U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
TRANSITION REPORT Pursuant to SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934
For the transition period from July 31 to December 31, 1997
Commission File Number 0-21809
_____________________
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. $3,094,000
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 March 1, 1998, 904,590 common shares of the Registrant were
outstanding. The aggregate market value of the shares held by non-affiliates
was $13,574,962 based upon the closing sale price of $18.625 per share as
quoted by The Nasdaq Stock Market.
Documents Incorporated by Reference
The following sections of the definitive Proxy Statement for the 1998
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 commercial and consumer loans, both
secured and unsecured, 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 slightly lower than average levels of income and housing
values and an improving lower 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.
1
<PAGE>
Change in Fiscal Year
In December 1997, the board of directors of HCFC and Home City determined
to change the fiscal year end of HCFC and Home City from June 30, to December
31, in order to have their fiscal year ends coincide with those of the
financial institutions to which their performance is compared.
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 and 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 December 31, At June 30,
___________________ _____________________________________________
1997 1997 1996
___________________ ___________________ ___________________
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
______ _____ ______ _____ ______ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family (first mortgage) $40,409 62.48% $37,739 64.61% $31,580 64.89%
Multifamily 2,756 4.26 2,774 4.75 3,233 6.64
Home equity (second mortgage) 1,553 2.40 452 0.77 313 0.64
Nonresidential real estate loans 10,315 15.95 8,127 13.91 7,255 14.91
Land loans 1,866 2.89 1,853 3.17 2,223 4.57
Construction loans 3,079 4.76 3,753 6.43 2,350 4.83
_______ ______ _______ ______ _______ ______
Total real estate loans 59,978 92.74 54,698 93.64 46,954 96.48
Commercial loans 493 0.76 464 0.79 73 0.15
Consumer loans:
Loans on deposits 166 0.26 235 0.40 160 0.33
Other consumer loans 4,035 6.24 3,018 5.17 1,481 3.04
_______ ______ _______ ______ _______ ______
Total consumer loans 4,201 6.50 3,253 5.57 1,641 3.37
_______ ______ _______ ______ _______ ______
Total loans 64,672 100.00% 58,415 100.00% 48,668 100.00%
______ ______ ______
Less:
Unearned and deferred (income)
expense, net (499) (487) (447)
Loans in process (1,186) (1,448) (2,634)
Allowance for loan losses (452) (445) (362)
_______ _______ _______
Net loans $62,535 $56,035 $45,225
_______ _______ _______
</TABLE>
2
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 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>
Due during the Due 4-5 Due 6-10 Due 11-15 Due more than
year ending December 31, years after years after years after 15 years after
__________________________
1998 1999 2000 12/31/97 12/31/97 12/31/97 12/31/97 Total
____ ____ ____ ________ ________ ________ ________ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $1,130 $ 888 $ 143 $ 636 $4,151 $25,663 $10,789 $43,400
Nonresidential 750 546 615 64 2,904 7,849 2,165 14,893
Consumer loans 302 269 188 1,156 825 1,461 0 4,201
Commercial loans 69 9 70 10 335 0 0 493
______ ______ ______ ______ ______ _______ _______ _______
Total loans $2,251 $1,712 $1,016 $1,866 $8,215 $34,973 $12,954 $62,987
====== ====== ====== ====== ====== ======= =======
</TABLE>
Of the loans due more than one year after December 31, 1997, loans with
aggregate balances of $32.6 million have fixed rates of interest, and loans
with aggregate balances of $28.1 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 5 to 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 slightly 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- to three-year adjustment
period.
3
<PAGE>
The aggregate amount of Home City's one- to four-family residential real
estate loans equaled approximately $40.4 million at December 31, 1997, and
represented 62.48% of loans at such date. The largest individual loan balance
on a one- to four-family loan at such date was $291,000. At such date, loans
secured by one- to four-family residential real estate with outstanding
balances of $217,000, or 0.54% of its one- to four-family 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 December 31, 1997, loans secured by multifamily properties totaled
approximately $2.8 million, or 4.26% 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 December 31,
1997, of approximately $648,000.
Home Equity Loans. Home City offers home equity loans secured by first
or 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 mortgages are
adjustable, with a maximum combined LTV for the first and second mortgage of
100%.
At December 31, 1997, home equity loans totaled approximately $1.6
million, or 2.40% 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 December 31, 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 December 31, 1997, Home City had a total of $10.3 million invested in
nonresidential real estate loans, all of which were secured by property
located within Home City's primary market area. Such loans comprised
approximately 15.95% of Home City's total loans at such date. At such date,
Home City had no nonresidential loans that were 90 days delinquent or
non-accruing. 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 December
31, 1997, Home City's nonresidential mortgage loans totaled 95.50% of Home
City's tangible capital.
4
<PAGE>
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 fixed interest rates
and terms of up to 15 years. Land loans are secured by the land being
purchased with the loan proceeds and have maximum LTVs of 75 to 80%.
At December 31, 1997, land loans totaled approximately $1.9 million, or
2.89% of Home City's total loan portfolio. The largest land loan at December
31, 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, or 1.62%, of total loans 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
or adjustable rates of interest and terms up to 30 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 December 31, 1997, a total of $3.1 million, or approximately 4.76% 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 December 31, 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 December 31, 1997, Home City had nine commercial loans in the
aggregate amount of $493,000, 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 December 31, 1997, Home City had approximately $4.2 million, or 6.50%
of its total loans, invested in consumer loans, and no such loans were more
than 90 days delinquent or nonaccruing. See "Delinquent Loans, Non-performing
Assets and Classified Assets."
5
<PAGE>
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
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
officials for approval or rejection if the loan amount does not exceed
$400,000. If the loan amount exceeds $400,000, 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.
6
<PAGE>
The following table presents Home City's mortgage loan origination and
participation activity for the periods indicated:
<TABLE>
<CAPTION>
Six months ended December 31, Year ended June 30,
_____________________________ _____________________
1997 1996 1997 1996
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans originated:
One- to four-family residential <F1> $ 7,238 $ 7,260 $14,872 $14,091
Multifamily residential 100 325 325 280
Nonresidential 3,298 1,399 2,451 2,210
Commercial 74 369 546 133
Consumer 1,737 1,631 2,975 1,797
Loans Purchased -- -- 374 --
_______ _______ _______ _______
Total loans originated 12,447 10,984 21,543 18,511
_______ _______ _______ _______
Reductions:
Principal repayments (5,643) (5,754) (10,902) (9,287)
Sales of loans -- -- -- (2,760)
Increase (decrease) in other items, net <F2> (304) 102 169 (199)
_______ _______ _______ _______
Net increase (decrease) $ 6,500 $ 5,332 $10,810 $ 6,265
======= ======= ======= =======
</TABLE>
[FN]
<F1> Includes construction loans.
<F2> Consists of unearned and deferred fees, costs and the allowance
for loan losses.
</FN>
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 $1.7
million to one borrower at December 31, 1997. The largest amount Home City
had outstanding to one borrower at December 31, 1997, was $1.4 million. Such
loans were secured by commercial and agricultural use properties. All of such
loans were current at December 31, 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.
7
<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 December 31, At June 30,
__________________________ __________________________________________________________
1997 1997 1996
__________________________ ___________________________ __________________________
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
______ ______ _____ ______ ______ _____ ______ ______ _____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for <F1>:
30-59 days 21 $ 567 0.90% 26 $ 667 1.18% 17 $ 565 1.24%
60-89 days 15 574 0.91 5 92 0.16 4 170 0.37
90 days and over 15 259 0.41 19 382 0.68 14 247 0.54
___ ______ ____ ___ ______ ____ ___ ______ ____
Total delinquent loans 51 $1,400 2.22% 50 $1,141 2.02% 35 $ 982 2.15%
=== ====== ==== === ====== ==== === ====== ====
</TABLE>
- -----------------------
[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>
<CAPTION>
At December 31, At June 30,
_______________ ______________
1997 1996 1997 1996
____ ____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $259 $132 $211 $247
Nonresidential -- 99 171 --
Commercial -- -- -- --
Consumer -- -- -- --
____ ____ ____ ____
Total non-performing loans 259 231 382 247
Real estate owned -- -- -- --
____ ____ ____ ____
Total non-performing assets $259 $231 $382 $247
==== ==== ==== ====
Total loan loss allowance $452 $399 $445 $362
Total non-performing assets as
a percentage of total assets 0.36% 0.34% 0.55% 0.44%
Loan loss allowance as a percent
of non-performing loans 174.52% 172.73% 116.49% 146.56%
</TABLE>
During the fiscal year ended December 31, 1997, $6,000 in interest income
was recognized and an additional $23,000 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
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.
8
<PAGE>
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 December 31, At June 30,
_______________ _______________
1997 1996 1997 1996
____ ____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Classified assets:
Substandard $377 $497 $438 $518
Doubtful 16 -- -- 19
Loss 77 101 81 102
____ ____ ____ ____
Total classified assets $470 $598 $519 $639
==== ==== ==== ====
</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 resid
ential 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 commercial and
consumer loans. Although these types of loans are considered to involve a
higher degree of risk than loans secured by one- to four-family residential
real estate, Home City has experienced charge-offs only from loans secured by
one- to four-family residential real estate.
The allowance for loan losses is reviewed quarterly by the Board of
Directors. The review process includes a credit analysis of loans on the
"watch list," past due loans, new significant borrowings and random samples of
new loans made. The analysis of loans secured by multifamily and
nonresidential real estate and commercial loans includes a review of tax
returns and financial statements, and the review of all loans includes an
estimation of the value of the collateral. The amounts of provisions for loan
losses for the periods shown in the table below were determined based upon
such loan review, past loss experience, anticipated growth and prevailing
economic conditions. While the Board of Directors believes that it uses the
9
<PAGE>
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>
Six months ended
December 31, Year ended June 30,
___________________ ___________________
1997 1996 1997 1996
____ ____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $445 $362 $362 $319
Charge-offs (16) -- (22) (7)
Recoveries -- -- 48 --
Provision for loan losses (charged to operations) 23 37 57 50
____ ____ ____ ____
Balance at end of period $452 $399 $445 $362
==== ==== ==== ====
Ratio of net charge-offs (recoveries) to average net
loans outstanding during the period 0.03% 0.00% (0.05)% 0.02%
Ratio of allowance for loan losses to total loans 0.72% 0.78% 0.79% 0.79%
</TABLE>
For the fiscal year ended December 31, 1997, $42,000 of the allowance for
loan losses was allocated to loans secured by nonresidential real estate,
$198,000 was allocated to loans secured by one- to four-family real estate,
and $60,000 was allocated to consumer loans. For the fiscal year ended June
30, 1997, $67,000, of the allowance for loan losses was allocated to loans
secured by nonresidential real estate, $220,000 was allocated to loans secured
by one- to four-family real estate, and $35,000 was allocated to consumer
loans. The allowance was unallocated for the fiscal year ended June 30,
1996.
