U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT Pursuant to SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 1998
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)324-573
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. [ ]
State issuer's revenues for the most recent fiscal year. $6,906,000
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days: As of March 12, 1999,
859,390 common shares of the Registrant were outstanding. The aggregate
market value of the shares held by non-affiliates was $10,504,384 based upon
the closing sale price of $16.00 per share as quoted by The Nasdaq Stock
Market.
Documents Incorporated by Reference
The following sections of the definitive Proxy Statement for the 1999
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. Section 16(a) Beneficial Ownership Reporting Compliance
3. Compensation of Directors and Executive Officers
4. 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 shares of Home City Federal Savings Bank of
Springfield ("Home City"or the "Bank"), 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,
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"), repayments of loans and
mortgage-backed and related securities, advances from the Federal Home Loan
Bank (the "FHLB") and other short-term borrowings. 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 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 Ohio 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.
Change in Fiscal Year
In December 1997, the Boards 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 December 31,
--------------- ---------------
1998 1997
--------------- ----------------
Percent Percent
of total of total
Amount loans Amount loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family (first mortgage) $42,521 53.00% $40,409 62.48%
Multifamily 2,485 3.10 2,756 4.26
Home equity (second mortgage) 1,965 2.45 1,553 2.40
Nonresidential real estate loans 10,347 12.90 10,315 15.95
Land loans 2,002 2.49 1,866 2.89
Construction loans 4,561 5.68 3,079 4.76
------ ----- ------ ------
Total real estate loans 63,881 79.62 59,978 92.74
Commercial loans 11,122 13.86 493 0.76
Consumer loans:
Loans on deposits 115 0.15 166 0.26
Other consumer loans 5,111 6.37 4,035 .24
------ ----- ------ -----
Total consumer loans 5,226 6.52% 4,201 6.50
------ ------ ------ -------
Total loans 80,229 100.00% 64,672 100.00%
====== =======
Less:
Unearned and deferred income, net (499) (499)
Loans in process (2,258) (1,186)
Allowance for loan losses (486) (452)
------ - ------
Net loans $76,986 $62,535
======= =======
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1998, 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>
<TABLE>
<CAPTION>
Due during the Due 4-5 Due 6-10 Due 11-15 Due more than 15
year ending December 31, years after years after years after years after
----------------------- ----------- ----------- ----------- -----------
1999 2000 2001 12/31/98 12/31/98 12/31/98 12/31/98 Total
---- ---- ---- -------- -------- -------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $1,924 $ 403 $ 424 $ 340 $ 7,904 $28,252 $5,689 $44,936
Nonresidential 316 382 316 316 3,798 8,435 2,625 16,188
Consumer loans 317 251 449 1,160 808 2,241 0 5,226
Commercial loans 3,245 608 416 1,496 3,187 1,978 192 11,122
----- ------ ------ ------ ------- ------ ------ ------
Total loans $5,802 $1,644 $1,605 $3,312 $15,697 $40,906 $8,506 $77,472
====== ====== ====== ====== ======= ======= ====== =======
</TABLE>
Of the loans due more than one year after December 31, 1998, loans with
aggregate balances of $43.6 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 mortgages 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.
The aggregate amount of Home City's one- to four-family residential real
estate loans equaled approximately $42.5 million at December 31, 1998, and
represented 53.00% of loans at such date. The largest individual loan balance
on a one- to four-family loan at such date was $267,000. At such date, loans
secured by one- to four-family residential real estate with outstanding
balances of $186,000, or 0.43% 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, 1998, loans secured by multifamily properties totaled
approximately $2.5 million, or 3.10% 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,
1998, of approximately $638,000.
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 mortgages of
100%.
At December 31, 1998, home equity loans totaled approximately $2.0
million, or 2.45% 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 $125,000 at December 31, 1998.
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, 1998, 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 12.90% 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."
<PAGE>
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At December
31, 1998, Home City's nonresidential mortgage loans totaled 87.21% of Home
City's tangible capital.
Land Loans. Home City makes two varieties of land loans. Loans are made
for the acquisition of land to be developed for construction. Such loans are
usually made for relatively short periods of time, generally not more than
three years, with fixed interest rates. Loans are also made to borrowers who
purchase and hold land for various reasons, such as the future construction of
a residence. Such loans are generally originated with 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, 1998, land loans totaled approximately $2.0 million, or
2.49% of Home City's total loan portfolio. The largest land loan at December
31, 1998, had a balance of approximately $467,000. All of such loans were
secured by property located within Home City's primary market area, of which
no 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, 1998, a total of $4.6 million, or approximately 5.68% 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, 1998, all of such loans were performing in accordance with
their terms.
Commercial Loans. In fiscal year 1998, Home City implemented a
commercial loan program, which includes extending loans to finance commercial
and industrial business activities, including equipment financing, commercial
lines of credit and working capital. The loans may be secured by
nonresidential real estate or by assets of the borrower other than real
estate, such as equipment or accounts receivable. Such loans are structured on
either a fixed-rate short-term basis or on an adjustable-rate basis tied to
prime rate as reported in the Wall Street Journal. Commercial loans are
orginated with terms up to 15 years and a maximum amount up to the Bank's
legal lending limit to one borrower. The LTV may range from 50% to 90%
depending on the purpose of the loan and the assets pledged to secure the
credit. At December 31, 1998, Home City had commercial loans in the aggregate
amount of $11.1 million, or approximately 13.86% of Home City's total loans,
each of which was performing in accordance with its terms.
Unlike residential mortgage loans, which generally are granted on the
basis of the borrower's ability to repay the debt from employment and other
income and which are secured by real property, the value of which tends to be
more easily ascertainable, business loans are of higher risk and typically are
granted on the basis of the borrower's ability to repay the debt from the cash
flow of the underlying business. In addition, it is generally the practice of
Home City to request additional collateral in the form of personal
guarantees. Additional collateral may include, on occasion, a lien on the
<PAGE>
business owner's personal residence. Nonetheless, the availability of funds
for the repayment of business loans generally is dependent on the success of
the business itself.
Consumer Loans. Home City makes various types of consumer loans,
including unsecured loans and loans secured by deposits. Such loans are made
only at fixed rates of interest for terms of up to 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 OPERATION."
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, 1998, Home City had approximately $5.2 million, or 6.52%
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."
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 that 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.
<PAGE>
Loan Originations, Purchases and Sales. Home City originates a slightly
greater number of fixed-rate loans than adjustable-rate loans. See
"DESCRIPTION OF BUSINESS - Loan Maturity Schedule." Home City occasionally
participates in loans by other institutions.
The following table presents Home City's mortgage loan origination and
participation activity for the years indicated:
December 31,
1998 1997
---- ----
(Dollars in thousands)
Loans originated:
One- to four-family residential (1) $17,108 $14,850
Multifamily residential 222 100
Nonresidential 5,390 4,350
Commercial 11,676 251
Consumer 3,407 3,081
Loans Purchased 0 374
------ -------
Total loans originated 37,803 23,006
Reductions:
Principal repayments (23,318) (10,791)
Sales of loans 0 0
Decrease in other items, net (2) (34) (237)
------- -------
Net increase $14,451 $11,978
======= =======
- --------------------------------------
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and the allowance for
loan losses.
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 $1.9
million to one borrower at December 31, 1998. The largest amount Home City
had outstanding to one borrower at December 31, 1998, was $1.7 million. Such
loans were secured by commercial and agricultural use properties. All of such
loans were current at December 31, 1998.
The aggregate amount of commercial loans that Home City may have
outstanding may not exceed 20% of Home City's total assets, and any amount in
excess of 10% of its total assets must be used only for small business loans.
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
<PAGE>
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.
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>
December 31, December 31,
-------------------------------- ------------------------
1998 1997
----------------- ----------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1):
30-59 days 29 $1,635 2.11% 21 $ 567 0.90%
60-89 days 19 877 1.13 15 574 0.91
90 days and over 10 192 0.25 15 59 0.41
-- ------ ---- -- ----- ----
Total delinquent loans 58 $2,704 3.49% 51 $1,400 2.22%
== ====== ===== === ====== =====
- -----------------------------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
The following table sets forth information with respect to the nonaccrual
status of Home City's loans that are 90 days or more past due and other
non-performing assets at the dates indicated:
December 31,
----------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $186 $259 $132
Nonresidential 0 0 99
---- ---- ----
Total non-performing loans 186 259 231
Real estate owned 0 0 0
--- --- ----
Total non-performing assets $186 $259 $231
=== === ===
Total loan loss allowance $486 $452 $399
Total non-performing assets as
a percentage of total assets 0.22% 0.36% 0.34%
Loan loss allowance as a percent
of non-performing loans 261.29% 174.52% 172.73%
<PAGE>
During the fiscal year ended December 31, 1998, $16,000 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.
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:
December 31,
--------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Classified assets:
Substandard $366 $377 $497
Doubtful 0 16 0
Loss 47 77 101
--- --- ---
Total classified assets $413 $470 $598
=== === ===
Federal examiners are authorized to classify an association's assets. If
an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the OTS. Home
City had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Home City establish prudent general
allowances for loan losses for any classified as substandard or doubtful. If
an asset, or portion thereof, is classified as loss, Home City must either
establish specific allowances for losses in the amount of 100% of the portion
of the asset classified loss, or charge-off such amount.
Allowance for Loan Losses. Home City maintains an allowance for loan
losses based upon a number of relevant factors, including but not limited to,
trends in the level of non-performing assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes
in the composition of the loan portfolio.
The single largest component of Home City's loan portfolio consists of
one- to four-family residential real estate loans. Substantially all of these
loans are secured by residential real estate and required down payments of 20%
of the lower of the sales price or appraisal value of the real estate. In
addition, these loans are secured by property in Home City's lending area of a
100-mile radius from Springfield, Ohio. Home City's practice of making loans
only in their market area and requiring a 20% down payment have contributed to
a low historical charge-off history.
