by $535,000, or 29.16%, during
fiscal 1996, due primarily to an increase in the average balance of deposits
outstanding of $5.9 million, or 15.56%, coupled with an increase in the
weighted-average rate from 4.81% in fiscal 1995 to 5.37% in fiscal 1996.
Interest expense on FHLB advances increased by $65,000, or 60.75%, due
primarily to an increase in the average balance of advances outstanding of
$958,000, or 58.85%, as FHLB advances were used to fund loan demand, coupled
with an increase in weighted-average rate from 6.57% to 6.64% in fiscal 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $72,000, or 3.80%, during fiscal
1996, as compared to fiscal 1995. The net interest rate spread decreased by
55 basis points, to 3.40% for fiscal 1996, as compared to 3.95% for fiscal
1995, while the net interest margin decreased by 50 basis points to 3.86% for
the fiscal year ended June 30, 1996.
Noninterest Income. Noninterest income totaled $58,000 for the fiscal
year ended June 30, 1996, an increase of $49,000, or 544.44%, from the $9,000
recorded in fiscal 1995. The increase resulted primarily from an increase of
$46,000 in income from life insurance policies which Home City maintains on
four directors to fund a deferred compensation plan for directors' fees, and
an increase of $3,000 in other miscellaneous fee income.
Noninterest Expense. Noninterest expense increased by $218,000, or
21.84%, to a total of $1.2 million for the fiscal year ended June 30, 1996, as
compared to fiscal 1995. The increase resulted primarily from a $134,000, or
33.67%, increase in salaries and employee benefits, and a $27,000, or 32.53%,
increase in legal, accounting and examination expenses. The increase in
salaries and employee benefits resulted primarily from the adoption in
September 1995, of a deferred 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, staff expansion and normal pay increases of 2%
to 3%. Federal deposit insurance premiums increased $13,000 to $96,000
primarily as a result of an increase in Home City's deposit base.
Federal Income Taxes. The provision for federal income taxes totaled $
243,000 for the fiscal year ended June 30, 1996, an increase of $3,000, or
1.25%, over the $240,000 provision recorded in fiscal 1995. The effective tax
rates were 32.10% and 30.20% for the fiscal years ended June 30, 1996 and
1995, respectively.
<PAGE>
Yields Earned and Rates Paid
The following table presents certain information relating to HCFC's
average balance sheet information and reflects the average yield on interest-
earning assets and the average cost of customer deposits and FHLB advances 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 and FHLB advances, respectively, for the years presented.
Average balances are derived from daily balances, which included nonaccruing
loans in the loan portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>
Year ended June 30,
___________________________________________________________________________________________
1997 1996 1995
_____________________________ _____________________________ _____________________________
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
_______ ____ ____ _______ ____ ____ _______ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing demand
deposits $ 899 $ 43 4.78% $ 648 $ 32 4.89% $ 318 $ 17 5.35%
Federal funds sold 763 39 5.13 682 37 5.39 1,160 63 5.41
Time deposits 1,785 102 5.72 691 24 3.48 184 6 3.28
Investment securities 4,655 259 5.55 1,868 111 5.96 2,678 131 4.89
Mortgage-backed and related
securities 1,989 134 6.74 3,368 209 6.19 3,947 274 6.94
Loans receivable <F1> 51,373 4,734 9.22 43,702 4,094 9.37 35,139 3,344 9.52
_______ ______ _______ ______ _______ ______
Total interest-earning assets 61,464 5,311 8.64 50,959 4,507 8.84 43,426 3,835 8.83
Noninterest-earning assets:
Cash and due from banks 628 561 672
Less: Allowance for loan
losses (387) (314) (283)
Properties and equipment 488 481 468
Other non-earning assets 1,499 734 575
_______ _______ _______
Total assets $63,692 $52,421 $44,858
_______ _______ _______
Interest-bearing liabilities:
NOW accounts $ 270 $ 5 1.73 $ 146 $ 2 1.71 $ -- $ -- --
Money market accounts 223 8 3.37 19 1 2.92 -- -- --
Passbook accounts 8,825 216 2.45 9,732 251 2.58 12,678 395 3.12
Certificates of deposit 39,567 2,458 6.21 34,225 2,116 6.18 25,504 1,440 5.65
_______ ______ _______ ______ _______ ______
Total deposits 48,884 2,686 5.50 44,122 2,370 5.37 38,182 1,835 4.81
FHLB advances 3,564 232 6.50 2,586 172 6.64 1,628 107 6.57
_______ ______ _______ ______ _______ _______
Total interest-bearing
liabilities 52,449 2,918 5.56 46,708 2,542 5.44 39,810 1,942 4.88
Noninterest-bearing liabilities 1,369 525 467
_______ _______ _______
Total liabilities 53,818 47,233 40,277
Unrealized gain on securities 183 140 32
Additional paid-in capital 4,505 -- --
Common shares acquired by ESOP (378) -- --
Retained earnings 5,564 5,048 4,549
_______ _______ _______
Total liabilities and
shareholders' equity $63,692 $52,421 $44,858
_______ _______ _______
Net interest income; net interest
rate spread $2,393 3.08% $1,965 3.40% $1,893 3.95%
______ ______ ______ ______ ______ ______
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.89% 3.86% 4.36%
______ ______ ______
Average interest-earning assets to
interest-bearing liabilities 117.19% 109.10% 109.08%
______ ______ ______
<FN>
<F1>
Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
</FN>
</TABLE>
<PAGE>
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 HCFC'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,
____________________________________________________________
1997 vs. 1996 1996 vs. 1995
_________________________ ________________________
Increase Increase
(decrease) (decrease)
due to due to
_______________ _______________
Volume Rate Total Volume Rate Total
______ ____ _____ ______ ____ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing demand deposits $ 12 $ (1) $ 11 $ 18 $ (3) $ 15
Federal funds sold 4 (2) 2 (26) -- (26)
Time deposits 38 40 78 16 2 18
Investment securities 166 (18) 148 (44) 24 (20)
Mortgage-backed and related securities (85) 10 (75) (40) (25) (65)
Loans receivable 719 (79) 640 816 (66) 750
____ ____ ____ ____ ____ ____
Total interest income 854 (50) 804 740 (68) 672
____ ____ ____ ____ ____ ____
Interest expenses attributable to:
NOW accounts 2 -- 2 2 -- 2
Money market accounts 6 1 7 1 -- 1
Passbook savings accounts (23) (12) (35) (91) (53) (144)
Certificates of deposit 330 12 342 491 185 676
Borrowed funds 65 (5) 60 63 2 65
____ ____ ____ ____ ____ ____
Total interest expense 380 (4) 376 466 134 600
____ ____ ____ ____ ____ ____
Increase (decrease) in net interest income $474 $(46) $428 $274 $(202) $ 72
</TABLE>
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 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 discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash
flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
that 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 present value
of the institution's assets with either an increase or 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, 1997, 2% of the economic value of Home City's assets was
approximately $1.4 million. Because the interest rate risk of a 200 basis
point increase in market rates (which was greater than the interest rate risk
of a 200 basis decrease) was $1.6 million at June 30, 1997, Home City would
have been required to deduct approximately $100,000 (half of the approximate
$200,000 difference) from its capital in determining whether Home City met its
risk-based capital requirement. Regardless of such deduction, however, Home
City's risk-based capital at June 30, 1997, would have still exceeded the
regulatory requirement by approximately $7.6 million.
<PAGE>
Presented below, as of June 30, 1997, 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 changes 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 repaid 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>
At June 30, 1997
____________________________
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
_____________ ________ _____ ______
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 (70)% $(3,650) (29)%
+300 (55) (2,621) (21)
+200 (35) (1,629) (13)
+100 (17) (722) (6)
0 0 0 0
-100 17 342 3
-200 35 477 4
-300 55 831 7
-400 70 1,309 10
</TABLE>
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 was within the policy limits set by the Board of Directors.
The Board of Directors considers the results of each quarterly analysis and
factors the information into its decisions in adjusting the pricing of loans
and deposits in the future.
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 rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market 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 the 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.
<PAGE>
Liquidity and Capital Resources
Home City's liquidity, primarily represented by cash and 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,
________________________________
1997 1996 1995
____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 577 $ 514 $ 555
Adjustments to reconcile net income
to net cash from operating activities 52 29 43
_______ _______ _______
Net cash provided by operating activities 629 543 598
Net cash provided by (used in)
investing activities (13,843) (7,585) (7,522)
Net cash provided by (used in)
financing activities 13,429 6,508 8,314
_______ _______ _______
Net change in cash and cash equivalents 215 (534) 1,390
Cash and cash equivalents at
beginning of period 1,843 2,377 987
_______ _______ _______
Cash and cash equivalents at end of period $ 2,058 $ 1,843 $ 2,377
_______ _______ _______
</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 liquid assets, which may include, but are not limited to, 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, 1997, Home City's regulatory liquidity ratio was 11.54%.
At such date, Home City had commitments to originate loans totaling $1.4
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 M of the Notes to Consolidated Financial Statements.
Home City is required by applicable law and regulation 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,
1997, June 30, 1996 and June 30, 1995.