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 December 31, At June 30,
________________________ ________________________________________________________
1997 1997 1996
________________________ ________________________ ________________________
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
____ _____ ____ _____ ____ _____
<S> <C> <C> <C> <C> <C> <C>
GNMA certificates $ 703 $ 700 $ 754 $ 730 $3,020 $2,946
FHLMC certificates -- -- -- -- 26 29
______ ______ ______ ______ ______ ______
Total mortgage-backed
and related securities $ 703 $ 700 $ 754 $ 730 $3,046 $2,975
====== ====== ====== ====== ====== ======
</TABLE>
10
<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 December 31, 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 December 31, 1997
_________________________________________________________________________________________________________
After one After five Total mortgage-backed
One year or less to five years 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 $ -- -- % $ -- -- % $ 183 6.69% $ 517 6.87% $ 700 $ 700 6.82%
FHLMC certificates -- -- -- -- -- -- -- -- -- -- --
_____ ___ _____ ___ _____ ____ _____ ____ _____ _____ ____
Total $ -- -- % $ -- -- % $ 183 6.69% $ 517 6.87% $ 700 $ 700 6.82%
===== === ===== === ===== ==== ===== ==== ===== ===== ====
</TABLE>
For additional information, see Note C of the Notes to Consolidated
Financial Statements.
11
<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 December 31, At June 30,
________________________________ _____________________________________________________________________
1997 1997 1996
________________________________ _________________________________ _________________________________
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 $ 591 10.31% $ 591 10.32% $ 1,397 13.19% $ 1,397 13.20% $ 588 12.70% $ 588 12.72%
Federal funds sold 100 1.74 100 1.75 200 1.89 200 1.89 400 8.64 400 8.65
Time deposits in
other financial
institutions 23 0.40 18 0.31 361 3.41 353 3.34 1,061 22.91 1,053 22.78
Investment securities:
U.S. government and
federal agency
securities 3,098 54.05 3,098 54.09 6,993 66.02 6,993 66.07 997 21.53 997 21.57
Municipal
securities<F1> 930 16.22 930 16.24 749 7.07 749 7.08 883 19.07 883 19.10
Equity securities:
FHLMC stock 503 8.78 503 8.78 420 3.97 420 3.97 270 5.83 270 5.84
Investment in
joint venture<F2> 29 0.51 29 0.51 29 0.27 29 0.27 18 0.39 18 0.39
Service
corporation<F3> 20 0.35 20 0.35 20 0.19 20 0.19 20 0.43 20 0.43
FHLB stock 438 7.64 438 7.65 423 3.99 423 3.99 394 8.51 394 8.52
_______ ______ _______ ______ _______ ______ _______ ______ _______ ______ _______ ______
Total investments $ 5,732 100.00% $ 5,727 100.00% $10,592 100.00% $10,584 100.00% $ 4,631 100.00% $ 4,623 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
- ------------------
[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>
12
<PAGE>
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Home City's investment securities
at December 31, 1997:
<TABLE>
<CAPTION>
At December 31, 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 $1,498 5.61% $1,600 5.94% $ -- --%
Municipal securities 221 4.26 550 4.50 159 5.30
Equity securities: <F1>
FHLMC stock -- -- -- -- 503 0.95
Investment in joint venture -- -- -- -- 29 --
Service corporation -- -- -- -- 20 --
FHLB stock -- -- -- -- 438 7.19
______ ____ ______ ____ ______ ____
Total investments $1,719 5.43% $2,150 5.57% $1,149 3.89%
====== ==== ====== ==== ====== ====
- ------------------
<FN>
<F1> By their nature, Equity securities have no maturity date.
</FN>
<CAPTION>
At December 31, 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 1.06 $3,098 $3,098 5.78%
Municipal securities 2.86 930 930 4.58%
Equity securities 990 990 3.66%
______ ______
Total $5,018 $5,018
====== ======
</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.
13
<PAGE>
At December 31, 1997, Home City's certificates of deposit totaled $42.3
million, or 81.81% of total deposits. Of such amount, approximately $16.9
million in certificates of deposit mature within one year. Based on past
experience and Home City's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with Home City
at maturity. If there is a significant deviation from historical experience,
Home City can utilize borrowings from the FHLB as an alternative to this
source of funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Home City at the dates indicated:
<TABLE>
<CAPTION>
At December 31, At June 30,
___________________ ___________________________________________
1997 1997 1996
___________________ ___________________ ___________________
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
______ ________ ______ ________ ______ ________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
_____________________
Demand $ 763 1.48% $ 540 1.08% $ 302 0.64%
NOW accounts <F1> 774 1.50 675 1.34 395 0.84
Passbook savings accounts <F2> 7,863 15.21 7,863 15.66 9,561 20.27
_______ ______ _______ ______ _______ ______
Total transaction accounts 9,400 18.19 9,078 18.08 10,258 21.75
Certificates of deposit:
________________________
4.01 - 6.00% 14,742 28.52 16,027 31.91 15,810 33.51
6.01 - 8.00% 27,547 53.29 25,120 50.01 21,106 44.74
_______ ______ _______ ______ _______ ______
Total certificates of deposit 42,289 81.81 41,147 81.92 36,916 78.25
_______ ______ _______ ______ _______ ______
Total deposits <F3> $51,689 100.00% $50,225 100.00% $47,174 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- ------------------
[FN]
<F1> Home City's weighted-average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At December
31, 1997 and June 30, 1997 and 1996, the weighted-average rates on NOW
accounts were 1.83%, 1.73%, and 1.71%, 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 2.31%, 2.45%, and 2.58%,
at December 31, 1997 and June 30, 1997 and 1996, respectively.
<F3> IRAs are included in the various certificates of deposit balances.
IRAs totaled $6.4 million, $6.0 million, and $5.5 million as of
December 31, 1997 and June 30, 1997 and 1996.
</FN>
The following table shows rate and maturity information for Home City's
certificates of deposit as of December 31, 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>
4.01 - 6.00% $12,315 $ 2,258 $ 164 $ 6 $14,743
6.01 - 8.00% 4,541 7,400 14,715 890 27,546
_______ _______ _______ _______ _______
Total certificates of deposit $16,856 $ 9,658 $14,879 $ 896 $42,289
======= ======= ======= ======= =======
</TABLE>
14
<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
December 31, 1997:
<TABLE>
<CAPTION>
Maturity Amount
________ ______
(Dollars in thousands)
<S> <C>
Three months or less $ 605
Over 3 months to 6 months 1,981
Over 6 months to 12 months 1,074
Over 12 months 4,219
______
Total $7,879
======
</TABLE>
The following table sets forth Home City's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Six months ended December 31, Year ended June 30,
_____________________________ ___________________
1997 1996 1997 1996
____ ____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $50,225 $47,174 $47,174 $40,936
Deposits 20,458 10,097 28,783 42,110
Withdrawals (20,437) (9,043) (28,418) (38,242)
_______ _______ _______ _______
Net increase (decrease) before
interest credited 21 1,054 365 3,868
Interest credited 1,443 1,331 2,686 2,370
_______ _______ _______ _______
Ending balance $51,689 $49,559 $50,225 $47,174
======= ======= ======= =======
Net increase $ 1,464 $ 2,385 $ 3,051 $ 6,238
Percentage increase 2.91% 5.06% 6.47% 15.24%
</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 December 31, 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>
Six months ended December 31, Year ended June 30,
_____________________________ ___________________
1997 1996 1997 1996
____ ____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance outstanding $ 4,452 $ 3,050 $ 3,564 $ 2,582
Maximum amount outstanding at any month end
during the period 5,712 4,155 5,108 3,564
Balance outstanding at end of period 5,712 4,101 5,108 2,903
Weighted average interest rate during the period 6.39% 6.62% 6.50% 6.66%
Weighted average interest rate at end of period 6.24% 6.49% 6.29% 6.49%
</TABLE>
15
<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 December 31, 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, 1997, Home City had approximately 3.98% 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 December 31, 1997, Home City had fifteen 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.
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
16
<PAGE>
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 December 31, 1997, was 15.20%. For information concerning
Home City's capital, see "ITEM SIX. Management's Discussion and Analysis or
Plan of Operation - Liquidity and 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 December 31, 1997, met the standards
for the highest level, a " well-capitalized association".
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control
of the institution if, after such distribution or payment, the institution
would be undercapitalized. In addition, each company controlling an
undercapitalized institution must guarantee that the institution will comply
with the terms of an OTS-approved capital plan until the institution has been
adequately capitalized on an average during each of four consecutive calendar
quarters and must provide adequate assurances of performance. The aggregate
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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 4%
of its net withdrawable savings deposits plus borrowings payable in one year
or less. Monetary penalties may be imposed upon member institutions failing
to meet its liquidity requirements. The eligible liquidity of Home City, as
computed under current regulations, at December 31, 1997, was approximately
$4.0 million, or 7.3%.
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"). Prior to September 30, 1996, the QTL
Test required savings associations to maintain a specified level of
investments in assets that are designated as QTIs, which are generally related
to domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. Uner this test 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) must
consist of QTIs on a monthly average basis in 9 out of every 12 months.
Congress created a second QTL Test, effective September 30, 1996, pursuant to
which a savings association may also qualify as a QTL thrift if at least 60%
of the association assets (on a tax basis) consist of specified assets
(generally loans secured by residential real estate or deposits, educational
loans, cash and certain governmental obligations). The OTS may grant
exceptions to the QTL Test under certain circumstances. If a savings
association fails to meet the QTL Test, the association and its holding
company 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." At
December 31, 1997, Home City had QTIs equal to approximately 80.1% of its
total portfolio assets.
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 $1,688,000 to one borrower at December 31, 1997. Notwithstanding the
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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 December 31, 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 December
31, 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 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
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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 December 31, 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 the association to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions). As under prior law, the OTS may
approve an acquisition resulting in a multiple savings and loan holding
company controlling savings associations in more than one state in the case of
certain emergency thrift acquisitions.