In addition to one- to four-family residential real estate loans, Home
City makes additional real estate loans including home equity, multifamily
residential real estate, nonresidential real estate and construction loans.
These loans are secured by property in Home City's lending area and also
require the borrower to provide a down payment. Home City also makes
<PAGE>
commercial and consumer loans. Although these types of loans are considered
to involve a higher degree of risk than loans secured by one- to four-family
residential real estate, Home City has experienced charge-offs only from
loans secured by one- to four-family residential real estate.
The allowance for loan losses is reviewed quarterly by the Board of
Directors. The review process includes a credit analysis of loans on the
"watch list," past due loans, new significant borrowings and random samples of
new loans made. The analysis of loans secured by multifamily and
nonresidential real estate and commercial loans includes a review of tax
returns and financial statements, and the review of all loans includes an
estimation of the value of the collateral. The amounts of provisions for loan
losses for the periods shown in the table below were determined based upon
such loan review, past loss experience, anticipated growth and prevailing
economic conditions. While the Board of Directors believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected, if circumstances differ
substantially from the assumptions used in making the final determination.
The following table sets forth an analysis of Home City's allowance for
loan losses for the periods indicated:
(Dollars in thousands)
1998 1997
---- ----
Balance at beginning of year $ 452 $ 400
Charge-offs (39) (39)
Recoveries 12 48
Provision for loan losses (charged to operations) 61 43
--- ---
Balance at end of year $ 486 $ 452
=== ===
Ratio of net charge-offs (recoveries) to average net
loans outstanding during the year 0.04% (0.02%)
Ratio of allowance for loan losses to total loans 0.63% 0.72%
For the fiscal year ended December 31, 1998, $45,000 of the allowance for
loan losses was allocated to loans secured by nonresidential real estate,
$210,000 was allocated to loans secured by one- to four-family real estate,
$91,000 was allocated to consumer loans, and $59,000 was allocated to
commercial loans. 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.
Mortgage-Backed and Related Securities
Home City maintains a portfolio of mortgage-backed securities in the form
of Government National Mortgage Association ("GNMA") participation
certificates. Mortgage-backed securities generally entitle Home City to
receive a portion of the cash flows from an identified pool of mortgages.
GNMA securities are backed by Federal Housing Authority-insured and Veterans
Administration-guaranteed loans, and are generally considered among the
highest quality investments with minimal credit risk. The timely payment of
principal and interest on these securities is guaranteed by the GNMA and
backed by the full faith and credit of the U.S. Government.
<PAGE>
The following tables set forth the composition of Home City's
mortgage-backed securities at the dates indicated:
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
(Dollars in thousands)
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
GNMA certificates $558 $559 $703 $700
---- ---- ---- ----
Total mortgage-baced
and related securities $558 $559 $703 $700
==== ==== ==== ====
</TABLE>
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, 1998.
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, 1998
---------------------------------------------------------------------------------------------------------------
One year or less After one to After five to After ten years Total mortgage-backed
five years 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 $ 0 00% $ 0 00% $ 559 6.79% $ 0 00% $ 559 $ 559 6.79%
--- --- ----- --- ----- ----- ----- --- ----- ----- -----
Total $ 0 00% $ 0 00% $ 559 6.79% $ 0 00% $ 559 $ 559 6.79%
=== === ===== === ===== ===== ==== === ===== ===== =====
For additional information, see Note C of the Notes to Consolidated Financial
Statements.
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 OPERATION."
The following table sets forth information concerning Home City's
investments at the dates indicated:
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------------- -------------------------------------
Carrying % oftotal Market % of Carrying % of Market % of
value total value total value total value total
----- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Interest-bearing demand
deposits in other
financial institutions $763 17.04% $763 17.05% $591 10.31% $591 10.32%
Federal funds sold 0 0 0 0 100 1.74 100 1.75
Time deposits in other
financial institutions 24 0.54 21 0.47 23 0.40 18 0.31
Investment securities:
U.S. government and
federal agencies 1,501 33.51 1,501 33.53 3,098 54.05 3,098 54.09
Municipal securities (1) 779 17.39 779 17.40 930 16.22 930 16.24
Equity securities:
FHLMC stock 779 17.39 779 17.40 503 8.78 503 8.78
Service corporation (2) 28 0.62 28 0.63 29 0.51 29 0.51
Joint venture (3) 4 0.09 4 0.09 20 0.35 20 0.35
FHLB stock 601 13.42 601 13.43 438 7.64 438 7.65
------ ------ ------ ------ ------ ------ ----- ------
Total investments $4,479 100.00% $4,476 100.00% $5,732 100.00% $5,727 100.00%
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
(1) Bonds issued by local school districts.
(2) 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.
(3) Home City has a 50% ownership interest in a joint venture that is
primarily involved in the development of low income housing.
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Home City's investment securities
at December 31, 1998:
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------
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)
<C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
agency securities $ 499 4.86% $1,002 5.75% $ -- --
Municipal securities 510 4.32 136 5.15 133 5.22%
Equity securities: (1)
FHLMC stock -- -- -- -- 779 0.74
Service corporation -- -- -- -- 28 --
Joint venture -- -- -- -- 4 --
------- ----- ------- ----- ---- -----
Total investments $ 1,009 4.59% $ 1,138 5.68% $ 944 1.34%
======= ===== ======= ==== ===== =====
- ----------------------------
</TABLE>
(1) By their nature, equity securities have no maturity date.
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------
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 1.44 $ 1,501 $ 1,501 5.46%
Municipal securities 2.36 779 779 4.62%
Equity securities (1) 811 811 0.71%
------ ------
Total $ 3,091 $ 3,091
======= =======
- -------------------------
</TABLE>
(1) By their nature, equity securities have no maturity date.
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 OPERATION." 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
utilizes brokers to attract deposits on a limited basis. Brokered deposits
approximated $1.5 million at December 31, 1998.
At December 31, 1998, Home City's certificates of deposit totaled $46.4
million, or 76.65% of total deposits. Of such amount, approximately $21.2
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 and commercial banks as
alternatives to this source of funds.
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Home City at the dates indicated:
At December 31,
----------------------------------------------
1998 1997
------------------ -----------------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
Transaction accounts:
Demand $ 1,605 2.65% $ 763 1.48%
NOW accounts (1) 1,439 2.38 774 1.50
Passbook savings accounts (2) 11,084 18.32 7,863 15.21
------ ----- ----- -----
Total transaction accounts 14,128 23.35 9,400 18.19
Certificates of deposit:
4.01 - 6.00% 22,157 36.62 14,742 28.52
6.01 - 8.00% 24,214 40.03 27,547 53.29
------ ----- ------ -----
Total certificates of deposit 46,371 76.65 42,289 81.81
------- ------ ------ -----
Total deposits (3) $60,499 100.00% $51,689 100.00%
======= ======= ======= ======
(1) Home City's weighted-average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At December 31,
1998 and 1997, the weighted-average rates on NOW accounts were 2.08%
and 1.79%, respectively.
(2) Home City's weighted-average rate on passbook savings accounts fluctuates
with the general movement of interest rates. The weighted-average
interest rate on passbook accounts was 2.79% and 2.37% at December 31,
1998 and 1997, respectively.
(3) IRAs are included in the various certificates of deposit balances. IRAs
totaled $6.6 million and $6.4 million as of December 31, 1998 and 1997,
respectively.
The following table shows rate and maturity information for Home City's
certificates of deposit as of December 31, 1998:
<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% $13,743 $ 5,852 $1,735 $ 827 $22,157
6.01 - 8.00% 7,420 15,685 624 485 24,214
------- ------ ------ ------- -------
Total certificates of deposit $21,163 $21,537 $2,359 $1,312 $46,371
======= ======= ====== ====== =======
</TABLE>
<PAGE>
The following table presents the amount of Home City's certificates of
deposit of $100,000 or more by the time remaining until maturity as of
December 31, 1998:
Maturity Amount
-------- ------
(Dollars in thousands)
Three months or less $1,519
Over 3 months to 6 months 1,161
Over 6 months to 12 months 1,724
Over 12 months 4,595
-----
Total $8,999
======
The following table sets forth Home City's deposit account balance
activity for the years indicated:
Year ended December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
Beginning balance $51,689 $49,559
Deposits 76,525 39,199
Withdrawals (70,664) (39,812)
-------- --------
Net increase (decrease) before
interest credited 5,861 (613)
Interest credited 2,949 2,743
------- -------
Ending balance $60,499 $51,689
======= =======
Net increase $ 8,810 $ 2,130
Percentage increase 17.04% 4.30%
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 -
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, 1998, Home City was in compliance with the QTL Test.
<PAGE>
Home City obtained advances from the FHLB of Cincinnati, as set forth in
the following table:
Years ended December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
Average balance outstanding $8,316 $4,265
Maximum amount outstanding at any month end
during the year $11,571 $5,712
Balance outstanding at end of year $11,571 $5,712
Weighted-average interest rate during the year 5.85% 6.41%
Weighted-average interest rate at end of year 5.48% 6.24%
The maximum amount of FHLB advances Home City was able to receive at
December 31, 1998, was $12.0 million.
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, 1998, the aggregate value of
the Intrieve stock and the joint venture investment equaled approximately
$32,000.
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, 1998, Home City had approximately 4.48% 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, 1998, Home City had twenty-one full-time employees and
two part-time employees. Home City believes that relations with its employees
are good. Home City offers health and life insurance benefits. None of the
employees of Home City 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. The OTS is
an office in the Department of the Treasury and is responsible for the
regulation and supervision of all savings associations the deposits of which
are insured by the FDIC in the SAIF and all federally-chartered savings
institutions. The OTS issues regulations governing the operation of savings
associations, regularly examines such institutions and imposes assessments on
savings associations based on their asset size to cover the costs of this
supervision and examination. It also promulgates regulations that prescribe
the permissible investments and activities of federally-chartered savings
associations, including the type of lending that such associations may engage
in and the investments in real estate, subsidiaries and securities they may
make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws
or regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
<PAGE>
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 "Deposit Insurance."