Savings associations are required to maintain "tangible capital" of not
less than 1.5% of the association's adjusted total assets. Tangible capital
is defined in OTS regulations as core capital less 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 the association's 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.
<PAGE>
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. Assets are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk. 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 $445,000 at June 30, 1997.
The following table summarizes Home City's regulatory capital
requirements and actual capital (see Note L of the Notes to Consolidated
Financial Statements for a reconciliation of capital under GAAP and regulatory
capital amounts) at June 30, 1997:
<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 $10,317 15.45% $ 1,002 1.5% $ 9,315 13.95% $66,778
Core capital 10,317 15.45 2,003 3.0 8,314 12.45 66,778
Risk-based capital 10,762 28.44 3,027 8.0 7,735 20.44 37,836
</TABLE>
At June 30, 1997, Home City had no material commitments for capital
expenditures.
Impact of Pending Legislation
The deposit accounts of Home City and other savings associations are
insured up to applicable limits by the FDIC in the SAIF. Legislation to
recapitalize the SAIF was enacted on September 30, 1996. Such legislation
provided that the SAIF will be merged into the Bank Insurance Fund if there
are no longer any federally chartered savings associations. Such legislation
also requires the Department of Treasury to submit a report to Congress on the
development of a common charter for all financial institutions. In addition,
legislation has been introduced to address this charter unification by
elimination of the federal thrift charter and the separate federal regulation
of savings associations.
Pursuant to such legislation, Congress may eliminate the OTS, and
Home City may be regulated under federal law as a bank or may be required to
change its charter. Such change in regulation or charter would likely change
the range of activities in which Home City may engage and may subject Home
City to additional regulation by the FDIC. In addition, Home City might
become subject to a different form of holding company regulation, which may
limit the activities in which HCFC may engage, and subject HCFC to other
additional regulatory requirements, including separate capital requirements.
HCFC cannot predict at this time when or whether Congress may actually pass
legislation regarding HCFC's and Home City's regulatory requirements or
charter. Although such legislation may change the activities in which HCFC
and Home City may engage, it is not anticipated that the current activities of
HCFC or Home City will be materially affected by those activity limits.
<PAGE>
ITEM 7. Financial Statements
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Home City Financial Corporation
Springfield, Ohio
We have audited the accompanying consolidated balance sheets of Home City
Financial Corporation as of June 30, 1997 and 1996, and the related
consolidated statements of income, cash flows and shareholders' equity for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home City
Financial Corporation as of June 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
ROBB, DIXON,
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
July 23, 1997
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED BALANCE SHEETS
______________________________________________________________________________________________________________
(Dollars in thousands)
At June 30,
1997 1996
____ ____
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 461 $ 855
Interest-bearing demand deposits in other banks 1,397 588
Federal funds sold 200 400
_______ _______
Total cash and cash equivalents 2,058 1,843
Time deposits with original maturities of 90 days or more 361 1,061
Investment securities available-for-sale, at fair value 8,634 2,582
Mortgage-backed and related securities available-for-sale, at fair value 730 2,975
Loans, net 56,035 45,225
Accrued interest receivable 407 273
Properties and equipment 488 488
Cash surrender value of life insurance 1,070 1,044
Other assets 181 237
_______ _______
TOTAL ASSETS $69,964 $55,728
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $50,225 $47,174
Advances from Federal Home Loan Bank 5,108 2,903
Accrued interest payable 59 49
Advance payments by borrowers for taxes and insurance 21 20
Deferred income taxes 100 68
Other liabilities 172 116
_______ _______
TOTAL LIABILITIES 55,685 50,330
_______ _______
SHAREHOLDERS' EQUITY
Preferred shares of no par value; 1,000,000 shares
authorized; no shares issued and outstanding 0 0
Common shares of no par value; 5,000,000 shares
authorized; 952,200 issued and outstanding 0 0
Additional paid-in capital 9,085 0
Retained earnings, substantially restricted 5,696 5,271
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes 260 127
Common shares purchased by
Employee Stock Ownership Plan (762) 0
_______ _______
TOTAL SHAREHOLDERS' EQUITY 14,279 5,398
_______ _______
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $69,964 $55,728
_______ _______
_______________________
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF INCOME
______________________________________________________________________________________________________________
(Dollars in thousands)
Year ended June 30,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
INTEREST INCOME:
Loans $4,734 $4,094 $3,344
Mortgage-backed securities 134 209 274
Investment securities 259 111 131
Federal funds sold 39 37 63
Time deposits 102 24 6
Interest-bearing demand deposits in other banks 145 56 17
______ ______ ______
TOTAL INTEREST INCOME 5,311 4,507 3,835
______ ______ ______
INTEREST EXPENSE:
Deposits 2,686 2,370 1,835
Advances from Federal Home Loan Bank 232 172 107
______ ______ ______
TOTAL INTEREST EXPENSE 2,918 2,542 1,942
______ ______ ______
NET INTEREST INCOME 2,393 1,965 1,893
Provision for loan losses 57 50 109
______ ______ ______
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,336 1,915 1,784
NONINTEREST INCOME:
Service charges on deposits 5 2 2
Life insurance 61 46 0
Loss on sale of mortgage-backed securities (19) 0 0
Other income 14 10 7
______ ______ ______
TOTAL NONINTEREST INCOME 61 58 9
______ ______ ______
NONINTEREST EXPENSE:
Salaries and employee benefits 620 532 398
Supplies, telephone and postage 47 44 29
Occupancy and equipment 101 102 104
FDIC deposit insurance 328 96 83
Data processing 69 54 47
Legal, accounting and examination 154 110 83
Franchise taxes 126 72 63
Other expenses 163 206 191
______ ______ ______
TOTAL NONINTEREST EXPENSE 1,608 1,216 998
______ ______ ______
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 789 757 795
Federal income tax expense 212 243 240
______ ______ ______
NET INCOME $ 577 $ 514 $ 555
______ ______ ______
_______________________
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
__________________________________________________________________________________________________________________________
(Dollars in thousands)
Unrealized
Gain (Loss)
on Securities
Available-for-Sale Common Total
Common Additional Net of Applicable Shares Share-
Stock Paid-in Retained Deferred Purchased holders'
# of Shares Capital Earnings Income Taxes by ESOP Equity
___________ _______ ________ ____________ _______ ______
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994 0 $ 0 $4,202 $ 113 $ 0 $ 4,315
Net income 555 555
Change in unrealized
gain (loss) on securities
available-for-sale, net of
applicable deferred income
taxes of $8 15 15
_______ _______ ______ _______ _______ _______
Balances at June 30, 1995 0 0 4,757 128 0 4,885
Net income 514 514
Change in unrealized
gain (loss) on securities
available-for-sale, net of
applicable deferred income
taxes (1) (1)
_______ _______ ______ _______ _______ _______
Balances at June 30, 1996 0 0 5,271 127 0 5,398
Net income 577 577
Issuance of 952,200
shares of common stock 952,200 9,085 (762) 8,323
Dividends declared
($0.16 per share) (152) (152)
Change in unrealized
gain (loss) on securities
available-for-sale, net of
applicable deferred income
taxes of $67 133 133
_______ _______ ______ _______ _______ _______
Balances at June 30, 1997 952,200 $ 9,085 $5,696 $ 260 $ (762) $14,279
_______ _______ ______ _______ _______ _______
_______________________
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
______________________________________________________________________________________________________________
(Dollars in thousands)
Year ended June 30,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 577 $ 514 $ 555
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 0 42 (17)
Provision for loan losses 57 50 109
Loss on sale of mortgage-backed securities 19 0 0
Depreciation 40 39 33
Deferred income taxes (35) 89 7
Life insurance income, net of expenses (26) (19) 0
Changes in operating assets and liabilities:
Increase in accrued interest receivable (134) (103) (52)
(Increase) decrease in other assets 57 (129) (66)
Increase in accrued interest payable 10 7 25
Increase in other liabilities 56 53 4
_______ _______ _______
Net cash provided by operating activities 621 543 598
_______ _______ _______
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in time deposits 700 (700) (361)
Purchases of held-to-maturity securities 0 0 (3,880)
Proceeds from maturities of held-to-maturity securities 0 500 4,120
Principal collection on mortgage-backed securities, held-to-maturity 0 278 564
Purchases of available-for-sale securities (6,997) (602) (45)
Proceeds from sales of available-for-sale securities 0 0 80
Proceeds from maturities of available-for-sale securities 1,136 20 0
Proceeds from sales of mortgage-backed securities, available-for-sale 1,891 0 0
Principal collections on mortgage-backed securities, available-for-sale 342 319 0
Proceeds from sales of loans 0 2,760 338
Net increase in loans (10,867) (9,075) (8,306)
Purchases of properties and equipment (40) (60) (35)
Proceeds from sale of real estate held for investment 0 0 3
Purchase of life insurance contracts 0 (1,025) 0
_______ _______ _______
Net cash used in investing activities (13,835) (7,585) (7,522)
_______ _______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 3,051 6,238 6,120
Net increase in short-term FHLB advances 700 500 0
Proceeds from new long-term FHLB advances 1,825 0 2,310
Payments on long-term FHLB advances (319) (216) (116)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 1 (14) 0
Issuance of common stock 8,323 0 0
Dividends paid (152) 0 0
_______ _______ _______
Net cash provided by financing activities 13,429 6,508 8,314
_______ _______ _______
Net increase (decrease) in cash and cash equivalents 215 (534) 1,390
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 1,843 2,377 987
_______ _______ _______
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,058 $ 1,843 $ 2,377
_______ _______ _______
_______________________
See accompanying notes.