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. The reserves of the BIF met the level required by law in May 1995.
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
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 associations effective in mid-1995.
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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 is now being shared
by both the SAIF and the BIF. As a result of such cost sharing, BIF
assessments for healthy banks in 1998 are $.013 per $100 in deposits and SAIF
assessments for healthy institutions in 1998 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 $47.8 million (subject to an exemption of up to $4.7 million), and to
maintain reserves of 10% of deposits in net transaction accounts against that
portion of total transaction accounts in excess of $47.8 million. These
percentages are subject to adjustment by the FRB. At December 31, 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 $438,000 at December 31, 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 December 31, 1997, Home
City's maximum limit on advances was approximately $8.8 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.
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.
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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 may be
subject to alternative minimum tax. An alternative minimum tax is imposed at
a minimum tax rate of 20% on "alternative minimum taxable income" (which is
the sum of a corporation's regular taxable income, with certain adjustments,
and tax preference items), less any available exemption. Such tax preference
items include interest on certain tax-exempt bonds issued after August 7,
1986. In addition, 75% of the amount by which a corporation's "adjusted
current earnings" exceeds its alternative minimum taxable income computed
without regard to this preference item and prior to reduction by net operating
losses, is included in alternative minimum taxable income. Net operating
losses can offset no more than 90% of alternative minimum taxable income. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax. Payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years. Although the
Taxpayers 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. HCFC's average gross receipts for the three
years ending December 31, 1997, is $5 million.
Certain thrift institutions such as Home City were, prior to the
enactment of the Small Business Jobs Protection Act, which was signed into law
on August 21, 1996, allowed deductions for bad debts under methods more
favorable to those granted to other taxpayers. Qualified thrift institutions
could compute deductions for bad debts using either the specific charge-off
method of Section 166 of the Code or the reserve method of Section 593 of the
Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an addition
to its bad debt reserve equal to 8% of its taxable income (determined without
regard to this deduction and with additional adjustments). Under the
experience method, a thrift institution was generally allowed a deduction for
an addition to its bad debt reserve equal to the greater of (i) an amount
based on its actual average experience for losses in the current and five
preceding taxable years, or (ii) an amount necessary to restore the reserve to
its balance as of the close of the base year. A thrift institution could
elect annually to compute its allowable addition to bad debt reserves for
qualifying loans either under the experience method or the percentage of
taxable income method. For tax years 1993, 1992 and 1991, Home City used the
percentage of taxable income method because such method provided a higher bad
debt deduction than the experience method.
The Small Business Jobs Protection Act eliminated the percentage of
taxable income reserve method of accounting for bad debts by thrift
institutions, effective for taxable years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize the
experience method applicable to such institutions, while thrift institutions
that are treated as large banks are required to use only the specific
charge-off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Any adjustments under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable-year period, beginning with the first
taxable year beginning after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that becomes a large
bank, the amount of the institution's applicable excess reserves generally is
the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its
reserve for losses on nonqualifying loans (all other types of loans) as of the
close of its last taxable year beginning before January 1, 1996, over (ii) the
balances of such reserves as of the close of its last taxable year beginning
before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a
thrift institution that becomes a small bank, like Home City, the amount of
the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and
its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
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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 Small Business Jobs Protection Act, which
require recapture in the case of certain excessive distributions to shareholders
. The pre-1988 reserves may not be utilized for payment of cash dividends or
other distributions to a shareholder (including distributions in dissolution
or liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated
earnings and profits; second, out of the pre-1988 reserves; and third, out of
such other accounts as may be proper. To the extent a distribution by Home
City to HCFC is deemed paid out of its pre-1988 reserves under these rules,
the pre-1988 reserves would be reduced and Home City's gross income for tax
purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of December
31, 1997, Home City's pre-1988 reserves 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 December 31, 1997,
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 compu
ted Ohio taxable income and 8.9% of computed Ohio taxable income in excess of
$50,000 or (ii) 0.582% times taxable net worth.
A special litter tax is also applicable to all corporations, including
HCFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the
litter tax is equal to 0.11% of the first $50,000 of computed Ohio taxable
income and 0.22% 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
0.014% times taxable net worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequence of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In
general, tax liability will be the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.40% of taxable net worth. The minimum tax will
still be $50 per year and maximum tax liability as measured by net worth will
be limited to $150,000 per year. The special litter taxes remain in effect.
Various other changes in the tax law may affect HCFC.
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, less any statutory deductions.
This rate is scheduled to decrease in each of the years 1999 and 2000. 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.
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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.
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
24
<PAGE>
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 December 31, 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 $362,000
</TABLE>
- ------------------
[FN]
<F1> At December 31, 1997, Home City's properties and equipment had a
total net book value of $493,000. 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 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.
25
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
There were 904,590 common shares of HCFC outstanding on December 31,
1997, held of record by approximately 339 shareholders. Price information
with respect to HCFC's common shares is quoted on The Nasdaq SmallCap 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, May 20,
1997, and August 18, 1997, as well as $0.09 per share on October 20,1997.
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
______________ _____________ __________________ _________________
<S> <C> <C> <C> <C>
High $14.250 $14.438 $16.250 $18.500
Low $12.000 $12.750 $14.188 $15.250
</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.
26
<PAGE>
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 mutual federal savings bank to a 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.
At the time of the Conversion the fiscal year end for both HCFC and Home
City was June 30. In December 1997 the Board of Directors resolved that the
fiscal year end of Home City Financial Corporation be changed to December 31
from June 30. 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. Unaudited consolidated
financial statements for the six-month period ended December 31, 1996, have
been included in the Annual Report for comparison purposes.
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 Six Months Ended December
31, 1997 and 1996," and "Comparison of Results of Operations for the
Fiscal Years Ended June 30, 1997 and 1996;"
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 $71.9 million at
December 31, 1997, an increase of $1.9 million, or 2.70%, over the $70.0
million in total assets at June 30, 1997. Such increase in assets was funded
primarily by the $1.5 million net increase in deposits, $604,000 net increase
in advances from the Federal Home Loan Bank (the "FHLB"), and undistributed
net earnings of $341,000.
Cash and cash equivalents, time deposits and investment securities
totaled $6.6 million at December 31, 1997, a decrease of $4.5 million, or
40.66%, under June 30, 1997 levels. During the six months ended December 31,
1997, $3.6 million of investment securities matured, which consisted primarily
27
<PAGE>
of U.S. government obligations totaling $500,000, U. S. federal agency
obligations totaling $3.0 million, and tax-free securities totaling $70,000.
The proceeds were used primarily to fund the increased demand for loans and
the repurchase of common shares.
Mortgage-backed securities totaled $700,000 at December 31, 1997, a
decrease of $30,000 from June 30, 1997. Due to the composition of the
mortgage-backed securities portfolio coupled with the current loan demand, no
additional purchases were made.
Loans receivable totaled $63.0 million at December 31, 1997, an increase
of $6.5 million, or 11.52%, from the $56.5 million total at June 30, 1997.
During the six months ended December 31, 1997, loan disbursements amounted to
$12.4 million. Such disbursements were partially offset by principal
repayments of $5.6 million.
Home City's allowance for loan losses totaled $452,000 at December 31,
1997, which represented 0.72% of total loans and 174.52% of non-performing
loans. At June 30, 1997, the allowance for loan losses totaled $445,000,
which represented 0.79% of total loans and 116.49% of non-performing loans.
Non-performing loans amounted to $259,000 and $382,000 at December 31,
1997 and June 30, 1997, respectively, and represented 0.36% and 0.55% of total
assets at each date. The decrease in six months ended December 31, 1997 was
due primarily to $230,000 in loans that were paid off, plus $123,000 in loans
that became classified as non-performing, less $15,000 in loans that became
classified as performing and $1,000 in principal reductions, for a net
reduction of $123,000. All loans classified as non-performing at December 31,
1997, were either under a workout plan or being refinanced elsewhere, the
underlying collateral was in the process of being sold or foreclosure action
was being initiated. Although management believes that its allowance for loan
losses at December 31, 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 $51.7 million at December 31, 1997, an increase of $1.5
million, or 2.91%, from $50.2 million at June 30, 1997. 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. Advances
from the FHLB increased from $4.1 million at December 31, 1996, to $5.7
million at December 31, 1997, an increase of 39.28%, as advances were used to
fund loan originations.
Comparison of Results of Operations for the Six Months Ended December 31, 1997
and 1996
The following discussion and analysis of the 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. Due to the change in fiscal year ends from June 30 to December
31, the following focuses on the comparison of the results of operations for
the six-month periods ended December 31, 1997 and 1996. The unaudited
consolidated financial statements for the six-month period ended December 31,
1996, have been included in the Annual Report for comparative purposes.
General . Net income for the six months ended December 31, 1997,
amounted to $494,000, an increase of $311,000, or 169.95%, over the $183,000
recorded in the same six-month period ended December 31, 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 $453,000 increase in net interest income, and a $14,000
decrease in the provision for loan losses, which was partially offset by a
$16,000 increase in noninterest expense, and a $140,000 increase in federal
income tax expense.
Net Interest Income. Net interest income totaled $1.5 million for the
six months ended December 31, 1997, an increase of $453,000, or 42.30%, over
the $1.1 million recorded in the same six-month period in 1996. Interest
income on loans increased by $578,000, or 25.70%, during the six months ended
December 31, 1997 due primarily to an increase in the average balance of the
loans outstanding of $11.9 million, or 24.63%, coupled with an 8 basis point
(100 basis points equals one percent) increase in yield from 9.29% in the
six-month period in 1996 to 9.37% in 1997. Interest income on mortgage-backed
securities decreased by $75,000, or 76.53%, due primarily to a $2.2 million,
or 74.69%, decrease in the average balance of mortgage-backed securities
outstanding, coupled with a decrease in the weighted-average yield
period-to-period, from 6.76% in 1996 to 6.34% in 1997. Interest income on
28
<PAGE>
investment securities increased by $97,000, or 119.75%, for the six months
ended December 31, 1997, compared to the same period in 1996, as the average
balance increased by $3.5 million year to year and the related yield decreased
by 84 basis points to 6.08% in 1997. Interest income on interest-bearing
demand deposits in other banks, federal funds sold, and time deposits
decreased by $3,000, $13,000, and $33,000, respectively, for the six months
ended December 31, 1997, compared to the same six-month period in 1996. The
average balance of interest-bearing demand deposits decreased $120,000, or
15.98%. The average balance invested in federal funds sold decreased by
$556,000, or 64.20%, compared to 1996, while the average balance of time
certificates decreased $882,000, or 72.77%. The yield on interest-bearing
deposits decreased 15 basis points to 4.72%, while the yield on federal funds
sold increased 34 basis points to 5.45% and the time deposit yield decreased
215 basis points to 4.45%.