Congress is considering proposed legislation that may subject Home City to
additional regulation, examination and oversight and may subject HCFC to more
restrictive holding company requirements, including greater activity and
capital requirements than currently imposed on it.
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.
Effective April 1, 1999, the core capital requirement will be at least
four percent of adjusted total assets for any savings association that does
not have the highest composite examination rating from the OTS and may be
higher if warranted for a particular association. Home City's core capital
ratio at December 31, 1998, was 13.91%. For information concerning Home
City's capital, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - Liquidity and Capital Resources."
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, 1998, met the standards
for the highest level, a " well-capitalized association".
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. See "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS."
<PAGE>
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. Under 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, 1998, Home City had QTIs equal to approximately 69.5% of its
total portfolio assets.
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, 1998.
Savings associations must also 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
limit the extent to which the savings institution or its subsidiaries may
engage in specified transactions with affiliates and 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. Home
City was in compliance with these requirements and restrictions at December
31, 1998.
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").
HCFC is a unitary savings and loan holding company, (i.e., it owns only
one savings association). 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 that may engage in
commercial, securities and insurance activities without limitation. Congress
is considering, however, 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. 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, 1998,
Home City met the QTL Test. See "Qualified Thrift Lender Test."
<PAGE>
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.
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.
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.
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. 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.
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 $46.5 million (subject to an exemption of up to $4.9 million), and to
maintain reserves of 10% of deposits in net transaction accounts against that
portion of total transaction accounts in excess of $46.5 million. These
percentages are subject to adjustment by the FRB. At December 31, 1998, 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 $601,000 at December 31, 1998.
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, 1998, Home
City's maximum limit on advances was approximately $12.0 million and Home
City's advances totaled $11.6 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.
<PAGE>
Taxation
Federal Taxation. HCFC and Home City each are 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. The Taxpayer Relief
Act of 1997 repealed the alternative minimum tax for certain "small
corporations" for tax years beginning after December 31, 1997. A corporation
initially qualifies as a small corporation if it had average gross receipts of
$5 million or less for the three tax years ending with its first tax year
beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7.5 million. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration. HCFC and Home City have both qualified as small
corporations. Both corporations' average gross receipts were less than $7.5
million for the year ending December 31, 1998.
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
<PAGE>
thrift institution that becomes a small bank, like Home City, the amount of
the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and
its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year,
the recapture of the applicable excess reserves otherwise required to be taken
into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax
year, the principal amount of residential loans made by the thrift during the
year is not less then its base amount. The "base amount" generally is the
average of the principal amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996. A
residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of
the property to acquire, construct or improve the property.
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, 1998, Home City's pre-1988 reserves for tax
purposes totaled approximately $1.1 million. Home City believes it had
approximately $5.4 million of accumulated earnings and profits for tax
purposes as of December 31, 1998, 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 1994. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Home City.
Ohio Taxation. HCFC is subject to the Ohio corporation franchise tax,
which, as applied to HCFC, is a tax measured on either net earnings or net
worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed taxable income in excess of
$50,000 or (ii) 0.04% 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.
Due to legislative changes enacted July 1, 1997, HCFC may elect to be a
"qualifying holding company" and as such be exempt from the net worth tax. To
be exempt it must satisfy all the requirements of the enacted law which
includes related member adjustments that could affect the taxable net worth of
HCFC's subsidiary Home City.
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 1.4% of Home City's book
net worth determined in accordance with GAAP, less statutory deductions. This
rate is scheduled to decrease in the year 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.
<PAGE>
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.
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
<PAGE>
the rate of inflation. While interest rates are greatly influenced by changes
in the rate of inflation, they do not change at the same rate or in the same
magnitude as the rate of inflation. Rather, interest rate volatility is based
on changes in the expected rate of inflation, as well as changes in monetary
and fiscal policies.
ITEM 2. Properties
Home City's only office for serving customers is located at 63 West Main
Street, Springfield, Ohio 45502. The 5,839 square foot building is owned by
Home City. Home City also leases administrative office space across the
street. HCFC operates out of Home City's offices.
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.
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
There were 859,390 common shares of HCFC outstanding on December 31,
1998, held of record by approximately 363 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 $0.09 per share on each of February 23, 1998, May
27, 1998, and July 27, 1998, as well as $0.10 per share on October 26,1998.
On April 22, 1998, the Board of Directors of HCFC declared a special cash
distribution in the amount of $3.50 per share.
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1998 September 30,1998 December 31,1998
-------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
High $19.250 $23.000 $15.500 $15.000
Low $18.250 $14.750 $11.000 $11.500
Dividend
Declared $0.09 $0.09 $0.09 $0.10
Capital
Distribution $3.50
March 31, 1997 June 30, 1997 September 30,1997 December 31,1997
-------------- ------------- ----------------- ----------------
High $14.250 $14.438 $16.250 $18.500
Low $12.000 $12.750 $14.188 $15.250
Dividend
Declared $0.08 $0.08 $0.08 $0.09
</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 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.
<PAGE>
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 shares 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 both corporations 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. Audited consolidated financial
statements for the years ended December 31, 1998 and 1997, 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, the following
statements in the referenced sections of this discussion and analysis may be
deemed 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" and "Comparison of
Results of Operations for the Fiscal Years Ended December 31, 1998 and
1997;"
2. 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 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 $85.4 million at
December 31, 1998, an increase of $13.5 million, or 18.79%, over the $71.9
million in total assets at December 31, 1997. Such increase in assets was
funded primarily by the $8.8 million net increase in deposits, $5.9 million
net increase in advances from the Federal Home Loan Bank (the "FHLB"), $1.8
million increase in short-term borrowing, and undistributed net earnings of
$621,000.
Cash and cash equivalents, time deposits and investment securities
totaled $5.0 million at December 31, 1998, a decrease of $1.1 million, or
17.91%, from December 31, 1997. During the year ended December 31, 1998,
$2.2 million of investment securities matured, which consisted primarily of
United States Government agency obligations totaling $2.0 million, and
tax-free securities totaling $218,000. The proceeds were used primarily to
fund the increased demand for loans and the repurchase of common shares.
Mortgage-backed securities totaled $559,000 at December 31, 1998, a
decrease of $141,000 from December 31, 1997. Due to the composition of the
mortgage-backed securities portfolio coupled with the current loan demand, no
additional purchases were made.
<PAGE>
Loans receivable totaled $77.5 million at December 31, 1998, an increase
of $14.5 million, or 23.00%, from the $63.0 million total at December 31,
1997. During the year ended December 31, 1998, loan disbursements amounted to
$37.8 million. Such disbursements were partially offset by principal
repayments of $23.3 million.
Home City's allowance for loan losses totaled $486,000 at December 31,
1998, which represented 0.63% of total loans and 261.29% of non-performing
loans. At December 31, 1997, the allowance for loan losses totaled $452,000,
which represented 0.72% of total loans and 174.52% of non-performing loans.
Non-performing loans were $186,000 and $259,000 at December 31, 1998 and
1997, respectively, and represented 0.22% and 0.36% of total assets at each
date. The decrease at December 31, 1998, was due primarily to $266,000 in
loans that were paid off, $4,000 in principal reductions, $634,000 in loans
that became classified as non-performing, and $438,000 in loans that became
classified as performing, for a net reduction of $74,000. All loans
classified as non-performing at December 31, 1998, 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, 1998,
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 $60.5 million at December 31, 1998, an increase of $8.8
million, or 17.04%, from $51.7 million at December 31, 1997. The increase is
consistent with the deposit growth trends that the Company has been
experiencing over the past several years. 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 $5.7 million at December 31, 1997, to $11.6 million at December
31, 1998, an increase of 102.57%, as advances were used to fund loan
originations. Short-term commercial lines of credit were utilized temporarily
to fund the 1998 stock repurchase.
Comparison of Results of Operations for the Fiscal Years Ended December 31,
1998 and 1997.
General. Net income for the year ended December 31, 1998, was $951,000,
an increase of $63,000, or 7.09%, over the $888,000 in net income recorded in
1997. The increase in net income resulted primarily from a $476,000 increase
in net interest income and a $9,000 increase in noninterest income, which was
partially offset by a $309,000 increase in noninterest expense and an increase
in the provision for federal income taxes of $95,000.
Net Interest Income. Net interest income totaled $3.3 million for the
year ended December 31, 1998, an increase of $476,000, or 16.73%, over the
$2.8 million recorded in 1997. Interest income on loans increased by $1.3
million, or 23.80%, during 1998 due primarily to an increase in the average
balance of the loans outstanding of $13.9 million, or 24.31%, being partially
offset by a 4 basis point (100 basis points equals one percent) decrease in
yield from 9.25% in 1997 to 9.21% in 1998. Interest income on mortgage-backed
securities decreased by $24,000, or 40.00%, due primarily to a $292,000, or
32.02%, decrease in the average balance of mortgage-backed securities
outstanding, coupled with a decrease in the weighted-average yield
year-to-year, from 6.55% in fiscal 1997 to 5.85% in 1998. Interest income on
investment securities decreased by $184,000, or 49.33%, for the year ended
December 31, 1998, compared to fiscal 1997, as the average balance decreased
by $3.0 million year to year and the related yield decreased by 21 basis
points to 5.61% in 1998. Interest income on interest-bearing deposits and
federal funds sold decreased by $84,000 and $22,000, respectively, for the
year ended December 31, 1998, compared to 1997. The average balance of
interest-bearing deposits decreased $1.6 million, or 74.36%. The average
balance invested in federal funds sold decreased by $419,000, or 86.39%,
compared to 1997. The yield on interest-bearing deposits decreased 53 basis
points to 4.46%, while the yield on federal funds sold decreased 3 basis
points to 5.22%.