</TABLE>
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
Notes to Consolidated Financial Statements
________________________________________________________________________________
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Home City Financial Corporation (the "corporation") is a financial services
company which was organized in August of 1996 and is a unitary savings and
loan holding company. The principal assets of the corporation are the capital
stock of Home City Federal Savings Bank of Springfield (the "bank"), a loan
made to the Home City Financial Corporation Employee Stock Ownership Plan (the
"ESOP") for the purchase of common shares of the corporation, and investment
securities. The bank provides a variety of financial services to individuals
and corporate customers, through its 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 and consumer loans. The bank owns 100% of
its subsidiary, Homciti Service Corp., which invests in stock of the bank's
data service provider, and a local joint venture, in both of which it has
minority interests.
The accounting and reporting policies of the corporation and its subsidiaries
conform to generally accepted accounting principles and general practices
within the financial services industry. The more significant accounting
policies are summarized below.
Basis of Consolidation
The consolidated financial statements include the accounts of the corporation
and all subsidiaries. Significant intercompany accounts and transactions have
been eliminated.
Uses of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particulary susceptible to significant change
relate to the determination of the allowance for losses on loans. In
connection with the determination of the allowance for loan losses, 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 is susceptible to changes
in local market conditions.
While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses 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
allowance for losses on loans. Such agencies may require the bank to recognize
additions to the allowance 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 allowance for loan losses may change materially
in the near term. However, the amount of the change that is reasonably
possible cannot be estimated.
<PAGE>
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the corporation
considers cash and due from banks, interest-bearing demand deposits with banks
and federal funds sold to be cash equivalents. The following are supplemental
disclosures for the consolidated statements of cash flows for the years ended
June 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ _____
<S> <C> <C> <C>
Cash paid during the year for interest $2,908 $2,535 $1,927
Cash paid during the year for income taxes 147 283 272
</TABLE>
Investment Securities
All investment and mortgage-backed securities are classified as available-for-
sale. Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Unrealized holding gains and losses, net of deferred 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. No investment securities are considered derivative securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and loans-in-process. Interest income is
recognized on an accrual basis. Loans are placed on nonaccrual status 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.
Effective January 1, 1995, the corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
("SFAS No. 114 and 118"). Under the corporation's credit policies and
practices, all loans with specific reserves meet the definition of impaired
loans under SFAS No. 114 and 118. Loan impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the observable market price of
the loan or the fair value of the collateral if the loan is collateral
dependent. The adoptionof SFAS No. 114 and 118 did not have a material effect
on the corporation's financial position or results of operations.
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.
Allowance for Loan Losses
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. The allowance is increased by a provision for
loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is computed principally on the
straight-line method over their estimated useful lives. The estimated lives
of buildings and improvements ranged from 10 to 50 years. The estimated lives
of equipment ranged from 5 to 25 years.
Real Estate Owned
Real estate owned is stated at fair value less estimated costs to sell. When
a property is acquired, the excess of the recorded investment in the property
over fair value, if any, is charged to the allowance for loan losses.
Subsequent declines in the estimated fair value, net operating results and
gains or losses on disposition of the property are included in other expenses.
<PAGE>
Derivative Financial Instruments
The corporation has no derivative financial instruments.
Income Taxes
The corporation files a non-consolidated federal income tax return on a
calendar year basis. The bank and Homciti Service Corp. file a consolidated
federal income tax return also on a calendar year basis. The effects of
current or deferred taxes are recognized as a current and deferred tax
liability or asset based on current tax laws. Accordingly, income tax expense
in the consolidated statements of income includes charges or credits to properly
reflect the current and deferred tax asset or liability.
Stock-based Compensation
The Board of Directors of the corporation expects to adopt a Stock Option Plan,
subject to approval by the shareholders of the corporation. At that time, the
corporation will account for its stock incentive plan in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations. The
corporation will then also adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." The corporation will there-
after include in the footnotes the impact of the fair value of employee stock-
based compensation plans on net income and earnings per share on a pro forma
basis.
Recognition and Retention Plan
It is anticipated that the shareholders will adopt a recognition and retention
plan at the 1997 annual shareholders' meeting. The purpose of the plan is to
reward and retain the directors and employees of the corporation, the bank and
the subsidiary who are in the key positions of responsibility by providing such
directors and employees with an equity interest in the corporation as
reasonable compensation for their contributions to the corporation, the bank
and the subsidiary.
Earnings Per Share
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share," is not applicable for the fiscal years ended June 30, 1997, 1996 and
1995, as the corporation completed its conversion to the stock form of
ownership in December 1996.
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform with the
1997 presentation.
NOTE B - BUSINESS COMBINATION
In September 1996, the bank's Board of Directors adopted a Plan of Conversion
(the "conversion") whereby the bank would convert to the stock form of
ownership, followed by the issuance of all the bank's outstanding common stock
to a newly formed holding company, Home City Financial Corporation.
On December 30, 1996, the bank completed its conversion to the stock form of
ownership, and issued all of the bank's outstanding common shares to the
corporation.
In connection with the conversion, the corporation sold 952,200 shares at a
price of $10.00 per share which, after consideration of offering expenses
totaling approximately $437,000, and shares purchased by employee benefit
plans totaling $762,000, resulted in net cash proceeds of approximately $8.3
million.
At the date of the conversion, the bank established a liquidation account in
an amount equal to retained earnings reflected in the balance sheet used in
the conversion offering circular. The liquidation account will be maintained
for the benefit of eligible savings account holders who maintained deposit
accounts in the bank after conversion.
<PAGE>
NOTE C - INVESTMENT SECURITIES
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
At June 30, 1997 At June 30, 1996
_______________________________________________ ______________________________________________
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 $6,995 $ 5 $ (7) $6,993 $1,001 $ 0 $ (4) $ 997
State & local
governments 739 11 (1) 749 879 6 (2) 883
Mortgage-
backed
securities 754 0 (24) 730 3,046 5 (76) 2,975
Equity
securities 484 408 0 892 459 243 0 702
______ ______ ______ ______ ______ ______ ______ ______
$8,972 $ 424 $ (32) $9,364 $5,385 $ 254 $ (82) $5,557
______ ______ ______ ______ ______ ______ ______ ______
</TABLE>
The following is a summary of maturities of securities available-for-sale as
of June 30, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Securities available-for-sale
_____________________________
Amounts maturing in: Amortized Fair
Cost Value
____ _____
<S> <C> <C>
One year or less $1,706 $1,706
After one year through five years 5,876 5,879
After five years through ten years 342 342
After ten years 564 545
Equity securities 484 892
______ ______
$8,972 $9,364
______ ______
</TABLE>
Interest income on investment securities for each of the three years ended
June 30 was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
U.S. government and federal agencies $187 $ 61 $ 96
State & local governments 39 24 15
Mortgage-backed securities 134 209 274
Equity securities 33 26 20
____ ____ ____
Total investment securities $393 $320 $405
____ ____ ____
</TABLE>
<PAGE>
For the year ended June 30, 1997, the bank sold securities available-for-sale
for total proceeds of approximately $1,891,100 resulting in gross realized
losses of approximately $19,000 and no gross realized gains. For the year
ended June 30, 1996, the bank sold no securities. For 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 or losses.
There were no securities transferred between classifications for the year
ended June 30, 1997. For the year ended June 30, 1996, securities with an
amortized cost of $4,763,000 were transferred from held-to-maturity to
available-for-sale because of favorable tax treatment and to improve the
corporation's asset liability management. The securities had an unrealized
gain of approximately $44,000. There were no securities transferred between
classifications for the year ended June 30, 1995.
Investment securities with a carrying value of approximately $499,000 and
$906,000 at June 30, 1997 and 1996, respectively, were pledged to secure
deposits as required or permitted by law.
NOTE D - LOANS
Loans at June 30, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Loans secured by first mortgages on real estate:
1-4 family dwelling units $38,191 $31,893
5 or more dwelling units 2,774 3,233
Non-residential properties 8,127 7,255
Land 1,853 2,223
Construction 3,753 2,350
Consumer 3,253 1,641
Commercial 464 73
_______ _______
58,415 48,668
Loans in proces (1,448) (2,634)
Net deferred loan origination fees (487) (447)
Allowance for loan losses (445) (362)
_______ _______
Total $56,035 $45,225
_______ _______
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Balance, beginning of year $362 $319 $229
Provision for loan losses 57 50 109
Loans charged off (22) (7) (19)
Recoveries 48 0 0
____ ____ ____
Balance, end of year $445 $362 $319
____ ____ ____
</TABLE>
At June 30, 1997 and 1996, the bank had loans amounting to approximately $0
and $72,000, respectively, that were specifically classified as impaired. The
average balance of those loans amounted to approximately $2,000, $104,000, and
$16,000 for the years ended June 30, 1997, 1996 and 1995, respectively. The
allowance for loan losses related to impaired loans amounted to approximately
$0 and $2,000 at June 30, 1997 and 1996, respectively. Interest income on
impaired loans of $2,000, $23,000 and $33,000 was recognized for cash payments
received for the years ended June 30, 1997, 1996 and 1995, respectively.