Interest expense on deposits increased by $57,000, or 4.27%, for the six
months ended December 31, 1997, due primarily to an increase in the average
balance of deposits outstanding of $1.6 million, or 3.29%, coupled with an
increase in the weighted-average rate paid from 5.46% for the six months ended
December 31, 1996, to 5.51% in the same six months in 1997. Interest expense
on FHLB advances increased by $41,000, or 40.59%, primarily due to an increase
in the average balance of advances outstanding of $1.4 million, or 45.97%,
partially offset by a decrease in weighted-average rate from 6.61% during the
six months ended December 31, 1996 to 6.39% in the same six months in 1997.
As a result of the foregoing changes in interest income and interest
expense, the net interest rate spread increased by 4 basis points, to 3.39%
for the six months ended December 31, 1997, as compared to 3.35% for the six
months ended December 31, 1996, while the net interest margin increased by 68
basis points to 4.47% for the six months ended December 31, 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
requirements regarding asset classifications. As a result of its analysis,
management concluded that the allowance was adequate as of December 31, 1997.
There can be no assurance that the allowance will be adequate to cover future
losses on non-performing assets.
Home City had net charge-offs of $16,000 during the six months ended
December 31, 1997, net recoveries of $26,000 during the fiscal year ended
June 30, 1997 and net charge-offs of $7,000 during the fiscal year ended June
30, 1996. 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 93% 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 December 31, 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
$23,000 and $37,000 for the six months ended December 31, 1997 and 1996,
respectively. The provision for loan losses was $57,000 and $50,000 for the
fiscal years ended June 30, 1997 and 1996, respectively. The ratio of
non-performing loans to total loans decreased to 0.41% in the six months ended
December 31, 1997 from 0.45% in the same six-month period in 1996, and
increased from 0.54% in the fiscal year ended June 30, 1996 to 0.68% in the
fiscal year ended June 30, 1997. At December 31, 1997, and 1996,
respectively, Home City had ratios of allowance for loan losses to total loans
of 0.72% and 0.78%, and ratios of allowance for loan losses to non-performing
loans of 174.52% and 172.73%. 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 $23,000 and $37,000 made in
the six-month periods ended December 31, 1997 and 1996, were deemed
appropriate by management to absorb reasonably foreseeable loan losses.
29
<PAGE>
Noninterest Income. Noninterest income totaled $35,000 for the six
months ended December 31, 1997, the same as for the six months ended December
31, 1996. Service charges on deposit accounts and security gains increased
$1,000 each while income from life insurance decreased $4,000. A $2,000
increase was also experienced in other income compared to the same six-month
period ended December 31, 1996.
Noninterest Expense. Noninterest expense increased by $16,000, or 1.92%,
to a total of $850,000 for the six months ended December 31, 1997, as compared
to same six-month period in 1996. The increase resulted primarily from a
$201,000 increase in salary and benefit expense, and a $64,000 increase in
professional fees (legal, accounting and examination fees). Conversely, a
significant decrease was noted in the FDIC deposit insurance expense and
assessments. During the third calendar quarter of 1996 the Company was
subject to a "Special SAIF Assessment" (a deposit insurance assessment paid as
a result of legislation enacted to recapitalize the Savings Association
Insurance Fund) equal to $263,000. In addition, franchise taxes increased by
$48,000 during the six months ended December 31, 1997, compared to the same
period in 1996. 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
$192,000 for the six months ended December 31, 1997, an increase of $140,000,
or 269.23%, from the $52,000 provision recorded for the same period in 1996.
HCFC's effective tax rate increased from 22.13% for the six months ended
December 31, 1996 to 28.00% in fiscal 1997 which was primarily the result of
tax-exempt income from investments and deferred loan costs.
Comparison of Results of Operations for the Fiscal 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.
30
<PAGE>
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 had net recoveries of $26,000
during the fiscal year ended June 30, 1997, and net charge-offs of $7,000
during the fiscal year ended June 30, 1996. 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 made up 93% of Home City's loan portfolio, and loans secured by first
mortgages on one- to four-family residential real estate made 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 and $50,000 for the fiscal years ended
June 30, 1997 and 1996, respectively. The ratio of non-performing loans to
total loans increased to 0.68% in fiscal 1997 from 0.54% in fiscal 1996. At
June 30, 1997 and 1996, Home City had a ratio of allowance for loan losses to
total loans of 0.79%, and ratios of allowance for loan losses to
non-performing loans of 116.49% and 146.56%. 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 and $50,000 made in 1997 and 1996, 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.
31
<PAGE>
Yields Earned and Rates Paid
The following tables present 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>
Six months ended December 31,
______________________________________________________________
1997 1996
_____________________________ _____________________________
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
_______ ____ ____ _______ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing demand deposits $ 631 $ 15 4.72% $ 751 $ 18 4.87%
Federal funds sold 310 9 5.45 866 22 5.11
Time deposits 330 7 4.45 1,212 40 6.60
Investment securities 5,872 178 6.08 2,341 81 6.92
Mortgage-backed and related securities 730 23 6.34 2,884 98 6.76
Loans receivable <F1> 60,327 2,827 9.37 48,404 2,249 9.29
_______ ______ _______ ______
Total interest-earning assets 68,200 3,059 8.97 56,458 2,508 8.88
Noninterest-earning assets:
Cash and due from banks 646 576
Less: Allowance for loan losses (453) (340)
Properties and equipment 499 488
Other non-earning assets 1,188 1,636
_______ _______
Total assets $70,080 $58,818
======= =======
Interest-bearing liabilities:
NOW accounts $ 409 $ 4 1.83 $ 251 $ 2 1.72
Money market accounts 379 7 3.48 165 3 3.37
Passbook accounts 7,799 90 2.31 9,768 122 2.50
Certificates of deposit 41,940 1,292 6.16 38,734 1,209 6.24
_______ ______ _______ ______
Total deposits 50,527 1,393 5.51 48,918 1,336 5.46
FHLB advances 4,452 142 6.39 3,050 101 6.61
_______ ______ _______ ______
Total interest-bearing liabilities 54,979 1,535 5.58 51,968 1,437 5.53
Noninterest-bearing liabilities 1,343 1,362
_______ _______
Total liabilities 56,322 53,330
Unrealized gain on securities 277 161
Additional paid-in capital 9,095 0
Treasury stock (711) 0
Common shares acquired by ESOP (749) 0
Common shares acquired by RRP (20) 0
Retained earnings 5,866 5,327
_______ _______
Total liabilities and shareholders' equity $70,080 $58,818
======= =======
Net interest income; net interest rate spread $1,524 3.39% $1,071 3.35%
====== ====== ====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 4.47% 3.79%
====== ======
Average interest-earning assets to interest-
bearing liabilities 124.05% 108.64%
====== ======
</TABLE>
- ------------------
[FN]
<F1> Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
</FN>
32
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
_____________________________________________________________
1997 1996
____________________________ ____________________________
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
_______ ____ ____ _______ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing demand deposits $ 899 $ 43 4.78% $ 648 $ 32 4.89%
Federal funds sold 763 39 5.13 682 37 5.39
Time deposits 1,785 102 5.72 691 24 3.48
Investment securities 4,655 259 5.55 1,868 111 5.96
Mortgage-backed and related securities 1,989 134 6.74 3,368 209 6.19
Loans receivable <F1> 51,373 4,734 9.22 43,702 4,094 9.37
_______ ______ _______ ______
Total interest-earning assets 61,464 5,311 8.64 50,959 4,507 8.84
Noninterest-earning assets:
Cash and due from banks 628 561
Less: Allowance for loan losses (387) (314)
Properties and equipment 488 481
Other non-earning assets 1,499 734
------- _______
Total assets $63,692 $52,421
======= =======
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
Certificates of deposit 39,567 2,458 6.21 34,225 2,116 6.18
_______ ______ _______ ______
Total deposits 48,884 2,686 5.50 44,122 2,370 5.37
FHLB advances 3,564 232 6.50 2,586 172 6.64
_______ ______ _______ ______
Total interest-bearing liabilities 52,449 2,918 5.56 46,708 2,542 5.44
Noninterest-bearing liabilities 1,369 525
_______ _______
Total liabilities 53,818 47,233
Unrealized gain on securities 183 140
Additional paid-in capital 4,505 --
Common shares acquired by ESOP (378) --
Retained earnings 5,564 5,048
_______ _______
Total liabilities and shareholders' equity $63,692 $52,421
======= =======
Net interest income; net interest rate spread $2,393 3.08% $1,965 3.40%
====== ====== ====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.89% 3.86%
====== ======
Average interest-earning assets to interest-
bearing liabilities 117.19% 109.10%
====== ======
</TABLE>
- ------------------
[FN]
<F1> Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
</FN>
33
<PAGE>
The tables below describe 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
periods 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>
Six months ended December 31,
_____________________________
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 $ (3) $ -- $ (3) $ 1 $ -- $ 1
Federal funds sold (15) 1 (14) 7 (3) 4
Time deposits (29) (4) (33) 14 20 34
Investment securities 123 (25) 98 18 6 24
Mortgage-backed and related securities (73) (2) (75) (18) 15 (3)
Loans receivable 553 25 578 299 (9) 290
_____ _____ _____ _____ _____ _____
Total interest income 556 (5) 551 321 29 350
_____ _____ _____ _____ _____ _____
Interest expenses attributable to:
NOW accounts 2 -- 2 1 -- 1
Money market accounts 4 -- 4 -- 3 3
Passbook savings accounts (25) (7) (32) (2) (9) (11)
Certificates of deposit 100 (17) 83 206 (8) 198
Borrowed funds 46 (5) 41 11 (1) 10
_____ _____ _____ _____ _____ _____
Total interest expense 127 (29) 98 216 (15) 201
_____ _____ _____ _____ _____ _____
Increase (decrease) in net interest income $ 429 $ 24 $ 453 $ 105 $ 44 $ 149
===== ===== ===== ===== ===== =====
<CAPTION>
Years 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
34
<PAGE>
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 December 31, 1997, 2% of the discounted present value of Home City's
assets was approximately $1.5 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 points decrease) was $880,000 at December 31, 1997,
Home City would not have been required to deduct from its capital in
determining whether Home City met its risk-based capital requirement.