Interest expense on deposits increased by $205,000, or 7.47%, during
1998, due primarily to an increase in the average balance of deposits
outstanding of $5.2 million, or 10.38%, coupled with a decrease in the
weighted-average rate from 5.52% in 1997 to 5.38% in 1998. Interest expense
on FHLB advances and short-term borrowings increased by $265,000, or 97.07%,
primarily due to an increase in the average balance outstanding of $4.8
million, or 111.93%, coupled with a decrease in weighted-average rate from
6.41% in 1997 to 5.95% in 1998.
As a result of the foregoing changes in interest income and interest
expense the interest rate spread increased by 39 basis points, to 3.52% for
1998, as compared to 3.13% for 1997, while the net interest margin increased
by 15 basis points to 4.38% for the year ended December 31, 1998.
Provision for Loan Losses. Home City maintains an allowance for loan
losses in an amount that, in management's judgment, is adequate to absorb
<PAGE>
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 that is considered adequate to absorb losses inherent
in the loan portfolio in accordance with generally accepted accounting
principles ("GAAP"). The amount of the provision is based on management's
regular review of the loan portfolio and consideration of such factors as
historical loss experience, 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, 1998. 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 $27,000 during the year ended December
31, 1998, and net recoveries of $9,000 during the year ended December 31,
1997. 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 86% of Home City's loan
portfolio, and loans secured by first mortgages on one- to four-family
residential real estate made up 53% of total loans at December 31,1998. Such
loans typically present less risk to a lender than loans 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 $61,000 and
$43,000 for the years ended December 31, 1998 and 1997, respectively. The
ratio of non-performing loans to total loans decreased to 0.21% in 1998 from
0.32% in 1997. At December 31, 1998 and 1997, Home City had a ratio of
allowance for loan losses to total loans of 0.63% and 0.72%, respectively, and
ratios of allowance for loan losses to non-performing loans of 296.34% and
226.00%. Due to such ratios of non-performing loans to total loans,
historical charge-offs, delinquency history, and the addition of commercial
and consumer installment lending, the provisions of $61,000 and $43,000 made
in 1998 and 1997 were deemed appropriate by management to absorb reasonably
foreseeable loan losses.
Noninterest Income. Noninterest income totaled $98,000 for the year
ended December 31, 1998, an increase of $9,000, or 10.11%, from the $89,000
recorded in 1997. The increase resulted primarily from increases of $11,000 in
income from life insurance policies, an increase of $3,000 in service charges
on deposit accounts, a $20,000 decrease in net losses recognized on the sale
of securities, and a decrease of $25,000 in other miscellaneous fee income.
Noninterest Expense. Noninterest expense increased by $309,000, or
18.70%, to a total of $2.0 million for the year ended December 31, 1998, as
compared to 1997. Salaries and employee benefit expenses increased $192,000,
or 22.35%, primarily as a result of additional staffing and the adoption of
employee benefit programs, $29,000, or 26.36%, in occupancy and equipment
expense, and $56,000, or 42.42%, in other operating 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, the Home City Financial Corporation Recognition and Retention Plan, and
normal merit increases for existing employees. The increase in the remaining
items of noninterest expense was due primarily to additional taxes, data
processing and other expenses related to the reporting requirements of a
public company.
Federal Income Taxes. The provision for federal income taxes totaled
$447,000 for the year ended December 31, 1998, an increase of $95,000, or
26.99%, from the $352,000 provision recorded in fiscal 1997. HCFC's effective
tax rate increased to 31.97% in 1998 from 28.39% in 1997 which was primarily
the result of tax-exempt income from investments and deferred loan costs.
<PAGE>
Yields Earned and Rates Paid
The following table presents certain information relating to HCFC's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of customer deposits and FHLB
advances for the periods indicated. Such yields and costs are derived by
dividing annual income or expense by the average monthly balance of
interest-earning assets or customer deposits and FHLB advances, respectively,
for the years presented. Average balances are derived from daily balances,
which included nonaccruing loans in the loan portfolio, net of the allowance
for loan losses.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
-------------------------------- ------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Interest-bearing demand deposits $ 537 $ 24 4.51% $ 840 $ 40 4.71%
Federal funds sold 66 3 5.22 485 25 5.25
Time deposits 23 1 1.25 1,344 69 5.17
Investment securities (1) 3,372 189 5.61 6,420 373 5.82
Mortgage-backed and related securities 620 36 5.85 912 60 6.55
Loans receivable (2) 71,172 6,555 9.21 57,253 5,295 9.25
Total interest-earning assets (3) 75,790 6,808 8.98 67,254 5,862 8.72
Noninterest-earning assets:
Less: Allowance for loan losses (460) (444)
Other non-earning assets 3,792 2,638
------ ------
Total assets $79,122 $69,448
====== ======
Interest-bearing liabilities:
NOW accounts $ 704 $ 15 2.08% $ 349 $ 6 1.79%
Money market accounts 291 9 3.08 330 11 3.43
Passbook accounts 9,223 257 2.79 7,840 186 2.37
Certificates of deposit 44,628 2,667 5.98 41,170 2,540 6.17
------ ----- ------- ------
Total deposits 54,846 2,948 5.38 49,689 2,743 5.52
Notes payable 723 51 7.02 0 0 0
FHLB advances 8,316 487 5.85 4,265 273 6.41
------ ---- ------- ------
Total interest-bearing liabilities 63,885 3,486 5.46% 53,954 3,016 5.59%
Noninterest-bearing liabilities 3,181 1,363
------ -------
Total liabilities 67,066 55,317
Total shareholders' equity 12,056 14,131
------ -------
Total liabilities and shareholders'
equity $79,122 $69,448
====== =======
Net interest income; net interest rate spread $3,322 3.52% $ 2,846 3.13%
===== ======
Net interest margin (4) 4.38% 4.23%
==== ====
Average interest-earning assets to interest-bearing liabilities 118.63% 124.65%
====== ======
</TABLE>
(1) Includes $40,000 and $38,000 of nontaxable municipal income recorded in
1998 and 1997, respectively. The tax-equivalent yield on investments is
6.22% and 6.13% for 1998 and 1997, respectively.
(2) Calculated net of deferred loan fees, loan discounts, loans in process
and allowance for loan losses.
(3) Tax-equivalent yield on interest-earning assets is 9.01% and 8.75% for
1998 and 1997, respectively.
(4) Net interest income as a percent of average interest-earning assets.
<PAGE>
The table below describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected HCFC's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in
rate and volume. The combined effects of changes in both volume and rate,
which cannot be separately identified, have been allocated proportionately to
the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 vs. 1997 1997 vs. 1996
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 $ (14) $ (2) $ (16) $ 8 $ (1) $ 7
Federal funds sold (22) 0 (22) (17) 1 (16)
Time deposits (67) (1) (68) 11 0 11
Investment securities (177) (7) (184) 232 25 257
Mortgage-backed and related securities (19) (5) (24) (143) (2) (145)
Loans receivable 1,285 (25) 1,260 977 (72) 905
------ ---- ----- ----- --- -----
Total interest income 986 (40) 946 1,068 (49) 1,019
Interest expenses attributable
to:
NOW accounts 6 3 9 2 0 2
Money market accounts (1) (1) (2) 8 0 8
Passbook savings accounts 33 38 71 (44) (10) (54)
Certificates of deposit 212 (85) 127 227 (4) 223
Notes payable 51 0 51 0 0 0
FHLB advances 256 (42) 214 100 (9) 91
--- --- --- --- --- ---
Total interest expense 557 (87) 470 293 (23) 270
--- --- --- --- --- ---
Increase (decrease) in net interest income $ 429 $ 47 $476 $ 775 $ (26) $ 749
=== === === === ==== ===
</TABLE>
Asset and Liability Management
Home City, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than
its interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Home City uses the net portfolio value ("NPV") methodology
recently adopted by the OTS as part of its capital regulations. Although Home
City is not currently subject to the NPV regulation because such regulation
does not apply to institutions with less than $300 million in assets and
risk-based capital in excess of 12%, the application of the NPV methodology
may illustrate Home City's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash
flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
that would result from a theoretical 200 basis point (100 basis points equal
one percent) change in market interest rates. Both a 200 basis point increase
in market interest rates and a 200 basis point decrease in market interest
rates are considered. If the NPV would decrease more than 2% of the economic
value of the institution's assets with either an increase or 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, 1998, 2% of the economic value of Home City's assets was
approximately $1.7 million. Because the interest rate risk of a 200 basis
point increase in market rates was a $923,000 decrease in NPV at December 31,
1998, Home City would not have been required to deduct from its capital in
determining whether Home City met its risk-based capital requirement.
<PAGE>
Presented below, as of December 31, 1998, 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 slightly 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.
At December 31, 1998
--------------------
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
- ----------------------- ----------- -------- --------
(Dollars in thousands)
+400 (60)% $(2,488) (16)%
+300 (45) (1,654) (11)
+200 (25) (923) (6)
+100 (10) (359) (2)
0 0 0 0
-100 (10) 442 3
-200 (25) 954 6
-300 (45) 1,519 10
-400 (60) 1,930 12
The NPV table indicates that at each 100 basis point increment, the
change in Home City's NPV that would have been caused by an increase in
interest rates was within the policy limits set by the Board of Directors.