In addition, at June 30, 1997 and 1996, the bank had other nonaccrual loans of
approximately $416,000 and $175,000, respectively, for which impairment has
not been recognized.
<PAGE>
The bank has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
At June 30, 1997 and 1996, the bank serviced loans for others with principal
balances of $2,632,000 and $3,358,000, respectively.
In the ordinary course of business, the bank has and expects to continue to
have transactions, including borrowings, with its officers, directors,
shareholders, 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, June 30, 1996 $1,192
New loans 608
Payments (587)
______
Balance, June 30, 1997 $1,213
______
</TABLE>
NOTE E - PROPERTIES AND EQUIPMENT
A summary of properties and equipment at June 30, 1997 and 1996, follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Land $113 $113
Buildings and improvements 435 424
Furniture, fixtures, and equipment 304 275
____ ____
852 812
Accumulated depreciation (364) (324)
____ ____
Total $488 $488
____ ____
</TABLE>
NOTE F - CASH SURRENDER VALUE OF LIFE INSURANCE
In September 1995, the bank purchased life insurance policies on each of its
directors other than the President of the bank. The bank is the beneficiary
of such policies. At June 30, 1997 and 1996, there were no notes payable to
the insurance company.
NOTE G - DEPOSITS
Deposit account balances at June 30, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ _____
Amount Percent Amount Percent
______ _______ ______ _______
<S> <C> <C> <C> <C>
Noninterest-bearing checking accounts $ 540 1.1% $ 302 .6%
Now and money market accounts 675 1.3 395 .8
Savings accounts 7,863 15.7 9,561 20.3
Certificates of deposit 41,147 81.9 36,916 78.3
_______ _____ _______ _____
Totals $50,225 100.0% $47,174 100.0%
_______ _____ _______ _____
</TABLE>
<PAGE>
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $7,647,000 and $7,216,000 at June
30, 1997 and 1996, respectively. Deposits in excess of $100,000 are not
insured by the FDIC.
At June 30, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
July 1, 1997 to June 30, 1998 $26,339
July 1, 1998 to June 30, 1999 7,335
July 1, 1999 to June 30, 2000 6,809
July 1, 2000 to June 30, 2001 387
After June 30, 2001 277
_______
Totals $41,147
________
</TABLE>
The bank held deposits of approximately $552,000 and $806,000 for related
parties at June 30, 1997 and 1996, respectively.
NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consisted of the following at June
30, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current
Interest Balance
__________________
Rate 1997 1996
____ ____ ____
<S> <C> <C> <C>
Federal Home Loan Bank advances
Fixed rate advances, with monthly interest payments:
Advance due September 25, 1996 5.80% $ 0 $ 500
Advance due September 15, 1997 6.65% 500 0
Advance due September 23, 1997 6.65% 700 0
Fixed rate advances, with monthly principal
and interest payments:
Advance due October 1, 2001 6.30% 287 0
Advance due February 1, 2003 6.05% 96 110
Advance due March 1, 2003 5.85% 206 236
Advance due December 1, 2004 8.35% 450 510
Advance due January 1, 2005 8.35% 281 303
Advance due January 1, 2005 8.30% 531 601
Advance due November 1, 2006 6.35% 1,436 0
Advance due February 1, 2010 3.30% 621 643
_______ _______
Totals $ 5,108 $ 2,903
_______ _______
</TABLE>
Federal Home Loan Bank ("FHLB") advances are collateralized by all shares of
FHLB stock owned by the bank (totaling $423,000) and by 100% of the bank's
qualified mortgage loan portfolio (totaling approximately $38,191,000). Based
on the carrying amount of FHLB stock owned by the bank, total FHLB advances
are limited to approximately $8,450,000.
The aggregate minimum future annual principal payments on borrowings are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
July 1, 1997 to June 30, 1998 $1,629
July 1, 1998 to June 30, 1999 410
July 1, 1999 to June 30, 2000 426
July 1, 2000 to June 30, 2001 442
After June 30, 2001 2,201
______
Totals $5,108
______
</TABLE>
<PAGE>
NOTE I - EMPLOYEE BENEFITS
401K Profit Sharing Plan
In 1994, the bank 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, 1997, 1996 and 1995, were $9,000, $8,000 and $5,000, respectively.
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 $4,000, $25,000 and $8,000 for the years ended June 30, 1997, 1996 and
1995, respectively.
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, 1997, 1996 and 1995,
contributions to the plan charged to operations were $12,000, $56,000 and
$38,000, respectively.
Employee Stock Ownership Plan ("ESOP")
In conjunction with the bank's conversion in December 1996, the corporation
formed the ESOP, which covers all full-time employees who have completed one
year of service and have attained the age of 21. The ESOP borrowed $762,000
from the corporation and purchased 76,176 common shares, equal to 8 percent of
the total number of shares issued in the conversion. The bank makes
discretionary contributions to the ESOP sufficient to service the debt. The
cost of shares not committed to be released and unallocated shares are
reported as a reduction of shareholders' equity. Shares are released to
participants' accounts under the shares allocated method. Dividends on
unallocated shares are used for debt service. Expense recognized related to
the ESOP totaled approximately $26,000 for the year ended June 30, 1997.
NOTE J - INCOME TAXES
Components of income tax expense for the years ended June 30, 1997, 1996 and
1995, were:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Current federal tax expense $247 $154 $233
Deferred federal tax expense (35) 89 7
____ ____ ____
Total $212 $243 $240
____ ____ ____
</TABLE>
<PAGE>
The net deferred tax liability included the following major temporary
differences at June 30:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Deferred tax liabilities:
Accumulated depreciation $ 21 $ 19
Net deferred loan costs 17 0
Net unrealized appreciation on
available-for-sale securities 133 69
____ ____
Total deferred tax liabilities 171 88
____ ____
Deferred tax assets:
Net deferred loan fees 0 (5)
Nonaccrual loan interest (4) (6)
Allowance for loan losses (50) (6)
Employee benefits (14) (3)
Other (3) 0
____ ____
Total deferred tax assets (71) (20)
____ ____
Total net deferred tax liability $100 $ 68
____ ____
</TABLE>
A reconciliation of the federal income tax rate to effective income tax rates
follows for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Federal income tax rate 34.00% 34.00% 34.00%
Adjusted for:
Tax-exempt income (3.12) (4.10) (1.38)
Other (4.22) 2.20 (2.42)
_____ _____ _____
Effective tax rate 26.66% 32.10% 30.20%
_____ _____ _____
</TABLE>
Included in retained earnings at June 30, 1997 and 1996, is approximately
$1,804,000 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 before 1988. 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 $613,000.
NOTE K - DIVIDEND RESTRICTION
The bank, as a federally chartered savings bank, is subject to the dividend
restrictions set forth by the Office of Thrift Supervision ("OTS"). Under
regulations of the OTS applicable to converted savings associations, the bank
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.
<PAGE>
As disclosed in Note L, the bank meets the requirements for a Tier I
association and has not been notified of any need for more than normal
supervision. As a subsidiary of the corporation, the bank is 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.
NOTE L - REGULATORY MATTERS
The bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision. Failure to
meet minimum capital requirements can initiate certain mandatory, and possible
additional discretionary, actions, by regulators that, if undertaken, could
have a direct material effect on the bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for 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 under the prompt corrective action guidelines are also subject
to qualitative judgements by the regulators about components, risk-weightings,
and other factors.
The capital adequacy regulations of the OTS require that the bank maintain
tangible capital equal to at least 1.5% of adjusted total assets, core capital
of at least 3.0% of adjusted total assets, and risk-based capital of at least
8.0% of risk-weighted assets. At June 30, 1997, the bank's capital exceeded
all of such requirements.
As of June 30, 1997, the most recent notification from the OTS, the bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized under the
prompt corrective action regulations, the bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below. There are no conditions or events since the most recent
notification that management believes have changed the bank's prompt
corrective action category.