Presented below, as of December 31, 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 December 31, 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)% $(2,169) (17)%
+300 (55) (1,493) (11)
+200 (35) (880) (7)
+100 (17) (358) (3)
0 0 0 0
-100 17 191 1
-200 35 403 3
-300 55 703 5
-400 70 1,102 8
</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
35
<PAGE>
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.
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>
Six months ended
December 31, Year ended June 30,
____________ ___________________
1997 1996 1997 1996
____ ____ ____ ____
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 494 $ 183 $ 577 $ 514
Adjustments to reconcile net income to net cash
from operating activities 314 345 52 29
_______ _______ _______ _______
Net cash provided by operating activities 808 528 629 543
Net cash provided by (used in) investing activities (2,483) (4,487) (13,843) (7,585)
Net cash provided by (used in) financing activities 1,135 11,955 13,429 6,508
_______ _______ _______ _______
Net change in cash and cash equivalents (540) 7,996 215 (534)
Cash and cash equivalents at beginning of period 2,058 1,843 1,843 2,377
_______ _______ _______ _______
Cash and cash equivalents at end of period $ 1,518 $ 9,839 $ 2,058 $ 1,843
======= ======= ======= =======
</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 4%
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 December 31, 1997, Home
City's regulatory liquidity ratio was 7.30%. At such date, Home City had
commitments to originate loans totaling $3.2 million and no commitments to
purchase or sell loans. Home City considers its liquidity and capital
reserves sufficient to meet itort- and long-term needs. Adjustments to
liquidity and capital reserves may be necessary, however, if loan demand
increases more than expected or if deposits decrease substantially. See Note
O 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 December
31, 1997, June 30, 1997 and June 30, 1996.
36
<PAGE>
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
from 4% to 5%, except for those associations with the highest examination
rating and acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of 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 $452,000 at December 31, 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 December 31, 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 $10,801 15.20% $ 1,066 1.50% $ 9,735 13.70% $71,068
Core capital 10,801 15.20 2,132 3.00 8,669 12.20 71,068
Risk-based capital 11,253 26.59 3,386 8.00 7,867 18.59 42,321
</TABLE>
At December 31, 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, HCFC 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.
37
<PAGE>
ITEM 7. Financial Statements
(Company Logo)
ROBB,DIXON
FRANCIS, DAVIS, ONESON & COMPANY
================================================================================
CERTIFIED PUBLIC ACCOUNTANTS
1205 WEAVER DRIVE - GRANVILLE, OHIO 43023 - 740-321-1000
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Home City Financial Corporation
Springfield, Ohio
We have audited the consolidated balance sheets of Home City Financial
Corporation and subsidiaries as of December 31, 1997, June 30, 1997 and June
30,1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for the six months ended December 31, 1997, and for
each of the years in the two-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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Home
City Financial Corporation and subsidiaries as of December 31, 1997, June 30,
1997 and June 30, 1996, and the consolidated results of their operations and
their cash flows for the six months ended December 31, 1997, and for each of
the years in the two-year period ended June 30, 1997, in conformity with
generally accepted accounting principles.
We have compiled the accompanying consolidated balance sheet of Home City
Financial Corporation as of December 31, 1996 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
six months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial
statements information that is the representation of Management. We have not
audited or reviewed the accompanying financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
ROBB, DIXON,
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
February 6, 1998
38
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
At December 31, At June 30,
__________________ __________________
1997 1996 1997 1996
____ ____ ____ ____
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 827 $ 1,519 $ 461 $ 855
Interest-bearing demand deposits in other banks 591 7,320 1,397 588
Federal funds sold 100 1,000 200 400
_______ _______ _______ _______
Total cash and cash equivalents 1,518 9,839 2,058 1,843
Time deposits with original maturities of 90 days or more 23 361 361 1,061
Investment securities available-for-sale, at fair value 5,018 2,642 8,634 2,582
Mortgage-backed and related securities available-for-sale,
at fair value 700 2,748 730 2,975
Loans, net 62,535 50,558 56,035 45,225
Accrued interest receivable 409 313 407 273
Properties and equipment 493 485 488 488
Cash surrender value of life insurance 1,085 1,070 1,070 1,044
Other assets 73 124 181 237
_______ _______ _______ _______
TOTAL ASSETS $71,854 $68,140 $69,964 $55,728
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $51,689 $49,559 $50,225 $47,174
Advances from Federal Home Loan Bank 5,712 4,101 5,108 2,903
Accrued interest payable 79 65 59 49
Advance payments by borrowers for taxes and insurance 71 69 21 20
Deferred income taxes 68 70 100 68
Other liabilities 231 283 172 116
_______ _______ _______ _______
TOTAL LIABILITIES 57,850 54,147 55,685 50,330
_______ _______ _______ _______
Shareholders' equity:
Preferred shares of no par value; 1,000,000 shares
authorized; no shares issued and outstanding 0 0 0 0
Common shares of no par value; 5,000,000 shares
authorized; 952,200 shares issued 0 0 0 0
Additional paid-in capital 9,150 9,085 9,085 0
Retained earnings, substantially restricted 6,037 5,454 5,696 5,271
Treasury stock, 47,610 common shares; at cost (711) 0 0 0
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes 332 216 260 127
Common shares purchased by:
Employee Stock Ownership Plan (686) (762) (762) 0
Recognition and Retention Plan (118) 0 0 0
_______ _______ _______ _______
TOTAL SHAREHOLDERS' EQUITY 14,004 13,993 14,279 5,398
_______ _______ _______ _______
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $71,854 $68,140 $69,964 $55,728
======= ======= ======= =======
</TABLE>
- -----------------------
See accompanying notes.
39
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended Year ended
December 31, June 30,
__________________ __________________
1997 1996 1997 1996
____ ____ ____ ____
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $2,827 $2,249 $4,734 $4,094
Mortgage-backed securities 23 98 134 209
Investment securities 178 81 259 111
Federal funds sold 9 22 39 37
Time deposits 7 40 102 24
Interest-bearing demand deposits in other banks 15 18 43 32
______ ______ ______ ______
TOTAL INTEREST INCOME 3,059 2,508 5,311 4,507
______ ______ ______ ______
INTEREST EXPENSE:
Deposits 1,393 1,336 2,686 2,370
Advances from Federal Home Loan Bank 142 101 232 172
______ ______ ______ ______
TOTAL INTEREST EXPENSE 1,535 1,437 2,918 2,542
______ ______ ______ ______
NET INTEREST INCOME 1,524 1,071 2,393 1,965
Provision for loan losses 23 37 57 50
______ ______ ______ ______
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,501 1,034 2,336 1,915
NONINTEREST INCOME:
Service charges on deposits 4 3 5 2
Life insurance 26 30 61 46
Gain (loss) on sale of securities, net 1 0 (19) 0
Other income 4 2 14 10
______ ______ ______ ______
TOTAL NONINTEREST INCOME 35 35 61 58
______ ______ ______ ______
NONINTEREST EXPENSE:
Salaries and employee benefits 447 246 620 532
Supplies, telephone and postage 19 22 47 44
Occupancy and equipment 58 50 101 102
FDIC deposit insurance 16 311 328 96
Data processing 45 34 69 54
Legal, accounting and examination 115 51 154 110
Franchise taxes 86 38 126 72
Other expenses 64 82 163 206
______ ______ ______ ______
TOTAL NONINTEREST EXPENSE 850 834 1,608 1,216
______ ______ ______ ______
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 686 235 789 757
Federal income tax expense 192 52 212 243
______ ______ ______ ______
NET INCOME $ 494 $ 183 $ 577 $ 514
====== ====== ====== ======
Earnings per common share - basic $ .59 $ .21 N/A N/A
Earnings per common share - diluted $ .53 $ .21 N/A N/A
</TABLE>
- -----------------------
See accompanying notes.
40
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Unrealized
gain (loss)
on securities
available-
for-sale
net of Common Common Total
Common Additional applicable shares shares share-
stock paid-in Retained Treasury deferred purchased purchased holders'
# of shares capital earnings stock income taxes by ESOP by RRP equity
___________ _______ ________ _____ ____________ _______ ______ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 0 $ 0 $4,757 $ 0 $ 128 $ 0 $ 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 0 127 0 0 5,398
Net income 577 577
Issuance of 952,200
common shares 952,200 9,085 (762) 8,323
Change in unrealized
gain (loss) on securities
available-for-sale, net of
applicable deferred income
taxes of $67 133 133
Dividends declared
($.16 per common share) (152) (152)
_______ ______ ______ _____ _____ _____ _____ _______
Balances at June 30, 1997 952,200 9,085 5,696 0 260 (762) 0 14,279
Net income 494 494
Purchase of 47,610 common
shares in treasury (711) (711)
Change in unrealized
gain (loss) on securities
available-for-sale, net of
applicable deferred income
taxes of $37 72 72
Amortization of deferred
compensation - Employee
Stock Ownership Plan 65 76 141
Purchase of 6,800 common
shares by Recognition
and Retention Plan (118) (118)
Dividends declared
($.17 per common share) (153) (153)
_______ ______ ______ _____ _____ _____ _____ _______
Balances at December 31, 1997 952,200 $9,150 $6,037 $(711) $ 332 $(686) $(118) $14,004
======= ====== ====== ===== ===== ===== ===== =======
</TABLE>
- -----------------------
See accompanying notes.