The Board of Directors considers the results of each quarterly analysis and
factors the information into its decisions in adjusting the pricing of loans
and deposits in the future.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a change in interest rates,
expected rates of prepayment on loans and mortgage-backed securities and early
withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
If interest rates continue to rise from the recent levels, Home City's
net interest income will be negatively affected. Moreover, rising interest
rates may negatively affect Home City's earnings due to diminished loan
demand.
<PAGE>
Liquidity and Capital Resources
Home City's liquidity, primarily represented by cash and cash
equivalents, is a result of its operating, investing and financing
activities. These activities are summarized below for the years presented:
Year ended December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
Net income $951 $888
Adjustments to reconcile net income to net cash
from operating activities 299 15
------- -------
Net cash provided by operating activities 1,250 903
Net cash used in investing activities (12,871) (11,832)
Net cash provided by financing activities 12,013 2,608
------- -------
Net change in cash and cash equivalents 392 (8,321)
Cash and cash equivalents at beginning of year 1,518 9,839
------- -------
Cash and cash equivalents at end of year $ 1,910 $ 1,518
======= =======
<PAGE>
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 borrows 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 investment 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, 1998, Home
City's regulatory liquidity ratio was 5.29%. At such date, Home City had
commitments to originate loans totaling $9.5 million and no commitments to
purchase or sell loans. Home City considers its liquidity and capital
reserves sufficient to meet its outstanding short- and long-term needs.
Adjustments to liquidity and capital reserves may be necessary, however, if
loan demand increases more than expected or if deposits decrease
substantially. See Note Q 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, 1998 and 1997.
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
<PAGE>
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 $486,000 at December 31, 1998.
The following table summarizes Home City's regulatory capital requirements
and actual capital (see Note P of the Notes to Consolidated Financial
Statements for a reconciliation of capital under GAAP and regulatory capital
amounts) at December 31, 1998:
<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 $11,864 13.91% $1,279 1.50% $10,585 12.41% $85,292
Core capital 11,864 13.91 2,559 3.00 9,305 10.91 85,292
Risk-based capital 12,350 21.93 4,504 8.00 7,846 13.93 56,305
</TABLE>
At December 31, 1998, Home City had no material commitments for capital
expenditures.
<PAGE>
Impact of Pending Legislation
For several years, Congress has been considering various changes to
the bank and savings association charters, the activities in which banks and
savings associations and their holding companies and subsidiaries may engage
and the authority of various regulatory authorities over the financial
institutions and their holding companies and subsidiaries. HCFC cannot
predict at this time whether and when Congress will actually adopt such
"financial modernization legislation" or in what form it will be adopted.
It is expected, however, that the range of activities in which banks and their
afilliated companies may engage will be expanded, and it is possible that
the range of activities in which HCFC and Home City may engage will be
restricted. It is not anticipated that the current activities of HCFC or
Home City will be materially affected by any such legislation.
Legislation to recapitalize the SAIF, which was enacted in 1996,
provided that the SAIF and the Bank Insurance Fund (the "BIF") would be
merged if the federal savings association charter was eliminated. Although
the elimination of the federal savings association charter has not occured
and is not now expected in the near future, Congress is still discussing the
merger of the SAIF and the BIF. Although the merger could be expected to
change the deposit insurance premiums paid by Home City, the effect on
Home City and HCFC cannot be predicted at this time.
Year 2000 Readiness
As for all financial institutions, the Bank's operations rely extensively
on computer systems. The Bank has been addressing the possibility that some
computer systems might not recognize the Year 2000 ("Y2K") correctly. In
1997 the Board of Directors appointed a Year 2000 Committee to assess the
issue and develop and implement plans for preventing any potential problems.
The Year 2000 Committee reports to the Board on its progress monthly.
The Committee developed an Action Plan Year 2000, which was presented to and
approved by the Board in 1997, subsequently updated and approved in December
1998.
The Bank relies primarily on third-party vendors for its computer output
and processing, as well as other significant functions and services, such
as those related to securities and wire transfers. The Year 2000 Committee
is working with these vendors to assess their Y2K readiness. Based upon this
ongoing assessment, the Board of Directors believes that with planned
modifications to existing software and hardware and planed conversations to
new software and hardware, the third-party vendors are taking the approrpriate
steps to ensure that critical systems will function properly. The Bank's
<PAGE>
most important third-party vendors have reported near completion of Y2K
readiness both internally and in their interface with the Bank. Any other
planned modifications and conversions are scheduled to be completed and
tested by June 30, 1999.
All of the Bank's personal computers ("PC's) and related software
have been inventoried and tested for Y2K capabilities. Those PC's identified
as not being Y2K compatible have been replaced at a cost for the new
hardware and software of approximately $38,000. All other Y2K preparedness
costs are not expected to be material. The Bank has not identified any
significant Y2K problems with the Bank's equipment or systems other than those
that are information technology related.
If the modifications and conversions by both third-party vendors and
the Bank are not completed on a timely basis or if they fail to function
properly, the operations and financial condition of the Bank could be
materially adversely affected. The Bank is developing a remediation
contingency plan for continued operations in the event of any such
systems failures.
In addition, financial institutions may experience increases in
problem loans and credit losses in the event that borrowers fail to
prepare properly for Y2K, and higher funding costs could result if
consumers react to publicity about the issue by withdrawing deposits.
The Bank is assessing such risks among its customers and developing
a proactive approach to create customer awareness as to the Bank's
Y2K preparedness. The Bank could also be materially adversely affected
if other third parties, such as governmental agencies, clearing-houses,
telephone companies, utilities and other service providers fail to
prepare properly. The Bank is therefore attempting to assess these
risks and develop a business resumption contingency plan to accomodate
any problems of this nature.
The Bank expects to continue reviewing, enhancing and validating
both the plan for remediation and the plan for business resumption
throughout 1999 with the goal of June 30, 1999, for completion of all
major aspectsof those plans. The Bank's Y2K preparedness has been
periodically reviewed by the Office of Thrift Supervision, its primary
regulator, and has also been reviewed by the Bank's external auditors
in an engagement specifically related to Y2K compliance issues.
Any forward-looking statements made in the foregoing Y2K
discussion speak only as of the date of this document and express the
expectations of the Bank at this time. Any forward-looking statements
are subject to risks and uncertainties, and the preparedness of the
Bank and its vendors is subject to change due to unanticipated events,
such as the unexpected inability of the Bank's vendors to implement
their plans.
The discussion constitutes a Year 2000 Readiness Disclosure within
the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
<PAGE>
ITEM 7. Financial Statements
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Home City Financial Corporation
Springfield, Ohio
We have audited the consolidated balance sheets of Home City Financial
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash
flows for the years then ended. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Robb, Dixon,
Francis, Davis, Oneson
& Company
Granville, Ohio
February 8, 1999
<PAGE>
Home City Financial Corporation - Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 1,147 $ 827
Interest-bearing demand deposits in other banks 763 591
Federal funds sold 0 100
----- -----
Total cash and cash equivalents 1,910 1,518
Time deposits with original maturities of 90 days or more 24 23
Investment securities available-for-sale, at fair value 3,091 4,580
Mortgage-backed securities available-for-sale, at fair value 559 700
Loans, net 76,986 62,535
Stock in Federal Home Loan Bank 601 438
Accrued interest receivable 440 409
Properties and equipment 584 493
Cash surrender value of life insurance 1,129 1,085
Other assets 31 73
----- -----
TOTAL ASSETS $85,355 $71,854
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $60,499 $51,689
Federal Home Loan Bank Advances 11,571 5,712
Notes payable 1,800 0
Accrued interest payable 115 79
Advance payments by borrowers for taxes and insurance 74 71
Deferred income taxes 112 68
Other liabilities 314 231
------ ------
TOTAL LIABILITIES 74,485 57,850
Shareholders' equity
Preferred shares, no par value; 1,000,000 shares
authorized; none issued 0 0
Common shares, no par value; 5,000,000 shares
authorized; 952,200 shares issued 0 0
Additional paid-in capital 6,013 9,150
Retained earnings, substantially restricted 6,658 6,037
Treasury shares, at cost (1,304) (711)
Accumulated other comprehensive income 517 332
Common shares purchased by:
Employee Stock Ownership Plan (609) (686)
Recognition and Retention Plan (405) (118)
------ ------
TOTAL SHAREHOLDERS' EQUITY 10,870 14,004
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $85,355 $71,854
====== ======
</TABLE>
- ------------------------
See accompanying notes.