The following reconciliation compares the bank's capital under GAAP to its
regulatory capital, at June 30, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Total Tier I
Capital Capital
_______ _______
<S> <C> <C>
Equity per GAAP $10,624 $10,624
Less unrealized gain on securities
available-for-sale, net of
applicable income taxes (257) (257)
Less advance to subsidiary (50) (50)
Plus allowance for loan losses 445 0
_______ _______
Regulatory capital $10,762 $10,317
_______ _______
</TABLE>
<PAGE>
<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, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $10,762 28.4% $ 3,027 8.0% $ 3,784 10.0%
Tier I Capital
(to Risk-Weighted Assets) 10,317 27.3 N/A N/A 2,270 6.0
Tier I Capital
(to Total Assets) 10,317 15.5 2,003 3.0 3,339 5.0
Tangible Capital
(to Total Assets) 10,317 15.5 1,002 1.5 N/A N/A
As of June 30, 1996:
Total Risk-Based 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 N/A N/A 1,800 6.0
Tier I Capital
(to Total Assets) 5,271 9.5 1,668 3.0 2,779 5.0
Tangible Capital
(to Total Assets) 5,271 9.5 834 1.5 N/A N/A
</TABLE>
NOTE M - 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)
At June 30, 1997 At June 30, 1996
__________________________________ __________________________________
Fixed-rate Adjustable-rate Total Fixed-rate Adjustable-rate Total
__________ _______________ _____ __________ _______________ _____
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 831 $ 292 $1,123 $ 837 $ 169 $1,006
Consumer and other loans 232 0 232 292 0 292
______ ______ ______ ______ ______ ______
$1,063 $ 292 $1,355 $1,129 $ 169 $1,298
______ ______ ______ ______ ______ ______
</TABLE>
Interest rates on commitments at June 30, 1997, ranged from 8.375% to 10.25%.
Interest rates on commitments at June 30, 1996, ranged from 7.75% to 10.00%.
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
proceedings.
<PAGE>
NOTE N - 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 and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets.
The bank's exposure to credit loss in the event of non-performance 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
M). The bank uses the same credit policies in making commitments and
conditional obligations 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
and may require payment of a fee. 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, 1997, 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 $ 1,552
Federal Home Loan Bank 161
Springfield Federal Savings Bank 338
</TABLE>
NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At June 30, 1997 At June 30, 1996
______________________ _______________________
Carrying Fair Carrying Fair
amount value amount value
______ _____ ______ _____
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,058 $ 2,058 $ 1,843 $ 1,843
Time deposits 361 353 1,061 1,053
Investment securities 8,634 8,634 2,582 2,582
Mortgage-backed securities 730 730 2,975 2,975
Loans 56,035 56,380 45,225 45,364
Accrued interest receivable 407 407 273 273
Life insurance 1,070 1,070 1,044 1,044
Financial liabilities:
Deposits 50,225 50,322 47,174 47,311
Advances from FHLB 5,108 5,050 2,903 2,954
Accrued interest payable 59 59 49 49
</TABLE>
The carrying amounts in the preceding table are included in the consolidated
balance sheets.
<PAGE>
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107"), 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. SFAS No. 107 excluded certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the company.
The following methods and assumptions were used by the corporation in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the consolidated
balance sheets 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: 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 adjustable-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. Fair
values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their fair
values. Fair values for fixed-rate certificates of deposit are estimates
using a discounted cash flow calculation that applies interest rates
currently offered on certificates to a schedule of aggregated contractual
expected monthly maturities on 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.
<PAGE>
NOTE P - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Home City Financial Corporation (parent
company only) follows:
<TABLE>
<CAPTION>
Balance Sheets
(Dollars in thousands)
At June 30,
1997 1996
____ ____
<S> <C> <C>
Assets:
Interest-bearing savings deposit with subsidiary bank $ 585 $ 0
Investment in subsidiary 10,624 0
Investment securities available-for-sale 3,000 0
Other assets 106 0
_______ _______
Total assets $14,315 $ 0
_______ _______
Liabilities and Shareholders' Equity:
Accrued expenses and other liabilities $ 36 $ 0
Shareholders' equity 14,279 0
_______ _______
Total liabilities and shareholders' equity $14,315 $ 0
_______ _______
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
(Dollars in thousands)
Year ended June 30,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Income:
Interest from subsidiary $ 25 $ 0 $ 0
Interest on securities available-for-sale 55 0 0
Income on ESOP loan 36 0 0
____ ____ ____
Total income 116 0 0
____ ____ ____
Expense:
Legal, consulting and examination 33 0 0
Franchise tax 11 0 0
Other 30 0 0
____ ____ ____
Total expense 74 0 0
____ ____ ____
Income before income taxes and equity in
undistributed earnings of subsidiary 42 0 0
Income tax provision 6 0 0
Income before equity in undistributed earnings
of subsidiary 36 0 0
Equity in undistributed earnings of subsidiary 358 0 0
____ ____ ____
Net income $394 $ 0 $ 0
____ ____ ____
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
(Dollars in thousands)
Year ended June 30,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 394 $ 0 $ 0
Adjustments to reconcile net income to net cash
flows from operating activities:
Equity in undistributed earnings of subsidiary (358) 0 0
Discount accretion (1) 0 0
Net increase in other assets (106) 0 0
Net increase in other liabilities 36 0 0
______ ______ ______
Net cash flows from operating activities (35) 0 0
______ ______ ______
Cash flows from investing activities:
Purchase of securities available-for-sale (2,996) 0 0
Purchase of common stock of subsidiary (4,555) 0 0
______ ______ ______
Net cash flows from investing activities (7,551) 0 0
______ ______ ______
Cash flows from financing activities:
Issuance of common stock 8,323 0 0
Dividends paid (152) 0 0
______ ______ ______
Net cash flows from financing activities 8,171 0 0
______ ______ ______
Net increase in cash and cash equivalents 585 0 0
Cash and cash equivalents:
Beginning of year 0 0 0
______ ______ ______
End of year $ 585 $ 0 $ 0
______ ______ ______
</TABLE>
NOTE Q - SUBSEQUENT EVENT
On June 16, 1997, the Board of Directors authorized management of the
corporation to cause the corporation to repurchase up to 5% of the outstanding
shares of the corporation in the over-the-counter market during the next
twelve months, with the amount of shares, price and dates of repurchase to be
determined at the discretion of management. On July 21, 1997, management made
the first trade with the intent to repurchase a total of 5% of the outstanding
shares before August 31, 1997. The shares acquired will be held as treasury
stock.
<PAGE>
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act of the Registrant
The information set forth under the caption "PROPOSAL ONE - ELECTION OF
DIRECTORS" of the Definitive Proxy Statement of the Corporation date September
19, 1997, filed with the United States Securities and Exchange Commission (the
"Proxy") is incorporated by reference herein.
ITEM 10. Executive Compensation
The information set forth under the caption "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS" of the Proxy Statement is incorporated by reference herein.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "VOTING SECURITIES AND
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy Statement is
incorporated by reference herein.
ITEM 12. Certain Relationships and Related Transactions
The information set forth under the caption "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS - Certain Transactions with Home City" of the Proxy Statement
is incorporated by reference herein.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (Incorporated by reference)
3.2 Code of Regulations (Incorporated by reference)
10.1 Employment Agreement with Mr. Ulery
21 Subsidiaries
27 Financial Date Schedule
99.1 Proxy Statement (Incorporated by reference)
99.2 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995
(b) Reports on Form 8-K
HCFC has not filed any reports on Form 8-k during the last quarter of
1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOME CITY FINANCIAL CORPORATION
/s/ Douglas L. Ulery
________________________________
Douglas L. Ulery
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities on the
dates indicated.
/s/ P. Clark Engelmeier
_______________________________ _________________________________
John D. Conroy P. Clark Engelmeier
Director Chairman of the Board
/s/ September 26, 1997 /s/ September 26, 1997
_______________________________ _________________________________
Date Date
/s/ James Foreman /s/ Terry A. Hoppes
_______________________________ _________________________________
James Foreman Terry A. Hoppes
Director Director
/s/ September 26, 1997 /s/ September 26, 1997
_______________________________ _________________________________
Date Date
/s/ Douglas L. Ulery /s/ Gary E. Brown
_______________________________ _________________________________
Douglas L. Ulery Gary E. Brown
Director Treasurer
President and Chief Executive Officer (Principal financial and accouting
officer)
/s/ September 26, 1997 /s/ September 26, 1997
_______________________________ _________________________________
Date Date
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
_______ ___________
<S> <C> <C>
3.1 Articles of Incorporation Incorporated by reference to the Registrant's
of Home City Financial Corporation Quarterly Report on Form 10-QSB for the
Quarter Ended March 31, 1997 (the "March
31, 1997, 10-QSB"), Exhibit 3(i)
3.2 Code of Regulations of Home City Incorporated by reference to the March 31,
Financial Corporation 1997, 10-QSB, Exhibit 3(ii)
10.1 Employment Agreement with Mr. Ulery
21 Subsidiaries of Home City
Financial Corporation
27 Financial Data Schedule
99.1 Proxy Statement Incorporated by reference to the definitive
Proxy Statement of the Registrant for the
1997 Annual Meeting of Shareholders of
Home City Financial Corporation, filed with
the Securities and Exchange Commisssion.