41
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended Year ended
December 31, June 30,
________________ ________________
1997 1996 1997 1996
____ ____ ____ ____
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 494 $ 183 $ 577 $ 514
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 8 13 0 42
Provision for loan losses 23 37 57 50
(Gain) loss on sale of securities (1) 0 19 0
Depreciation 42 20 40 39
Deferred income taxes (69) 45 (35) 89
Life insurance income, net of expenses (14) (26) (26) (19)
Employee Stock Ownership Plan compensation expense 141 0 0 0
Changes in operating assets and liabilities:
Increase in accrued interest receivable (2) (40) (134) (103)
(Increase) decrease in other assets 107 113 57 (129)
Increase in accrued interest payable 20 16 10 7
Increase in other liabilities 59 167 56 53
_______ _______ _______ _______
Net cash provided by operating activities 808 528 621 543
_______ _______ _______ _______
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in time deposits 337 700 700 (700)
Proceeds from maturities of held-to-maturity securities 0 0 0 500
Principal collections on mortgage-backed securities,
held-to-maturity 0 214 0 278
Purchases of available-for-sale securities (267) (14) (6,997) (602)
Proceeds from sales of available-for-sale securities 400 0 0 0
Proceeds from maturities of available-for-sale securities 3,570 0 1,136 20
Proceeds from sales of mortgage-backed securities,
available-for-sale 0 0 1,891 0
Principal collections on mortgage-backed securities,
available-for-sale 46 0 342 319
Proceeds from sales of loans 0 0 0 2,760
Net increase in loans (6,523) (5,370) (10,867) (9,075)
Purchases of properties and equipment (46) (17) (40) (60)
Purchase of life insurance contracts 0 0 0 (1,025)
_______ _______ _______ _______
Net cash used in investing activities (2,483) (4,487) (13,835) (7,585)
_______ _______ _______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,463 2,385 3,051 6,238
Net increase in short-term FHLB advances 800 0 700 500
Proceeds from new long-term FHLB advances 0 1,825 1,825 0
Payments on long-term FHLB advances (196) (627) (319) (216)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 50 49 1 (14)
Proceeds from sale of common shares 0 8,323 8,323 0
Purchase of common shares by Recognition and Retention Plan (118) 0 0 0
Purchase of treasury shares (711) 0 0 0
Dividends paid (153) 0 (152) 0
_______ _______ _______ _______
Net cash provided by financing activities 1,135 11,955 13,429 6,508
_______ _______ _______ _______
Net increase (decrease) in cash and cash equivalents (540) 7,996 215 (534)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,058 1,843 1,843 2,377
_______ _______ _______ _______
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,518 $ 9,839 $ 2,058 $ 1,843
======= ======= ======= =======
</TABLE>
- -----------------------
See accompanying notes.
42
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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 inter-company accounts and transactions
have been eliminated.
Use 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 particularly 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.
43
<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 in other
banks and federal funds sold to be cash equivalents. The following are
supplemental disclosures for the consolidated statements of cash flows for the
six months ended December 31, 1997, and for the years ended June 30, 1997 and
1996.
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended
December 31, Year ended June 30,
___________ ___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Cash paid during the period for interest $1,515 $2,908 $2,535
Cash paid during the period for income taxes 240 147 283
</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
adoption of 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.
44
<PAGE>
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.
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.
Earnings per Share
The weighted-average number of shares of common stock used in calculating
earnings per share was determined by reducing outstanding shares by
unallocated ESOP shares and unvested Recognition and Retention Plan (the
"RRP") shares. The effect of stock options on weighted-average shares
outstanding is calculated using the Treasury Stock method. Fully diluted
shares outstanding include the maximum dilutive effect of stock issuable upon
exercise of common stock options and unallocated ESOP and RRP shares of common
stock. Earnings per share information for periods prior to 1997 are not
presented because the bank did not complete its Reorganization until December
30, 1996.
Reclassifications
Certain amounts 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.
45
<PAGE>
NOTE C - INVESTMENT SECURITIES
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
At December 31, 1997
_____________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____ _____ ______ _____
<S> <C> <C> <C> <C>
U.S. government & federal agencies $3,098 $ 2 $ (3) $3,097
State & local governments 917 14 (1) 930
Mortgage-backed securities 703 0 (3) 700
Equity securities 499 492 0 991
______ ____ ____ ______
Total $5,217 $508 $ (7) $5,718
====== ==== ==== ======
<CAPTION>
At June 30, 1997
_____________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____ _____ ______ _____
<S> <C> <C> <C> <C>
U.S. government & federal agencies $6,995 $ 5 $ (7) $6,993
State & local governments 739 11 (1) 749
Mortgage-backed securities 754 0 (24) 730
Equity securities 484 408 0 892
______ ____ ____ ______
Total $8,972 $424 $(32) $9,364
====== ==== ==== ======
<CAPTION>
At June 30, 1996
_____________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____ _____ ______ _____
<S> <C> <C> <C> <C>
U.S. government & federal agencies $1,001 $ 0 $ (4) $ 997
State & local governments 879 6 (2) 883
Mortgage-backed securities 3,046 5 (76) 2,975
Equity securities 459 243 0 702
______ ____ ____ ______
Total $5,385 $254 $(82) $5,557
====== ==== ==== ======
</TABLE>
46
<PAGE>
The following is a summary of maturities of securities available-for-sale as
of December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Amortized Fair
Amounts maturing in : Cost Value
____ _____
<S> <C> <C>
One year or less $1,499 $1,497
After one year through five years 2,364 2,371
After five years through ten years 152 159
______ ______
Total investment securities 4,015 4,027
Corporate equity securities 499 991
Mortgage-backed securities 703 700
______ ______
Total $5,217 $5,718
====== ======
</TABLE>
Interest income on investment securities for the six months ended December 31,
1997 and for each of the two years ended June 30, was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months
ended
December 31, Year ended June 30,
___________ ___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
U.S. government and federal agencies $142 $187 $ 61
State & local governments 18 39 24
Mortgage-backed securities 23 134 209
Equity securities 18 33 26
____ ____ ____
Total $201 $393 $320
==== ==== ====
</TABLE>
For the six months ended December 31, 1997, the corporation sold securities
available-for-sale for total proceeds of approximately $400,000 resulting in
gross realized gains of $1,000 and no gross realized losses. 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.
There were no securities transferred between classifications for the six
months ended December 31, 1997, or 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.
Investment securities with a carrying value of approximately $500,000,
$499,000 and $906,000 at December 31, 1997 and June 30, 1997 and 1996,
respectively, were pledged to secure deposits as required or permitted by law.
47
<PAGE>
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1997 and June 30, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, June 30,
____________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Loans secured by real estate:
1-4 family residential properties $40,669 $36,953 $28,812
5 or more dwelling units 2,731 2,749 3,233
Non-residential properties 10,124 7,762 7,255
Land 1,690 1,546 2,223
Construction 3,079 3,753 2,350
Consumer 4,201 3,253 1,641
Commercial 493 464 73
_______ _______ _______
62,987 56,480 45,587
Allowance for loan losses (452) (445) (362)
_______ _______ _______
Total $62,535 $56,035 $45,225
======= ======= =======
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended
December 31, Year ended June 30,
___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Balance, beginning of period $445 $362 $319
Provision for loan losses 23 57 50
Loans charged off (16) (22) (7)
Recoveries 0 48 0
____ ____ ____
Balance, end of period $452 $445 $362
==== ==== ====
</TABLE>
At December 31, 1997 and June 30, 1997 and 1996, the bank had loans amounting
to approximately $102,000, $0 and $72,000, respectively, that were
specifically classified as impaired. The average balance of those loans
amounted to approximately $179,000, $2,000 and $104,000 for the six months
ended December 31, 1997, and the years ended June 30, 1997, and 1996,
respectively. The allowance related to impaired loans amounted to
approximately $8,000, $0 and $2,000 at December 31, 1997 and June 30, 1997 and
1996, respectively. Interest income on impaired loans of $6,000, $2,000 and
$23,000 was recognized for cash payments received for the six months ended
December 31, 1997, and for the years ended June 30, 1997 and 1996.
In addition, at December 31, 1997 and June 30, 1997 and 1996, the bank had
other nonaccrual loans of approximately $164,000, $416,000 and $175,000,
respectively, for which impairment had not been recognized.
The bank has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
At December 31, 1997 and June 30, 1997 and 1996, the bank serviced loans for
others with principal balances of $2,395,000, $2,632,000 and $3,358,000,
respectively.
48
<PAGE>
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, 1997 $1,523
New loans 12
Payments (31)
______
Balance, December 31, 1997 $1,504
======
</TABLE>
NOTE E - PROPERTIES AND EQUIPMENT
A summary of properties and equipment at December 31, 1997 and June 30, 1997
and 1996, follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, June 30,
______________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Land $113 $113 $113
Buildings and improvements 437 435 424
Furniture, fixtures, and equipment 328 304 275
____ ____ ____
878 852 812
Accumulated depreciation (385) (364) (324)
____ ____ ____
Total $493 $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 December 31, 1997 and June 30, 1997 and 1996, there were
no notes payable to the insurance company.
NOTE G - DEPOSITS
Deposit account balances at December 31, 1997 and June 30, 1997 and 1996, are
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1997 June 30, 1997 June 30, 1996
__________________ __________________ __________________
Amount Percent Amount Percent Amount Percent
______ _______ ______ _______ ______ _______
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing checking accounts $ 763 1.5% $ 540 1.1% $ 302 0.6%
NOW and money market accounts 774 1.5 675 1.3 395 0.8
Savings accounts 7,863 15.2 7,863 15.7 9,561 20.3
Certificates of deposit 42,289 81.8 41,147 81.9 36,916 78.3
_______ _____ _______ _____ _______ _____
Totals $51,689 100.0% $50,225 100.0% $47,174 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
49
<PAGE>
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $7,879,000, $7,647,000 and
$7,216,000 at December 31, 1997 and June 30, 1997 and 1996, respectively.
Deposits in excess of $100,000 are not insured by the FDIC.
At December 31, 1997, the scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998 $16,856
1999 9,658
2000 14,879
2001 215
After 2001 681
_______
Total $42,289
=======
</TABLE>
The bank held deposits of approximately $532,000, $552,000 and $806,000 for
related parties at December 31, 1997 and June 30, 1997 and 1996, respectively.
NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank (the "FHLB") consisted of the
following at December 31, 1997 and June 30, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current
Interest December 31, June 30,
____________ _______________
Rate 1997 1997 1996
____ ____ ____ ____
<S> <C> <C> <C> <C>
Federal Home Loan Bank advances
Variable-rate advances, with monthly interest payments:
Advance due September, 1996 5.80% $ 0 $ 0 $ 500
Advance due September, 1997 6.65 0 1,200 0
Advance due January, 1998 5.87 500 0 0
Advance due March, 1998 5.87 1,500 0 0
Fixed-rate advances, with monthly principal
and interest payments:
Advance due October , 2001 6.30 258 287 0
Advance due February, 2003 6.05 89 96 110
Advance due March, 2003 5.85 191 206 236
Advance due December , 2004 8.35 420 450 510
Advance due January, 2005 8.32 766 812 904
Advance due November, 2006 6.35 1,379 1,436 0
Advance due January, 2010 3.30 609 621 643
______ ______ ______
Total $5,712 $5,108 $2,903
====== ====== ======
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by the
bank (totaling $438,000) and by 100% of the bank's qualified mortgage loan
portfolio (totaling approximately $40,699,000). Based on the carrying amount
of FHLB stock owned by the bank, total FHLB advances are limited to
approximately $8,760,000.