Home City Financial Corporation - Consolidated Statements of Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans $ 6,555 $ 5,295
Mortgage-backed securities 36 60
Investment securities 189 373
Interest-bearing deposits and federal funds sold 28 134
----- -----
TOTAL INTEREST INCOME 6,808 5,862
INTEREST EXPENSE
Deposits 2,948 2,743
Borrowed funds 538 273
------ ------
TOTAL INTEREST EXPENSE 3,486 3,016
------ ------
NET INTEREST INCOME 3,322 2,846
Provision for loan losses 61 43
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,261 2,803
NON INTEREST INCOME
Service charges on deposits 10 7
Life insurance 67 56
Gain (loss) on sale of securities, net 2 (18)
Other income 19 44
------ ------
TOTAL NONINTEREST INCOME 98 89
NONINTEREST EXPENSE
Salaries and employee benefits 1,051 859
Supplies, telephone and postage 51 45
Occupancy and equipment 139 110
FDIC deposit insurance 34 32
Data processing 98 80
Legal, accounting and examination 219 220
Franchise taxes 181 174
Other expense 188 132
------ ------
TOTAL NONINTEREST EXPENSE 1,961 1,652
------ ------
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 1,398 1,240
Federal income tax expense 447 352
------ ------
NET INCOME $ 951 $ 888
====== ======
Earnings per common share - basic
$1.17 $1.06
Earnings per common share - diluted $1.04 $0.97
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------------
Common Common
shares shares
Common Common purchased purchased
shares shares by ESOP by RRP
------ ------ ------- ------
<S> <C> <C> <C> <C>
December 31, 1996 952,200 0 (76,176) 0
Net income
Other comprehensive income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $59
Comprehensive income
Purchase of treasury shares (47,610)
Shares allocated under
Employee Stock
Ownership Plan 7,618
Purchse of common shares
by Recognition and
Retention Plan (6,800)
Dividends declared
($.33 per share)
------- ------- ------- ------
December 31, 1997 952,000 (47,610) (68,558) (6,800)
Net income
Other comrephensive income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $97
Comprehensive income
Purchase of treasury shares (45,200)
Purchase of common shares
by Recognition and
Retention Plan (17,002)
Shares allocated under
Employee Stock
Ownership Plan 7,618
Shares eared under Recognition
and Retention Plan 4,761
Capital distribution
($3.50 per share)
Dividends declared
($.37 per share)
------- ------ ------ ------
December 31, 1998 952,000 92,810 (60,940) (19,041)
======= ====== ====== ======
</TABLE>
Continued on next page
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Amounts
-----------------------------------------------------------------------------------------------
Accum-
ulated
other Common Common
Additional compre- shares shares Compre-
paid-in Retained Treasury hensive purchased purchased hensive
capital earnings shares income by ESOP by RRP income
------- -------- ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 $ 9,075 $ 5,455 $ 0 $ 216 $ (762) $ 0
Net income 888 $ 888
Other comprehensive income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $59 116 116
------
Comprehensive income $ 1,004
======
Purchase of treasury shares (711)
Shares allocated under
Employee Stock
Ownership Plan 75 76
Purchase of common shares
by Recognition and
Retention Plan (118)
Dividends declared
($.33 per share) (306)
------- -------- ------ ------ ------- -----
December 31, 1997 9,150 6,037 (711) 332 (686) (118)
Net income
Other comprehensive income 951 $ 951
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $97
185 185
------
Comprehensive incomes $ 1,136
======
Purchase of treasury shares (593)
Purchase of common shares
by Recognition and
Retention Plan (370)
Shares allocated under Employee Stock
Ownership Plan 36 77
Shares earned under Recogntion
and Retention Plan (7) 83
Capital distribution
($3.50 per share) (3,166)
Dividends declared
($.37 per share) (330)
------- -------- ------ ------ ------ -----
December 31, 1998 $ 6,013 $ 6,658 ($1,304) $ 517 ($609) ($405)
</TABLE>
<PAGE>
Home City Financial Corporation - Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 951 $888
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 2 (9)
Provision for loan losses 61 43
(Gain) loss on sale of securities (2) 18
Depreciation 50 42
Deferred income taxes (9) (69)
Life insurance income, net of expenses (44) (15)
Employee Stock Ownership Plan compensation expense 113 151
Recognition and Retention Plan compensation expense 76 0
FHLB stock dividends (34) (30)
Net change in:
Accrued interest receivable (31) (95)
Accrued interest payable 36 14
Other assets 9 26
Other liabilities 72 (61)
----- ------
Net cash provided by operating activities 1,250 903
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in time deposits 1 337
Purchases of securities available-for-sale (1,070) (7,220)
Proceeds from sales of securities available-for-sale 617 401
Proceeds from maturities of securities available-for-sale 2,220 4,706
Proceeds from sales of mortgage-backed securities available-for-sale 0 1,891
Collections on mortgage-backed securities available-for-sale 143 123
Net increase in loans (14,512) (12,020)
Purchases of properties and equipment (141) (50)
Purchase of FHLB stock (129) 0
------- -------
Net cash used in investing activities (12,871) (11,832)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,810 2,129
Net increase (decrease) in short-term FHLB advances (473) 2,000
Proceeds from new long-term FHLB advances 6,875 0
Payments on long-term FHLB advances (543) (388)
Net increase in advance payments by borrowers
for taxes and insurance 3 2
Net proceeds from notes payable 1,800 0
Distribution of capital (3,166) 0
Purchase of common shares by Recognition and Retention Plan (370) (118)
Purchase of treasury shares (593) (711)
Cash dividends paid (330) (306)
------- ------
Net cash provided by financing activities 12,013 2,608
Net increase (decrease) in cash and cash equivalents 392 (8,321)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,518 9,839
------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,910 $1,518
====== ======
</TABLE>
- ----------------------
See accompanying notes
<PAGE>
Home City Financial Corporation 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") and a loan
made to the Home City Financial Corporation Employee Stock Ownership Plan (the
"ESOP") for the purchase of common shares of the corporation. 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, commercial 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.
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
years ended December 31, 1998 and 1997:
(Dollars in thousands)
1998 1997
Cash paid during the year for interest $3,450 $3,002
Cash paid during the year for income taxes 459 395
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.
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, bank and service corporation each file separate tax returns
using a calendar year end. 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 treasury
shares, 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
<PAGE>
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 1998 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 is maintained for
the benefit of eligible savings account holders who maintained deposit
accounts in the bank after conversion.
NOTE C - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost of securities available-for-sale and their approximate fair
values are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At December 31, 1998 At December 31, 1997
-------------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
Cost gains losses Value cost gains losses Value
--------- ---------- ---------- ------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
U.S.
government $ 0 $ 0 $ 0 $ 0 $ 598 $ 2 $ 0 $ 600
Federal
agencies 1,500 2 (1) 1,501 2,500 0 (3) 2,497
State &
municipal
securities 764 15 0 779 917 14 (1) 930
Equity
securities 45 766 0 811 61 492 0 553
--------- ---------- ---------- ------- --------- ---------- ---------- -------
Total 2,309 783 (1) 3,091 4,076 508 (4) 4,580
--------- ---------- ---------- ------- --------- ---------- ---------- -------
Mortgage-backed securities
GNMA's 558 1 0 559 703 0 (3) 700
--------- ---------- ----------- ------- --------- ---------- ---------- -------
Total $ 2,867 $ 784 $ (1) $ 3,650 $ 4,779 $ 508 $ (7) $ 5,280
========= ========== =========== ======= ========= ========== ========== =======
</TABLE>
<PAGE>
The amortized cost and estimated fair value of investment and mortgage-backed
securities available-for-sale at December 31, 1998, respectively, by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Investment Mortgage-backed
securities securities
---------- ----------
Amortized Fair Amortized Fair
Amounts maturing in : cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
One year or less $1,007 $1,010 $ 0 $ 0
After one year through five years 1,130 1,137 0 0
After five years through ten years 127 133 558 559
Equity securities 45 811 0 0
------ ----- ----- -----
Total $2,309 $3,091 $ 558 $ 559
====== ====== ===== =====
</TABLE>
<PAGE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
Investment securities with carrying values of approximately $2,838,000 and
$500,000 were pledged at December 31, 1998 and 1997, respectively, to secure
certain deposits.
During 1998, the corporation sold securities available-for-sale for total
proceeds of approximately $617,000, resulting in gross realized gains of
approximately $2,000 and no gross realized losses. During 1997, the
corporation sold securities available-for-sale for total proceeds of
approximately $2,292,000 resulting in gross realized gains of approximately
$1,000 and gross realized losses of approximately $19,000.
NOTE D - LOANS
Loans at December 31, 1998 and 1997, are summarized as follows:
(Dollars in thousands)
1998 1997
---- ----
Loans secured by real estate:
One-to-four-family residential properties $42,485 $40,669
Multifamily (5 or more) residential properties 2,463 2,731
Nonresidential properties 9,894 10,124
Land 1,721 1,690
Construction 4,561 3,079
Consumer 5,226 4,201
Commercial 11,122 493
------ ------
Total 77,472 62,987
Allowance for loan losses (486) (452)
------ ------
Net loans $76,986 $62,535
====== ======
An analysis of the allowance for loan losses is as follows:
(Dollars in thousands)
1998 1997
---- ----
Balance, beginning of year $452 $400
Provision for loan losses 61 43
Loans charged off (40) (39)
Recoveries 13 48
---- ----
Balance, end of year $486 $452
At December 31, 1998 and 1997, the total recorded investment in impaired
loans, all of which had allowances determined in accordance with SFAS No. 114
and No. 118, amounted to approximately $54,000 and $95,000, respectively.
The average recorded investment in impaired loans amounted to approximately
$68,000 and $179,000 for the years ended December 31, 1998 and 1997,
respectively. The allowance for loan losses related to impaired loans amounted
to approximately $54,000 and $8,000 at December 31, 1998 and 1997,
respectively. Interest income on impaired loans of $16,000 and $6,000 was
recognized for cash payments received for the years ended December 31, 1998
and 1997.
In addition, at December 31, 1998 and 1997, the bank had other nonaccrual
loans of approximately $164,000 and $200,000, 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, 1998 and 1997, the bank serviced loans for others with
principal balances of $2,132,000 and $2,395,000, respectively.
In the ordinary course of business, the bank has and expects to continue to
have transactions, including borrowings, with its officers, directors,
shareholders, and their affiliates. In the opinion of management, such
transactions were on substantially the same terms, including interest rates
and collateral, as those prevailing at the time of comparable transactions
with other persons and did not involve more than a normal risk of
collectibility or present any other unfavorable features to the bank.
All loans to such borrowers are summarized as follows:
(Dollars in thousands)
Balance, December 31, 1997 $1,504
New loans 23
Payments (561)
------
Balance, December 31, 1998 $966
======
<PAGE>
NOTE E - PROPERTIES AND EQUIPMENT
A summary of properties and equipment at December 31, 1998 and 1997, follows:
(Dollars in thousands)
1998 1997
Land $ 118 $ 113
Buildings and improvements 437 437
Equipment 464 328
----- -----
1,019 878
Accumulated depreciation (435) (385)
----- -----
Total $ 584 $ 493
===== =====
NOTE F - CASH SURRENDER VALUE OF LIFE INSURANCE
In September 1995, the bank purchased life insurance policies on each of its
outside directors. The bank is the beneficiary of such policies. At December
31, 1998 and 1997, there were no notes payable to the insurance company.