99.2 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
</TABLE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this "AGREEMENT")
is entered into as of the 15th day of December, 1996, by and between Home
City Federal Savings Bank of Springfield, a savings bank chartered under the
laws of the United States (hereinafter referred to as the "EMPLOYER"), and
Douglas L. Ulery, an individual (hereinafter referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the President and Chief
Executive Officer of the EMPLOYER;
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Board of Directors of the EMPLOYER desires to retain the
services of the EMPLOYEE as the President and Chief Executive Officer of the
EMPLOYER;
WHEREAS, the EMPLOYEE desires to continue to serve as the President and
Chief Executive Officer of the EMPLOYER; and
WHEREAS, the EMPLOYEE and the EMPLOYER desire to enter into this
AGREEMENT to set forth the terms and conditions of the employment relationship
between the EMPLOYER and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYER and the EMPLOYEE hereby agree as follows:
1. Employment and Term.
(a) Term. Upon the terms and subject to the conditions of this
AGREEMENT, the EMPLOYER hereby employs the EMPLOYEE, and the EMPLOYEE hereby
accepts employment, as the President and Chief Executive Officer of the
EMPLOYER. The TERM of this AGREEMENT shall commence on the effective date of
the EMPLOYER's conversion from mutual to stock form and shall end thirty-six
(36) months thereafter, subject to extension pursuant to subsection (b) of
this Section 1 (hereinafter, including any such extensions, referred to as the
"TERM"), and to earlier termination as provided herein.
(b) Extension. Prior to each anniversary of the date of this
AGREEMENT, the Board of Directors of the EMPLOYER shall review this AGREEMENT
and document its approval of this AGREEMENT in the board minutes. In
connection with such annual review, the TERM shall be extended for a one-year
period beyond the then-effective expiration date, provided the Board of
Directors of the EMPLOYER determines in a duly adopted resolution that this
AGREEMENT should be extended. Any such extension shall be subject to the
written consent of the EMPLOYEE.
<PAGE>
2. Duties of EMPLOYEE.
(a) General Duties and Responsibilities. The EMPLOYEE shall serve as
the President and Chief Executive Officer of the EMPLOYER. Subject to the
direction of the Board of Directors of the EMPLOYER, the EMPLOYEE shall have
responsibility for the general management and control of the business and
affairs of the EMPLOYER and shall perform all duties and shall have all powers
which are commonly incident to the office of President and Chief Executive
Officer or which, consistent therewith, are delegated to him by the Board of
Directors. Such duties shall include, but not be limited to, (1) managing the
day-to-day operations of the EMPLOYER, (2) managing the efforts of the
EMPLOYER to comply with applicable laws and regulations, (3) marketing of the
EMPLOYER and its services, (4) supervising other employees of the EMPLOYER,
(5) providing prompt and accurate reports to the Board of Directors of the
EMPLOYER regarding the affairs and conditions of the EMPLOYER, and (6) making
recommendations to the Board of Directors of the EMPLOYER concerning the
strategies, capital structure, tactics, and general operations of the
EMPLOYER.
(b) Devotion of Entire Time to the Business of the EMPLOYER. The
EMPLOYEE shall devote his entire productive time, ability and attention during
normal business hours throughout the TERM to the faithful performance of his
duties under this AGREEMENT. The EMPLOYEE shall not directly or indirectly
render any services of a business, commercial or professional nature to any
person or organization other than the EMPLOYER and Home City Financial
Corporation and their subsidiaries and affiliates without the prior written
consent of the Board of Directors of the EMPLOYER; provided, however, that the
EMPLOYEE shall not be precluded from (i) reasonable participation in
community, civic, charitable or similar organizations; or (ii) the pursuit of
personal investments which do not interfere or conflict with the performance
of the EMPLOYEE's duties to the EMPLOYER. Nothing in this section shall limit
the EMPLOYEE's right to invest in securities of any business that does not
provide services or products of the type or competing with those provided by
the EMPLOYER or its subsidiaries or affiliates.
3. Compensation, Benefits and Reimbursements.
(a) Salary. The EMPLOYEE shall receive during the TERM an annual
salary payable in equal installments not less often than monthly. The amount
of such annual salary shall be $88,000 until changed by the Board of Directors
of the EMPLOYER in accordance with Section 3(b) of this AGREEMENT.
(b) Annual Salary Review. On or before each anniversary of the
effective date of this AGREEMENT, the annual salary of the EMPLOYEE shall be
reviewed by the Board of Directors of the EMPLOYER and may be maintained or
increased, in its discretion, based upon the EMPLOYEE's individual performance
and the overall profitability and financial condition of the EMPLOYER. The
results of the annual salary review shall be reflected in the minutes of the
appropriate meetings of the Board of Directors of the EMPLOYER.
<PAGE>
(c) Expenses. In addition to any compensation received under Section
3(a) or (b) of this AGREEMENT, the EMPLOYER shall pay or reimburse the
EMPLOYEE for all reasonable travel, entertainment and miscellaneous expenses
incurred in connection with the performance of his duties under this
AGREEMENT. Such reimbursement shall be made in accordance with the existing
policies and procedures of the EMPLOYER pertaining to reimbursement of
expenses to senior management officials.
(d) Employee Benefit Programs.
(i) During the TERM, the EMPLOYEE shall be entitled to
participate in all formally established employee benefit, bonus, pension
and profit-sharing plans and similar programs that are maintained by the
EMPLOYER from time to time, including programs in respect of group health,
disability or life insurance, and all employee benefit plans or programs
hereafter adopted in writing by the Board of Directors of the EMPLOYER, for
which senior management personnel are eligible, including any employee
stock ownership plan, stock option plan or other stock benefit plan (here-
inafter collectively referred to as the "BENEFIT PLANS"). Notwithstanding
any statement to the contrary contained elsewhere in this Agreement, the
EMPLOYER may discontinue or terminate at any time any such BENEFIT PLANS,
now existing or hereafter adopted, to the extent permitted by the terms of
such plans and applicable law, and shall not be required to compensate the
EMPLOYEE for such discontinuance or termination; and
(ii) After the termination of the employment of the EMPLOYEE in
accordance with Section 4(a) of this AGREEMENT, for any reason other than
JUST CAUSE (as defined hereinafter), the EMPLOYER shall provide, until both
the EMPLOYEE and his spouse become sixty-five (65) years of age, or the
earlier date the EMPLOYEE obtains substantially equivalent coverage from
another full-time employer, substantially the same health insurance benefits
as are available to retired employees of the EMPLOYER on the date of this
AGREEMENT; provided, however, that all premiums for such benefits shall be paid
by the EMPLOYEE and/or his spouse after the EMPLOYEE's termination; provided
further, however, that the EMPLOYER'S obligation under this Section 3(d)(ii)
shall terminate in the event that the EMPLOYER no longer makes available an
employee group health insurance program which permits the EMPLOYER to make
coverage available for retirees.
(e) Vacation and Sick Leave. The EMPLOYEE shall be entitled, without
loss of pay, to be absent voluntarily from the performance of his duties under
this AGREEMENT, subject to the following conditions:
(i) The EMPLOYEE shall be entitled to annual vacation and
annual sick leave in accordance with the policies periodically established
by the Board of Directors of the EMPLOYER for senior management officials
of the EMPLOYER; and
<PAGE>
(ii) In addition to paid vacations and sick leave, the EMPLOYEE
shall be entitled, without loss of pay, to absent himself voluntarily from
the performance of his employment with the EMPLOYER for such additional
period of time and for such valid and legitimate reasons as the Board may,
in its discretion, determine, and the Board may grant to the EMPLOYEE a
leave or leaves of absence, with or without pay, at such time or times and
upon such terms and conditions as such Board, in its discretion, may
determine.
4. Termination of Employment.
(a) General. The employment of the EMPLOYEE shall terminate at any
time during the TERM (i) at the option of the EMPLOYER upon the delivery by
the EMPLOYER of written notice of employment termination to the EMPLOYEE, or
(ii) at the option of the EMPLOYEE upon the delivery by the EMPLOYEE of
written notice of termination to the EMPLOYER if, unless consented to in
writing by the EMPLOYEE, (A) the present capacity or circumstances in which
the EMPLOYEE is employed are materially changed (including, without
limitation, a material reduction in responsibilities or authority, or the
assignment of duties or responsibilities substantially inconsistent with those
normally associated with EMPLOYEE's position described in Section 2(a) of this
AGREEMENT), (B) the EMPLOYEE is no longer the President and Chief Executive
Officer of the EMPLOYER and HCFC, (C) the EMPLOYEE is required to move his
personal residence, or perform his principal executive functions, more than
thirty-five (35) miles from his primary office as of the date of the
commencement of the TERM of this AGREEMENT, or (D) the EMPLOYER otherwise
breaches this AGREEMENT in any material respect.
(b) Termination for JUST CAUSE. In the event that the EMPLOYER
terminates the employment of the EMPLOYEE before the expiration of the TERM
because of the EMPLOYEE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure or refusal to perform the duties and responsibilities assigned in this
AGREEMENT, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, conviction of
a felony or for fraud or embezzlement, or material breach of any provision of
this AGREEMENT (hereinafter collectively referred to as "JUST CAUSE"), the
EMPLOYEE shall not receive, and shall have no right to receive, any
compensation or other benefits for any period after such termination.
(c) Termination in Connection with a CHANGE OF CONTROL.