50
<PAGE>
The aggregate minimum future annual principal payments on borrowings are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998 $2,402
1999 417
2000 432
2001 436
After 2001 2,025
______
Total $5,712
======
</TABLE>
NOTE I - EMPLOYEE BENEFITS
401(k) Profit Sharing Plan
In 1994, the bank initiated a 401(k) 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 six months
ended December 31, 1997, and for the years ended June 30, 1997 and 1996, were
$5,000, $9,000 and $8,000, 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 $7,000, $4,000 and $25,000 for the six months ended December 31, 1997, and
for the years ended June 30, 1997 and 1996, 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 six months ended December 31, 1997, and the
years ended June 30, 1997 and 1996, contributions to the plan charged to
operations were $7,000, $12,000 and $56,000, respectively.
NOTE J - STOCK REPURCHASE PROGRAM
During 1997, the corporation received regulatory approval to repurchase up to
5% of its outstanding shares. During the six months ended December 31, 1997,
47,610 common shares were repurchased at an average price of $14.93.
Repurchased shares are treated as treasury shares and are available for
general corporate purposes, including issuance in connection with stock-based
compensation plans.
NOTE K - STOCK-BASED COMPENSATION PLANS
As part of the conversion transaction (see NOTE B), an ESOP was established
for the benefit of employees of the corporation and bank, age 21 or older, who
have completed at least one year of full-time service. The ESOP borrowed
$762,000 from the corporation and used those funds to acquire 76,176 common
shares of the corporation at $10 per share.
51
<PAGE>
Shares issued to the ESOP are allocated to ESOP participants based on
principal and interest payments made by the ESOP on the loan. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the corporation's discretionary contributions to the ESOP
and earnings on ESOP assets. Principal payments are scheduled to occur in
even annual amounts over a ten-year period. However, in the event
contributions exceed the minimum debt service requirements, additional
principal payments will be made. During 1997, 7,618 common shares with a fair
value of $18.50 were committed to be released, resulting in ESOP compensation
expense of $141,000. Shares held by the ESOP at December 31, 1997 and June
30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
____________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Allocated shares 7,618 0 0
Unallocated shares 68,558 76,176 0
__________ __________ __
Total ESOP shares 76,176 76,176 0
========== ========== ==
Fair value of unallocated shares $1,268,000 $1,100,000 $0
</TABLE>
A Stock Option and Incentive Plan (the "SOP") and RRP were authorized by the
shareholders at the October 20, 1997, annual meeting. The RRP is a restricted
stock award plan. The SOP and RRP are administered by a Committee of
Directors of the corporation. This committee selects recipients and terms of
awards pursuant to the plans. Total shares made available under the SOP and
RRP plans were 95,220 and 38,088, respectively.
RRP awards vest in five equal annual installments, subject to the continuous
employment of the recipients as defined under such plans. SOP options vest in
five equal annual installments and expire ten years from the date of grant.
No compensation expense is being recognized in connection with the grant of
the options for which the exercise prices equal the corporation's stock price
at the dates of grant. Compensation expense for the RRP is based upon market
price at the date of grant and is recognized on a pro rata basis over the
vesting period of the awards. Compensation cost charged against income for
the RRP was $0 for the six months ended December 31, 1997, and $0 for each of
the years in the two-year period ended June 30, 1997. The unamortized
unearned compensation value of the RRP is shown as a reduction to
shareholders' equity in the accompanying consolidated balance sheets.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the standard's fair value method been used to measure compensation cost for
the SOP. In future years, the pro forma effect of not applying this standard
is expected to increase as additional options are granted. The compensation
cost charged against income for the RRP is the same as if the provisions of
SFAS No. 123 had been applied.
<TABLE>
<CAPTION>
(Dollars in thousands)
Six months ended
December 31, 1997
_________________
<S> <C>
Net income as reported $494
Pro forma net income 486
</TABLE>
The Black-Scholes option-pricing model was used to determine the grant-date
fair-value of options in fiscal 1997. Significant assumptions used in the
model included weighted-average assumptions: risk-free interest rate of 6.23%,
expected life of 10 years, expected volatility of stock price of 24% and
expected dividends of 2.54% per year.
52
<PAGE>
Information pursuant to the SOP at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Range of Average
Number Average Exercise Fair Value
of Options Exercise Price Price of Grants
__________ ______________ _____ _________
<S> <C> <C> <C> <C>
Outstanding, June 30, 1997 0 $ 0
Granted 71,415 16.125
______ _______
Outstanding, December 31, 1997 71,415 $16.125 $16.125 $16.125
====== ======= ======= =======
</TABLE>
No options are exercisable at December 31, 1997.
At December 31, 1997, the weighted-avera.8 years.
NOTE L - INCOME TAXES
Components of income tax expense for the six months ended December 31, 1997,
and for the years ended June 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, June 30,
____________ ___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Current federal tax expense $261 $247 $154
Deferred federal tax expense (69) (35) 89
____ ____ ____
Total $192 $212 $243
==== ==== ====
</TABLE>
The net deferred tax liability included the following major temporary
differences at December 31, 1997 and June 30, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, June 30,
___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Deferred tax liabilities:
Accumulated depreciation $ 27 $ 21 $ 19
Net deferred loan costs 37 17 0
Net unrealized appreciation on
available-for-sale securities 170 133 69
Other 33 0 0
____ ____ ____
Total deferred tax liabilities 267 171 88
____ ____ ____
Deferred tax assets:
Net deferred loan fees 0 0 (5)
Nonaccrual loan interest (8) (4) (6)
Allowance for loan losses (110) (50) (6)
Employee benefits (81) (14) (3)
Other 0 (3) 0
____ ____ ____
Total deferred tax assets (199) (71) (20)
____ ____ ____
Total net deferred tax liability $ 68 $100 $ 68
==== ==== ====
</TABLE>
53
<PAGE>
A reconciliation of the federal income tax rate to effective income tax rates
follows for the six months ended December 31, 1997, and for each of the years
in the two-year period ended June 30, 1997:
<TABLE>
<CAPTION>
December 31, June 30,
___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Federal income tax rate 34.00% 34.00% 34.00%
Adjusted for:
Tax-exempt income (3.20) (3.12) (4.10)
Other (2.80) (4.22) 2.20
_____ _____ _____
Effective tax rate 28.00% 26.66% 32.10%
===== ===== =====
</TABLE>
Included in retained earnings at December 31, 1997, June 30, 1997 and 1996, is
approximately $1,084,000 in bad debt reserves for which no deferred federal
income tax liability has been recorded. These amounts represent allocations
of income to bad debt deductions for tax purposes 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
$368,000.
NOTE M - DIVIDEND RESTRICTION
The bank, as a federally chartered savings bank, is subject to the dividend
restrictions set forth by the Office of Thrift Supervision (the "OTS"). Under
regulations of the OTS applicable to converted savings associations, the bank
is not permitted to pay a cash dividend on its capital stock 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.
As disclosed in NOTE N, 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 N - REGULATORY MATTERS
The bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the OTS. 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 December 31, 1997, the bank's capital
exceeded all of such requirements.
As of December 31, 1997, the most recent notification from the OTS, the bank
was categorized as well capitalized under the regulatory framework for prompt
54
<PAGE>
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 December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Total Tier 1
Capital Capital
_______ _______
<S> <C> <C>
Equity per GAAP $11,180 $11,180
Less unrealized gain on securities available-for-sale,
net of applicable income taxes (329) (329)
Less advance to subsidiary (50) (50)
Plus allowance for loan losses 452 0
_______ _______
Regulatory capital $11,253 $10,801
======= =======
<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 December 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $11,253 26.6% $3,386 8.0% $4,232 10.0%
Tier I Capital
(to Risk-Weighted Assets) 10,801 25.5 N/A N/A 2,539 6.0
Tier I Capital
(to Total Assets) 10,801 15.2 2,132 3.0 3,553 5.0
Tangible Capital
(to Total Assets) 10,801 15.2 1,066 1.5 N/A N/A
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) 5,721 17.6 N/A N/A 1,800 6.0
Tier I Capital
(to Total Assets) 5,721 9.5 1,668 3.0 2,779 5.0
Tangible Capital
(to Total Assets) 5,721 9.5 834 1.5 N/A N/A
</TABLE>
55
<PAGE>
NOTE O - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements.
The bank had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At December 31, 1997 At June 30, 1997 At June 30, 1996
_________________________ _________________________ _________________________
Fixed- Adjustable- Fixed- Adjustable- Fixed- Adjustable-
rate rate Total rate rate Total rate rate Total
____ ____ _____ ____ ____ _____ ____ ____ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage
loans $2,175 $574 $2,749 $ 831 $292 $1,123 $ 837 $169 $1,006
Consumer and
other loans 498 0 498 232 0 232 292 0 292
______ ____ ______ ______ ____ ______ ______ ____ ______
$2,673 $574 $3,247 $1,063 $292 $1,355 $1,129 $169 $1,298
====== ==== ====== ====== ==== ====== ====== ==== ======
</TABLE>
Interest rates on commitments at December 31, 1997, ranged from 7.75% to 10.75%.
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.
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit 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 nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments (see NOTE
O). The bank uses the same credit policies in making commitments 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 December 31, 1997, the bank had deposits with the following banks in excess
of Federal Deposit Insurance Corporation (the "FDIC") insurance of $100,000:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Huntington National Bank $1,085
Federal Home Loan Bank 120
</TABLE>
56
<PAGE>
NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1997 June 30, 1997 June 30, 1996
_________________ _________________ _________________
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
______ _____ ______ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,518 $ 1,518 $ 2,058 $ 2,058 $ 1,843 $ 1,843
Time deposits 23 18 361 353 1,061 1,053
Investment securities 5,018 5,018 8,634 8,634 2,582 2,582
Mortgage-backed securities 700 700 730 730 2,975 2,975
Loans 62,535 63,176 56,035 56,380 45,225 45,364
Accrued interest receivable 409 409 407 407 273 273
Life insurance 1,085 1,085 1,070 1,070 1,044 1,044
Financial liabilities:
Deposits 51,689 51,828 50,225 50,322 47,174 47,311
Advances from FHLB 5,712 5,617 5,108 5,050 2,903 2,954
Accrued interest payable 79 79 59 59 49 49
</TABLE>
The carrying amounts in the preceding table are included in the consolidated
balance sheets.