NOTE G - DEPOSITS
Deposit account balances at December 31, 1998 and 1997, are summarized as
follows:
(Dollars in thousands)
1998 1997
Amount Percent Amount Percent
Noninterest-bearing accounts $ 1,605 2.7% $ 763 1.5%
NOW and money market accounts 1,439 2.4 774 1.5
Savings accounts 11,084 18.3 7,863 15.2
Certificates of deposit 46,371 76.6 42,289 81.8
------ ---- ------ ----
Totals $60,499 100.0% $51,689 100.0%
======= ====== ======= ======
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $8,999,000 and $7,879,000 at
December 31, 1998 and 1997, respectively. Deposits in excess of $100,000 are
not insured by the FDIC.
At December 31, 1998, the scheduled maturities of certificates of deposit are
as follows:
(Dollars in thousands)
1999 $21,163
2000 21,537
2001 2,359
2002 1,179
2003 and thereafter 133
-------
Total $46,371
=======
The bank held related party deposits of approximately $553,000 and $532,000 at
December 31, 1998 and 1997, respectively.
<PAGE>
NOTE H - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current
interest
rate Balance
---- -------
<S> <C> <C> <C> <C>
Variable-rate advances, with monthly interest payments:
Advance due in 1998 5.87% $ 0 $2,000
Advance due in 1999 5.02 1,526 0
Advance due in 2003 4.64 1,500 0
Advance due in 2008 5.28 5,000 0
Fixed-rate advances, with monthly principal and interest
payments:
Advance due in 2000 5.46 234 0
Advance due in 2001 6.30 197 258
Advance due in 2003 5.91 233 280
Advance due in 2004 8.35 360 420
Advance due in 2005 8.32 673 766
Advance due in 2006 6.35 1,261 1,379
Advance due in 2010 3.30 587 609
------- ------
Total Federal Home Loan Bank advances 5.48% $11,571 $5,712
======= ======
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by the
bank (totaling $601,000) and by 100% of the bank's qualified mortgage loan
portfolio (totaling approximately $42,485,000). Based on the carrying amount
of FHLB stock owned by the bank, total FHLB advances are limited to
approximately $12,028,000.
The aggregate minimum future annual principal payments on FHLB advances are
$2,131,000 in 1999, $479,000 in 2000, $436,000 in 2001, $388,000 in 2002, and
$8,137,000 after 2002.
NOTE I - NOTES PAYABLE
Notes payable are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current
interest
rate Balance
---- -----------------------
<S> <C> <C> <C>
Note due February 26, 1999 6.50 $1,500 $ 0
Note due June 26, 1999 6.50 300 0
------ ---
Total notes payable 6.50% $1,800 $ 0
====== ====
</TABLE>
The corporation's indebtedness is to a bank under notes that have floating
interest rates which are tied to prime. The notes are unsecured.
<PAGE>
NOTE J - FEDERAL INCOME TAXES
The consolidated provision for income taxes for the following years consists
of the following:
(Dollars in thousands)
1998 1997
---- ----
Federal income tax expense
Current tax expense $456 $421
Deferred tax expense (9) (69)
---- ----
Total $447 $352
==== ====
A cumulative net deferred tax liability is included in other liabilities at
December 31, 1998 and 1997. The components of the deferred tax accounts are
as follows:
(Dollars in thousands)
1998 1997
---- ----
Deferred tax liability
Accumulated depreciation $ 32 $ 27
Net deferred loan costs 28 37
Net unrealized gain on securities available-for-sale 267 170
Other 5 33
----- -----
Total deferred tax liability 332 267
Deferred tax asset
Nonaccrual loan interest (5) (8)
Allowance for loan losses (130) (110)
Employee benefits (85) (81)
------ -----
Total deferred tax asset (220) (199)
------ -----
Total net deferred tax liability $ 112 $ 68
===== =====
A reconciliation of the federal income tax rate to effective income tax rates
for the years ended December 31:
1998 1997
---- ----
Federal income tax rate 34.0% 34.0%
Adjusted for:
Tax-exempt income (1.9) (3.2)
Other (0.1) (2.4)
----- -----
Effective tax rate 32.0% 28.4%
===== =====
Included in retained earnings at December 31, 1998, and 1997, 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 K - DIVIDEND RESTRICTION
The bank, as a federally chartered savings bank, is subject to the dividend
restrictions of 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
<PAGE>
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 P, 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 paying any dividend on its common shares. The
OTS may object to the dividend during that 30-day period based on safety and
soundness concerns. Moreover, the OTS may prohibit any capital distribution
otherwise permitted by regulation if the OTS determines that such distribution
would constitute an unsafe or unsound practice.
NOTE L - EARNINGS PER SHARE
Earnings per share (EPS) is computed in accordance with SFAS No. 128, Earnings
per share, which was adopted by the corporation as of December 31, 1997. EPS
for periods prior to 1997 are not presented because the bank did not complete
its Reorganization until December 30, 1996. Diluted EPS is computed using the
treasury stock method, giving effect to potential additional common shares
that were outstanding during the period. Potential dilutive common shares
include shares held by the corporation's ESOP that are committed for release,
shares awarded but not released under the corporation's RRP and stock options
granted under the Stock Option Plan. Following is a summary of the effect of
diluted securities in the weighted-average number of shares (denominator) for
the basic and diluted EPS calculations. There are no adjustments to net
income.
1998 1997
---- ----
Weighted-average common shares outstanding - basic 812,070 831,527
Effect of dilutive securities on number of shares
RRP shares 17,027 532
ESOP shares 68,558 76,155
Stock options 19,869 3,800
------- ------
Total dilutive securities 105,454 80,487
------- ------
Weighted-average common shares outstanding - diluted 917,524 912,014
NOTE M 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. 401(k) profit sharing expense for the years ended
December 31, 1998 and 1997, was $10,000 and $11,000, 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 for the
years ended December 31, 1998 and 1997, was $28,000 and $13,000, 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. Incentive compensation plan expense for the years ended
December 31, 1998 and 1997, was $46,000 and $7,000, respectively.
<PAGE>
NOTE N - STOCK REPURCHASE PROGRAM
During 1998, the corporation received regulatory approval to repurchase up to
5% of its outstanding shares. During the year ended December 31, 1998, 45,200
common shares were purchased at an average price of $13.13. During 1997, the
corporation previously received regulatory approval to repurchase 5% of its
outstanding shares. During the year ended December 31, 1997, 47,610 common
shares were purchased 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 O - STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan (ESOP)
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.
Shares issued to the ESOP are allocated to ESOP participants based on
principal 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 each of 1998 and 1997, 7,618 common shares were
allocated among the participants. ESOP compensation expense for the years
ended December 31, 1998 and 1997, was $113,000 and $151,000, respectively.
Shares held by the ESOP at December 31, 1998 and 1997, are as follows:
1998 1997
---- ----
Allocated shares 15,236 7,618
Unallocated shares 60,940 68,558
------ ------
Total ESOP shares 76,176 76,176
====== ======
Fair value of unallocated shares $823,000 $1,268,000
Recognition and Retention Plan ("RRP")
A recognition and retention plan was approved by the shareholders of the
corporation at the October 20, 1997, Annual Meeting. The RRP is a restricted
stock award plan. The RRP is administered by a committee of directors of the
corporation. The committee selects recipients and terms of awards pursuant to
the plan. Total shares made available under the plan was 38,088.
RRP awards vest in five equal annual installments, subject to the continuous
employment of the recipients as defined under such plans. 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. RRP
expense for the years ended December 31, 1998 and 1997, was $76,000 and $0,
respectively. The unamortized unearned compensation value of the RRP is shown
as a reduction to shareholders' equity in the accompanying consolidated
balance sheets.
Stock Option Plan ("SOP")
A stock option plan was approved by the shareholders of the corporation at the
October 20, 1997, Annual Meeting. The SOP is administered by a committee of
directors of the corporation. The committee selects recipients and terms of
awards pursuant to the plan. The maximum number of common shares which may be
issued under the SOP is 131,422 shares. The maximum term of each option is
ten years from the date of grant. The initial awards were granted on October
20, 1997, at the fair value of the common stock on that date ($16.125). Due
to the capital distribution in 1998, the number of shares granted was
increased from 71,415 to 98,565, and the exercise price was decreased from
$16.125 to $11.70. The initial awards vest in equal installments over a
five-year period from the grant date and expire during October 2007. Unvested
options become immediately exercisable in the event of death or disability.
<PAGE>
Option activity under the SOP is as follows:
Weighted-
Number of average
shares exercise price
Outstanding December 31, 1996 0 $0.00
Granted 98,565 11.70
Exercised 0 0.00
Canceled 0 0.00
Outstanding December 31, 1997 98,565 11.70
Granted 0 0.00
Exercised 0 0.00
Canceled 0 0.00
Outstanding, December 31, 1998 98,565 $11.70
At December 31, 1998, 32,857 shares were available for future grants under the
SOP.