(i) In the event that, in connection with a CHANGE OF CONTROL
(including, without limitation, a termination other than for JUST CAUSE within
six months prior to a CHANGE OF CONTROL) or after a CHANGE OF CONTROL, the
employment of the EMPLOYEE is terminated by the EMPLOYER for any reason other
than JUST CAUSE before the expiration of the TERM, then the following shall
occur:
(A) The EMPLOYER shall promptly pay to the EMPLOYEE or
to his beneficiaries, dependents or estate an amount equal to the product
of three multiplied by the greater of the annual salary set forth in
<PAGE>
Section 3(a) of this AGREEMENT or the annual salary payable to the
EMPLOYEE as a result of any annual salary review in accordance with
Section 3 (b) of this AGREEMENT;
(B) The EMPLOYEE, his dependents, beneficiaries and
estate shall continue to be covered under all BENEFIT PLANS in which the
EMPLOYEE is a participant immediately prior to the CHANGE OF CONTROL of
the EMPLOYER at the EMPLOYER's expense as if the EMPLOYEE were still
employed under this AGREEMENT until the earliest of the expiration of the
TERM or the date on which the EMPLOYEE is included in another employer's
benefit plans as a full-time employee and shall be entitled thereafter to
the benefits described in Section 3(d)(ii) of this AGREEMENT; and
(C) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by seeking other
employment or otherwise, nor shall any amounts received from other
employment or otherwise by the EMPLOYEE offset in any manner the
obligations of the EMPLOYER hereunder, except as specifically stated in
subparagraph (B).
(ii) In the event that, within six months prior to or within one
year after a CHANGE OF CONTROL, the employment of the EMPLOYEE is terminated
by the EMPLOYEE in accordance with Section 4(a)(ii) of this AGREEMENT before
the expiration of the TERM, then the following shall occur:
(A) The EMPLOYER shall promptly pay to the EMPLOYEE or
to his beneficiaries, dependents or estate an amount equal to the product
of three multiplied by the average of the annual compensation paid to the
EMPLOYEE during the most recent five taxable years;
(B) The EMPLOYEE, his dependents, beneficiaries and
estate shall continue to be covered under all BENEFIT PLANS in which the
EMPLOYEE is a participant immediately prior to the CHANGE OF CONTROL of
the EMPLOYER at the EMPLOYER's expense as if the EMPLOYEE were still
employed under this AGREEMENT until the earliest of the expiration of
the TERM or the date on which the EMPLOYEE is included in another
employer's benefit plans as a full-time employee and shall be entitled
thereafter to the benefits described in Section 3(d)(ii) of this
AGREEMENT; and
<PAGE>
(C) The EMPLOYEE shall not be required to mitigate the
amount of any payment provided for in this AGREEMENT by seeking other
employment or otherwise, nor shall any amounts received from other
employment or otherwise by the EMPLOYEE offset in any manner the
obligations of the EMPLOYER hereunder, except as specifically stated in
subparagraph (B).
In the event that payments pursuant to this subsection (c) would result
in the imposition of a penalty tax pursuant to Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder (hereinafter collectively referred to as "SECTION 280G"), such
payments shall be reduced to the maximum amount which may be paid under
SECTION 280G without exceeding such limits. Payments pursuant to this
subsection (c) also may not exceed applicable limits established by the Office
of Thrift Supervision (hereinafter referred to as the "OTS"). In the event a
reduction in payments is necessary in order to comply with the requirements of
this AGREEMENT relating to the limitations of SECTION 280G or applicable OTS
limits, the EMPLOYEE may determine, in his sole discretion, which categories
of payments are to be reduced or eliminated.
(d) Termination Without CHANGE OF CONTROL. In the event that the
employment of the EMPLOYEE is terminated by the EMPLOYER or is terminated by
the EMPLOYEE in accordance with Section 4(a)(ii) of this AGREEMENT before the
expiration of the TERM other than (i) for JUST CAUSE or (ii) in connection
with or after a CHANGE OF CONTROL, the EMPLOYER shall be obligated (A) to pay
to the EMPLOYEE, his designated beneficiaries or his estate, for the remainder
of the TERM, the salary set forth in Section 3(a) of this AGREEMENT or the
salary payable to the EMPLOYEE as a result of any annual salary review in
accordance with Section 3(b) of this AGREEMENT; (B) to provide to the
EMPLOYEE, at the EMPLOYER's expense, health, life, disability, and other
benefits as provided in Section 3(d)(i) of this Agreement, until the
expiration of the TERM or until the earlier date the EMPLOYEE obtains
substantially equivalent coverage from another full-time employer; and (C) to
provide to the EMPLOYEE the benefits set forth under Section 3(d)(ii) of this
AGREEMENT. In the event that payments pursuant to this subsection (d) would
result in the imposition of a penalty tax pursuant to SECTION 280G, such
payments shall be reduced to the maximum amount which may be paid under
SECTION 280G without exceeding those limits. Payments pursuant to this
subsection also may not exceed the applicable limits established by the OTS.
In the event a reduction in payments is necessary in order to comply with the
requirements of this AGREEMENT relating to the limitations of SECTION 280G or
applicable OTS limits, the EMPLOYEE may determine, in his sole discretion,
which categories of payments are to be reduced or eliminated.
(e) Death of the EMPLOYEE. The TERM shall automatically terminate
upon the death of the EMPLOYEE. In the event of such death, the EMPLOYEE's
estate shall be entitled to receive the compensation due the EMPLOYEE through
the last day of the calendar month in which the death occurred, except as
otherwise specified herein.
<PAGE>
(f) "Golden Parachute" Provision. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned upon
their compliance with 12 U.S.C. & sect;1828(k) and any regulations promulgated
thereunder.
(g) Definition of "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall
mean any one of the following events: (i) the acquisition of ownership or
power to vote more than 25% of the voting stock of the EMPLOYER or HCFC; (ii)
the acquisition of the ability to control the election of a majority of the
directors of the EMPLOYER or HCFC; (iii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the EMPLOYER or HCFC cease for any reason to constitute at least
two-thirds thereof; provided, however, that any individual whose election or
nomination for election as a member of the Board of Directors was approved by
a vote of at least two-thirds of the directors then in office shall be
considered to have continued to be a member of the Board of Directors; or (iv)
the acquisition by any person or entity of "conclusive control" of the
EMPLOYER within the meaning of 12 C.F.R. §574.4(a), or the acquisition by
any person or entity of "rebuttable control" within the meaning of 12 C.F.R.
§574.4(b) that has not been rebutted in accordance with 12 C.F.R.
§574.4(c). For purposes of this paragraph, the term "person" refers to
an individual or corporation, partnership, trust, association, or other
organization, but does not include the EMPLOYEE and any person or persons with
whom the EMPLOYEE is "acting in concert" within the meaning of 12 C.F.R. Part
574.
(h) Legal Fees. EMPLOYER shall promptly pay all legal fees and
expenses which EMPLOYEE may incur as a result of EMPLOYEE or EMPLOYER
contesting the validity or enforceability of this AGREEMENT if a court of
competent jurisdiction renders a final decision in favor of EMPLOYEE with
respect to any such contest, or to the extent agreed to by EMPLOYER and
EMPLOYEE in an agreement of settlement with respect to any such contest.
5. Special Regulatory Events. Notwithstanding Section 4 of this
AGREEMENT, the obligations of the EMPLOYER to the EMPLOYEE shall be as follows
in the event of the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYER's affairs by a notice served
under Section 8(e) (3) or (g) (1) of the Federal Deposit Insurance Act
(hereinafter referred to as the "FDIA"), the EMPLOYER's obligations under this
AGREEMENT shall be suspended as of the date of service of such notice, unless
stayed by appropriate proceedings. If the charges in the notice are
dismissed, the EMPLOYER shall (i) pay the EMPLOYEE all of the compensation
withheld while the obligations in this AGREEMENT were suspended and (ii)
reinstate any of the obligations that were suspended.
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYER's affairs by an order issued
under Section 8(e) (4) or (g) (1) of the FDIA, all obligations of the EMPLOYER
under this AGREEMENT shall terminate as of the effective date of such order;
provided, however, that vested rights of the EMPLOYEE shall not be affected by
such termination.
<PAGE>
(c) If the EMPLOYER is in default as defined in Section 3(x)(1) of
the FDIA, all obligations under this AGREEMENT shall terminate as of the date
of default; provided, however, that vested rights of the EMPLOYEE shall not be
affected.
(d) All obligations under this AGREEMENT shall be terminated, except
to the extent of a determination that the continuation of this AGREEMENT is
necessary for the continued operation of the EMPLOYER, (i) by the Director of
the OTS, or his or her designee at the time that the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on behalf of
the EMPLOYER under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director of the OTS, or his or her designee, at any time the
Director of the OTS, or his or her designee, approves a supervisory merger to
resolve problems related to the operation of the EMPLOYER or when the EMPLOYER
is determined by the Director of the OTS to be in an unsafe or unsound
condition. No vested rights of the EMPLOYEE shall be affected by any such
action.
6. Consolidation, Merger or Sale of Assets. Nothing in this AGREEMENT
shall preclude the EMPLOYER from consolidating with, merging into, or
transferring all, or substantially all, of its assets to another corporation
that assumes all of the EMPLOYER's obligations and undertakings hereunder.
Upon such a consolidation, merger or transfer of assets, the term "EMPLOYER"
as used herein, shall mean such other corporation or entity, and this
AGREEMENT shall continue in full force and effect.