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 bank.
The following methods and assumptions were used by the bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement
of financial condition for cash and cash equivalents approximate those
assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits.
Investment securities: 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.
57
<PAGE>
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.
Advance 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.
NOTE R - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Home City Financial Corporation (parent
company only) follows:
<TABLE>
<CAPTION>
Balance Sheets
(Dollars in thousands)
At December 31, At June 30,
_______________ ________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Assets
Interest-bearing savings deposit with subsidiary bank $ 147 $ 585 $ 0
Interest-bearing time deposit with subsidiary bank 2,027 0 0
Investment in subsidiary 11,213 10,624 0
Investment securities available-for-sale 601 3,000 0
Other assets 37 106 0
_______ _______ _______
Total assets $14,025 $14,315 $ 0
======= ======= =======
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 21 $ 36 $ 0
Shareholders' equity 14,004 14,279 0
_______ _______ _______
Total liabilities and shareholders' equity $14,025 $14,315 $ 0
======= ======= =======
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION.
Statements of Income
(Dollars in thousands)
Six months
ended
December 31, Year ended June 30,
____________ ___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Income
Interest from subsidiary deposits $ 33 $ 25 $ 0
Interest on securities available-for-sale 48 55 0
Income on ESOP loan 35 36 0
____ ____ ____
Total income 116 116 0
____ ____ ____
Expense
Legal, consulting and examination 58 33 0
Franchise tax 11 11 0
Other 84 30 0
____ ____ ____
Total expense 153 74 0
____ ____ ____
Income before income taxes and equity in
undistributed earnings of subsidiary (37) 42 0
Income tax provision (16) 6 0
Income before equity in undistributed earnings ____ ____ ____
of subsidiary (21) 36 0
Equity in undistributed earnings of subsidiary 515 358 0
____ ____ ____
Net income $494 $394 $ 0
==== ==== ====
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
(Dollars in thousands)
Six months
ended
December 31, Year ended June 30,
____________ ___________________
1997 1997 1996
____ ____ ____
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 494 $ 394 $ 0
Adjustments to reconcile net income to net cash
flows from operating activities:
Equity in undistributed earnings of subsidiary (515) (358) 0
Discount accretion (1) (1) 0
Amortization of deferred compensation - ESOP 141 0 0
Net (increase) decrease in other assets 69 (106) 0
Net increase (decrease) in other liabilities (17) 36 0
______ ______ ______
Net cash flows from operating activities 171 (35) 0
______ ______ ______
Cash flows from investing activities:
Net increase in time deposits (2,027) 0 0
Purchase of securities available-for-sale 0 (2,996) 0
Sale of securities available for-sale 400 0 0
Maturities of securities available-for-sale 2,000 0 0
Purchase of common shares of subsidiary 0 (4,555) 0
______ ______ ______
Net cash flows from investing activities 373 (7,551) 0
______ ______ ______
Cash flows from financing activities:
Proceeds from sale of common shares 0 8,323 0
Purchase of treasury shares (711) 0 0
Purchase of common shares by RRP (118) 0 0
Dividends paid (153) (152) 0
______ ______ ______
Net cash flows from financing activities (982) 8,171 0
______ ______ ______
Net increase (decrease) in cash and cash equivalents (438) 585 0
Cash and cash equivalents:
Beginning of period 585 0 0
______ ______ ______
End of period $ 147 $ 585 $ 0
====== ====== ======
</TABLE>
60
<PAGE>
NOTE S - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted-average number of shares of dilutive
potential common shares.
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Net income $ 494
========
Weighted-average number of common 832,920
shares used in basic EPS
Effect of dilutive securities:
Stock options 3,800
ESOP 76,135
RRP 23,802
________
Weighted number of common shares and
dilutive potential common shares used
in dilutive EPS 936,657
========
</TABLE>
NOTE T - QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands,except per share data)
First Second
Quarter Quarter
_______ _______
<S> <C> <C>
Six months ended December 31, 1997:
Interest income $ 1,512 $ 1,547
Interest expense 771 764
________ ________
Net interest income 741 783
Provision for loan losses 8 15
Other income 18 17
Operating expense 384 466
Provision for income taxes 124 68
________ ________
Net income $ 243 $ 251
======== ========
Earnings per share $ 0.29 $ 0.30
Weighted-average common
shares outstanding 839,507 826,334
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
First Second Third Fourth
Quarter Quarter Quarter Quarter
_______ _______ _______ _______
<S> <C> <C> <C> <C>
Year ended June 30, 1997:
Interest income $1,219 $1,289 $1,388 $1,415
Interest expense 691 746 733 748
______ ______ ______ ______
Net interest income 528 543 655 667
Provision for loan losses 1 36 20 0
Other income 17 18 3 23
Operating expense 557 277 371 403
Provision (benefit) for income taxes (3) 55 89 71
______ ______ ______ ______
Net income $ (10) $ 193 $ 178 $ 216
====== ====== ====== ======
Earnings per share N/A $ 0.22 $ 0.20 $ 0.25
Weighted-average common
shares outstanding N/A 876,024 876,024 876,024
<CAPTION>
(Dollars in thousands)
First Second Third Fourth
Quarter Quarter Quarter Quarter
______ _______ ______ _______
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Interest income $1,069 $1,102 $1,151 $1,185
Interest expense 600 633 653 656
______ ______ ______ ______
Net interest income 469 469 498 529
Provision for loan losses 0 0 0 50
Other income 1 17 17 23
Operating expense 295 310 296 315
Provision for income taxes 57 57 70 59
______ ______ ______ ______
Net income $ 118 $ 119 $ 149 $ 128
====== ====== ====== ======
Earnings per share N/A N/A N/A N/A
Weighted-average common
shares outstanding N/A N/A N/A N/A
</TABLE>
62
<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 dated March
25, 1998, filed with the United States Securities and Exchange Commission (the
"Proxy Statement") is incorporated by reference herein.
ITEM 10. Executive Compensation
The information set forth under the caption "COMPENSATION OF DIRECTORS
AND EXECUTIVE OFFICERS" of the Definitive 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 Definitive 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
Definitive 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 (Incorporated by
reference)
10.2 Home City Financial Corporation 1997 Stock Option and
Incentive Plan (Incorporated by reference)
10.3 Home City Financial Corporation Recognition and
Retention Plan and Trust Agreement (Incorporated by
reference)
21 Subsidiaries (Incorporated by reference)
27 Financial Data 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 dated December 15 , 1997,
declaring the change in fiscal years for HCFC and Home City from June 30, to
December 31.
63
<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/ John D. Conroy /s/ P. Clark Engelmeier
____________________________ _____________________________
John D. Conroy P. Clark Engelmeier
Director Chairman of the Board
/s/ March 23, 1998 /s/ March 23, 1998
____________________________ _____________________________
Date Date
/s/ James Foreman /s/ Terry A. Hoppes
____________________________ _____________________________
James Foreman Terry A. Hoppes
Director Director
/s/ March 23, 1998 /s/ March 23, 1998
____________________________ _____________________________
Date Date
/s/ Douglas L. Ulery /s/ Charles A. Mihal
____________________________ _____________________________
Douglas L. Ulery Charles A. Mihal
Director Treasurer and Chief Financial Officer
President and Chief Executive Officer
/s/ March 23, 1998 /s/ March 23, 1998
____________________________ _____________________________
Date Date
64
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation Incorporated by reference to the
of Home City Financial Registrant's Quarterly Report
Corporation 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 Incorporated by reference to the
City Financial Corporation March 31, 1997, 10-QSB, Exhibit
3 (ii)
10.1 Employment Agreement with Incorporated by reference to the
Mr. Ulery June 30, 1997, 10-KSB, Exhibit
10.1
10.2 Home City Financial Incorporated by reference to
Corporation 1997 Stock Option the Registrant's 1997
and Incentive Plan Definitive Proxy Statement
dated September
19, 1997, Exhibit A
10.3 Home City Financial Incorporated by reference to
Corporation Recognition and the Registrant's 1997
Retention Plan Definitive Proxy Statement
and Trust Agreement dated September 19, 1997,
Exhibit B
21 Subsidiaries of Home City Incorporated by reference to
Financial Corporation the June 30, 1997, 10-KSB,
Exhibit 21
27 Financial Data Schedule
99.1 Proxy Statement Incorporated by reference to
the definitive Proxy Statement
of the Registrant for the
1998 Annual Meeting of
Shareholders of Home City
Financial Corporation, filed
with the Securities and
Exchange Commission
99.2 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
65
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31, 1997 and June 20, 1997, and the
related Consolidated Income Statements for the six months and twelve months
ended December 31, 1997 and June 30, 1997, and is 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> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 827
<INT-BEARING-DEPOSITS> 614
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,718
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 62,987
<ALLOWANCE> 452
<TOTAL-ASSETS> 71,854
<DEPOSITS> 51,689
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 449
<LONG-TERM> 3,712
0
0
<COMMON> 0
<OTHER-SE> 14,004
<TOTAL-LIABILITIES-AND-EQUITY> 71,854
<INTEREST-LOAN> 2,827
<INTEREST-INVEST> 223
<INTEREST-OTHER> 9
<INTEREST-TOTAL> 3,059
<INTEREST-DEPOSIT> 1,393
<INTEREST-EXPENSE> 1,535
<INTEREST-INCOME-NET> 1,524
<LOAN-LOSSES> 23
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 850
<INCOME-PRETAX> 686
<INCOME-PRE-EXTRAORDINARY> 494
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 4.47
<LOANS-NON> 342
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 93
<ALLOWANCE-OPEN> 445
<CHARGE-OFFS> 16
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 452
<ALLOWANCE-DOMESTIC> 452
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 152
</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 the six months ended December 31, 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.
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.
68
<PAGE>
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
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.
69