7. Confidential Information. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information regarding
the EMPLOYER and its customers and businesses. The EMPLOYEE agrees and
covenants not to disclose or use for his own benefit, or the benefit of any
other person or entity, any confidential information, unless or until the
EMPLOYER consents to such disclosure or use or such information becomes common
knowledge in the industry or is otherwise legally in the public domain. The
EMPLOYEE shall not knowingly disclose or reveal to any unauthorized person any
confidential information relating to the EMPLOYER, its parent, subsidiaries or
affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the
EMPLOYER. The EMPLOYEE shall not otherwise knowingly act or conduct himself
(a) to the material detriment of the EMPLOYER, its subsidiaries, or
affiliates, or (b) in a manner which is inimical or contrary to the interests
of the EMPLOYER.
8. Nonassignability. Neither this AGREEMENT nor any right or interest
hereunder shall be assignable by the EMPLOYEE, his beneficiaries, or legal
representatives without the EMPLOYER's prior written consent; provided,
however, that nothing in this Section 8 shall preclude (a) the EMPLOYEE from
designating a beneficiary to receive any benefits payable hereunder upon his
death, or (b) the executors, administrators, or other legal representatives of
the EMPLOYEE or his estate from assigning any rights hereunder to the person
or persons entitled thereto.
<PAGE>
9. No Attachment. Except as required by law, no right to receive payment
under this AGREEMENT shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or
to execution, attachment, levy, or similar process of assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any such action
shall be null, void and of no effect.
10. Indemnification; Insurance.
(a) Indemnification. The EMPLOYER agrees to indemnify the EMPLOYEE
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the EMPLOYEE in connection with or arising out of any action, suit
or proceeding in which the EMPLOYEE may be involved by reason of his having
been a director or officer of the EMPLOYER or any of its subsidiaries, whether
or not the EMPLOYEE is a director or officer at the time of incurring any such
expenses or liabilities. Such expenses and liabilities shall include, but
shall not be limited to, judgments, court costs and attorney's fees and the
cost of reasonable settlements. The EMPLOYEE shall be entitled to
indemnification in respect of a settlement only if the Board of Directors of
the EMPLOYER has approved such settlement. Notwithstanding anything herein to
the contrary, (i) indemnification for expenses shall not extend to matters for
which the EMPLOYEE has been terminated for JUST CAUSE, and (ii) the
obligations of this Section 10 shall survive the TERM of this AGREEMENT.
Nothing contained herein shall be deemed to provide indemnification prohibited
by applicable law or regulation.
(b) Insurance. During the TERM, the EMPLOYER shall provide the
EMPLOYEE (and his heirs, executors, and administrators) with coverage under a
directors' and officers' liability policy at the EMPLOYER's expense, at least
equivalent to such coverage provided to directors and senior officers of the
EMPLOYER.
11. Binding Agreement. This AGREEMENT shall be binding upon, and inure to
the benefit of, the EMPLOYEE and the EMPLOYER and their respective permitted
successors and assigns.
12. Amendment of AGREEMENT. This AGREEMENT may not be modified or
amended, except by an instrument in writing signed by the parties hereto.
13. Waiver. No term or condition of this AGREEMENT shall be deemed to
have been waived, nor shall there be an estoppel against the enforcement of
any provision of this AGREEMENT, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver, unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than the act specifically waived.
14. Severability. If, for any reason, any provision of this AGREEMENT is
held invalid, such invalidity shall not affect the other provisions of this
<PAGE>
AGREEMENT not held so invalid, and each such other provision shall, to the
full extent consistent with applicable law, continue in full force and
effect. If this AGREEMENT is held invalid or cannot be enforced, then any
prior Agreement between the EMPLOYER (or any predecessor thereof) and the
EMPLOYEE shall be deemed reinstated to the full extent permitted by law, as if
this AGREEMENT had not been executed.
15. Headings. The headings of the paragraphs herein are included solely
for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this AGREEMENT.
16. Governing Law; Regulatory Authority. This AGREEMENT has been executed
and delivered in the State of Ohio and its validity, interpretation,
performance, and enforcement shall be governed by the laws of the State of
Ohio, except to the extent that federal law is governing. References to the
OTS included herein shall include any successor primary federal regulatory
authority of the EMPLOYER.
17. Effect of Prior Agreements. This AGREEMENT contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the EMPLOYER or any predecessor of the EMPLOYER and the
EMPLOYEE.
18. Notices. Any notice or other communication required or permitted
pursuant to this AGREEMENT shall be deemed delivered if such notice or
communication is in writing and is delivered personally or by facsimile
transmission or is deposited in the United States mail, postage prepaid,
addressed as follows:
If to the EMPLOYER:
Home City Federal Savings Bank of Springfield
63 West Main Street
Springfield, Ohio 45502
If to the EMPLOYEE:
Mr. Douglas L. Ulery
2548 Erter Drive
Springfield, Ohio 45503
<PAGE>
IN WITNESS WHEREOF, the EMPLOYER has caused this AGREEMENT to be executed
by its duly authorized officer, and the EMPLOYEE has signed this AGREEMENT,
each as of the day and year first above written.
Attest: HOME CITY FEDERAL SAVINGS BANK
OF SPRINGFIELD
/s/ JoAnn Holdeman /s/ Clark Engelmeier
________________________________ By_________________________________
P. Clark Engelmeier
Chairman of the Board
Attest:
/s/ JoAnn Holdeman /s/ Douglas L. Ulery
________________________________ ___________________________________
Douglas L. Ulery
EXHIBIT 21
SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
Home City Federal Savings Bank United States
of Springfield
Homciti Service Corp. Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the June 30,
1997 & 1996,Consolidated Balance Sheets,& related Consolidate Income Statements
for the 12 months ended June 30,1997 & 1996,& the periods ended June 30,1997
& 1996,& qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001022103
<NAME> HOME CITY FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 461
<INT-BEARING-DEPOSITS> 1,758
<FED-FUNDS-SOLD> 200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,364
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 56,480
<ALLOWANCE> 445
<TOTAL-ASSETS> 69,694
<DEPOSITS> 50,225
<SHORT-TERM> 1,200
<LIABILITIES-OTHER> 352
<LONG-TERM> 3,908
0
0
<COMMON> 0
<OTHER-SE> 14,279
<TOTAL-LIABILITIES-AND-EQUITY> 69,964
<INTEREST-LOAN> 4,734
<INTEREST-INVEST> 393
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 5,311
<INTEREST-DEPOSIT> 2,686
<INTEREST-EXPENSE> 2,918
<INTEREST-INCOME-NET> 2,393
<LOAN-LOSSES> 57
<SECURITIES-GAINS> (19)
<EXPENSE-OTHER> 1,608
<INCOME-PRETAX> 789
<INCOME-PRE-EXTRAORDINARY> 577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 755
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.89
<LOANS-NON> 416
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 438
<ALLOWANCE-OPEN> 362
<CHARGE-OFFS> 22
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 445
<ALLOWANCE-DOMESTIC> 445
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 296
</TABLE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
______________________________________________________________________
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Home City
Financial Corporation ("HCFC") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information
regarding future economic performance and finances and plans and objectives of
management, contained or incorporated by reference in HCFC's Annual Report on
Form 10-KSB for fiscal year 1997 is forward-looking. In some cases,
information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from
any such forward-looking statement appear together with such statement. In
addition, forward-looking statements are subject to other risks and
uncertainties affecting the financial institutions industry, including, but
not limited to, the following:
Interest Rate Risk
__________________
HCFC's operating results are dependent to a significant degree on its net
interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on
deposits, borrowings and other interest-bearing liabilities. The interest
income and interest expense of HCFC change as the interest rates on
interest-earning assets and interest-bearing liabilities change. Interest
rates may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond HCFC's control. In a
rising interest rate environment, loans tend to prepay slowly and new loans at
higher rates increase slowly, while interest paid on deposits increases
rapidly because the terms to maturity of deposits tend to be shorter than the
terms to maturity or prepayment of loans. Such differences in the adjustment
of interest rates on assets and liabilities may negatively affect HCFC's
income.
Possible Inadequacy of the Allowance for Loan Losses
____________________________________________________
HCFC 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 loans and changes in the composition of the loan
portfolio. While the Board of Directors of HCFC 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.
<PAGE>
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from the
operation of the property, which may be negatively affected by national and
local economic conditions. Construction loans may also be negatively affected
by such economic conditions, particularly loans made to developers who do not
have a buyer for a property before the loan is made. The risk of default on
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans. In
addition, the collateral securing such loans, if any, may decrease in value
more rapidly than the outstanding balance of the loan.
Competition
___________
Home City Federal Savings Bank of Springfield ("Home City") competes for
deposits with other savings associations, commercial banks and credit unions
and 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. 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. 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.
Legislation and Regulation that may Adversely Affect HCFC's Earnings
____________________________________________________________________
Home City is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (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 is also subject to regulation and examination by the
OTS. Such supervision and regulation of HCFC and Home City are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company 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.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such
<PAGE>
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.
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. In addition, Home City would be
regulated under federal law as a bank and would, therefore, become subject to
the more restrictive activity limitations imposed on national banks.
Moreover, 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.