Additional information regarding options outstanding as of December 31, 1998,
is as follows:
Weighted-average
Exercise Options Options remaining
price outstanding exercisable contractual life
$11.70 98,565 19,711 8.8 years
SFAS No. 123, Accounting for Stock-Based Compensation, 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 corporation's calculations were made using the Black-Scholes option
pricing model with the following weighted-average assumptions:
October 1997
grant
Risk-free interest rate 6.23%
Expected dividend 2.54%
Expected lives, in years 10
Expected volatility 23.96%
The weighted-average grant-date fair value of options granted during October
1997 was $3.88. The corporation's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. Had
compensation cost for these awards been determined with SFAS No. 123, the
corporation's net income and earnings per share would have been reduced to the
following pro forma amounts:
(Dollars in thousands,
except per share data)
Year ended December 31,
-----------------------
Net income: 1998 1997
- ---------- ---- ----
As reported $951 $888
Pro forma $901 $880
Earnings per common share - basic
As reported $1.17 $1.06
Pro forma $1.11 $1.05
Earnings per common share - diluted
As reported $1.04 $0.97
Pro forma $0.98 $0.96
<PAGE>
NOTE P - REGULATORY MATTERS
Home City is subject to various regulatory capital requirements administered
by the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory requirements - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on Home
City Financial Corporation's financial statements. Under 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. Home City's capital amounts
and classifications are also subject to qualitative judgments by regulators
about components, risk-weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios of tangible capital of
not less than 1.5% of adjusted total assets, total capital to risk-weighted
assets of not less than 8.0%, and core capital equal to 3.0% of adjusted total
assets (as defined in the regulations). Management believes, as of December
31, 1998, that Home City meets all capital adequacy requirements to which it
is subject.
At December 31, 1998, the most recent notification from the OTS categorized
Home City as "Well Capitalized" under the framework for prompt corrective
action. To be considered well capitalized under Prompt Corrective Action
Provisions, the bank must maintain total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed Home City's categorization.
The bank is required to report capital ratios unconsolidated with HCFC. The
bank's actual capital amounts and ratios are presented in the following
tables:
(Dollars in thousands)
Risk-based Tier I
capital capital
------- -------
Equity per GAAP $12,414 $12,414
Less unrealized gain on securities available-for-sale,
net of applicable income taxes (517) (517)
Less advance to subsidiary (33) (33)
Plus allowance for loan losses 486 N/A
------ --------
Regulatory capital $12,350 $11,864
======= =======
<TABLE>
<CAPTION>
(Dollars in thousands)
To be well
Minimum required 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, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) $12,350 21.9% $4,504 8.0% $5,631 10.0%
Tier I Capital
(to Risk-Weighted Assets) 11,864 21.1 N/A N/A 3,378 6.0
Tier I Capital
(to Total Assets) 11,864 13.9 2,559 3.0 4,265 5.0
Tangible Capital
(to Total Assets) 11,864 13.9 1,279 1.5 N/A N/A
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
</TABLE>
<PAGE>
NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the bank has various outstanding commitments
and contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying consolidated
financial statements. 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 and standby letters of credit is represented by the
contractual or notional amount of those instruments. The bank uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated balance sheet.
The bank had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
-------------------- ---------------
Fixed- Adjustable- Fixed- Adjustable-
rate rate Total rate rate Total
------ ----------- ----- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Undisbursed balance
of loans closed -
mortgage loans $1,865 $ 393 $2,258 $1,150 $ 37 $1,187
First mortgage
loans 1,933 508 2,441 1,026 536 1,562
Consumer and
other loans 100 0 100 0 0 0
Open-end consumer lines 0 1,476 1,476 0 498 498
Commercial lines 0 3,192 3,192 0 0 0
------ ------- ------ ----- ----------- ------- ------
Total $3,898 $ 5,569 $9,467 $2,176 $1,071 $3,247
====== ======= ====== ====== =========== =======
</TABLE>
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. Management 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,
is based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
The bank has not been required to perform on any financial guarantees during
the past three years. The bank has not incurred any losses on its commitments
during the past three years.
The bank maintains deposit accounts at four banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. Account balances at two of these institutions exceeded FDIC
insurance limits. The amount in excess of the FDIC limit totaled $1,583,000.
NOTE R - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or
not recognized in the statement of financial condition. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
SFAS No. 107 excluded certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the corporation.
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.
<PAGE>
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.
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.
Accrued interest: The carrying amount of accrued interest approximates fair
value.
Borrowed funds: The fair values for borrowed funds are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on like-type borrowed funds.
The estimated fair values of the corporation's financial instruments are as
follows:
(Dollars in thousands)
December 31,
-----------
1998 1997
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $1,910 $1,910 $1,518 $1,518
Time deposits 24 21 23 18
Investment securities 3,091 3,091 4,580 4,580
Mortgage-backed securities 559 559 700 700
Loans 76,986 80,430 62,535 63,176
Accrued interest receivable 440 440 409 409
Life insurance 1,129 1,129 1,085 1,085
Financial liabilities:
Deposits 60,499 60,372 51,689 51,828
Notes payable 1,800 1,800 0 0
Advances from FHLB 11,571 11,378 5,712 5,617
Accrued interest payable 115 115 79 79
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions. The contract or notional amounts of the bank's
financial instruments with off-balance sheet risk are disclosed in NOTE Q. No
derivatives were held by the bank for trading purposes. It is not practical
to estimate the value of Federal Home Loan Bank stock because it is not
marketable. The carrying amount of that investment is reported in the
consolidated balance sheet.
<PAGE>
NOTE S - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Home City Financial Corporation (parent
company only) follows:
Balance Sheets
(Dollars in thousands)
December 31,
-----------
1998 1997
---- ----
Assets
Interest-bearing savings deposit with subsidiary bank $ 151 $ 147
Interest-bearing time deposit with subsidiary bank 0 2,027
Investment in subsidiary bank 12,414 11,213
Investment securities available-for-sale 0 601
Other assets 113 37
------- -------
Total assets $12,678 $14,025
======= =======
Liabilities and Shareholders' Equity
Notes payable $ 1,800 $ 0
Accrued expense and other liabilities 8 21
------- -------
Total liabilities 1,808 21
Shareholders' equity 10,870 14,004
------- -------
Total liabilities and shareholders' equity $12,678 $14,025
======= =======
Statements of Income
(Dollars in thousands)
Year ended
December 31,
------------
1998 1997
---- ----
Income
Interest income $ 127 $ 230
Other income 3 1
------ ------
Total income 130 231
Expense
Interest expense 51 0
Other expense 156 227
------ ------
Total expense 207 227
------ ------
Income (loss) before income taxes and undistributed
earnings of subsidiary (77) 4
Income tax benefit (15) (10)
------ ------
Income (loss) before undistributed earnings of subsidiary (62) 14
Undistributed earnings of subsidiary 1,013 874
----- -----
Net income $ 951 $ 888
====== ======
<PAGE>
Statements of Cash Flows
(Dollars in thousands)
Year ended
December 31,
------------
1998 1997
---- ----
Cash flows from operating activities
Net income $ 951 $ 888
Adjustments to reconcile net income to net cash
flows from operating activities:
Undistributed earnings of subsidiary (1,013) (874)
Discount accretion 0 (1)
Gain on sale of securities available-for-sale (2) (1)
Deferred income taxes (9) (22)
Compensation expense for ESOP 113 151
Compensation expense for RRP 76 0
Net increase in other assets (67) (12)
Net decrease in other liabilities (13) (122)
------- ------
Net cash provided by operating activities 36 7
------- ------
Cash flows from investing activities
Net (increase) decrease in time deposits 2,027 (2,027)
Purchase of securities available-for-sale 0 (2,996)
Sale of securities available-for-sale 600 400
Maturities of securities available-for-sale 0 2,000
------ ------
Net cash flows provided by (used in) investing activities 2,627 (2,623)
------ -------
Cash flows from financing activities
Net proceeds from notes payable 1,800 0
Distribution of capital (3,166) 0
Purchase of treasury shares (593) (711)
Purchase of common shares by RRP (370) (118)
Cash dividends paid (330) (306)
------- -------
Net cash used in financing activities (2,659) (1,135)
Net increase (decrease) in cash and cash equivalents 4 (3,751)
Cash and cash equivalents at beginning of year 147 3,898
------- -------
Cash and cash equivalents at end of year $ 151 $ 147
====== ========
<PAGE>
NOTE T - QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------ ------ -------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Interest income $1,580 $1,669 $1,770 $1,789
Interest expense 792 839 913 942
------ ------ ------ ------
Net interest income 788 830 857 847
Provision for loan losses 12 20 21 8
Other income 18 19 27 34
Other expense 482 474 493 512
Provision for income taxes 100 115 120 112
------ ------ ------ ------
Net income $ 212 $ 240 $ 250 $ 249
====== ====== ====== ======
Earnings per share- basic $ 0.26 $ 0.29 $ 0.31 $ 0.31
Earnings per share - diluted $ 0.23 $ 0.26 $ 0.27 $ 0.28
Weighted-average common
shares outstanding 829,232 817,462 812,230 786,530
Year ended December 31, 1997:
Interest income $ 1,388 $ 1,415 $ 1,512 $ 1,547
Interest expense 733 748 771 764
------- ------- ------- -------
Net interest income 655 667 741 783
Provision for loan losses 20 0 8 15
Other income 31 23 18 17
Other expense 399 403 384 466
Provision for income taxes 89 71 124 68
------- ------- ------- -------
Net income $ 178 $ 216 $ 243 $ 251
======= ======= ======= =======
Earnings per share - basic $ 0.22 $ 0.25 $ 0.29 $ 0.30
Earnings per share- diluted $ 0.21 $ 0.23 $ 0.27 $ 0.26
Weighted-average common
shares outstanding 876,024 876,024 839,507 826,334
</TABLE>
<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" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" of
the Definitive Proxy Statement of the Corporation dated March 12, 1999, 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 Proxy Statement is incorporated by reference
herein.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "VOTING SECURITIES AND
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy Statement
is incorporated by reference herein.
ITEM 12. Certain Relationships and Related Transactions
The information set forth under the caption "COMPENSATION OF DIRECTORS
AND EXECUTIVE OFFICERS - Certain Transactions with Home City" of the Proxy
Statement is incorporated by reference herein.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (Incorporated by reference)
3.2 Code of Regulations (Incorporated by reference)
10.1 Employment Agreement with Mr. Ulery (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 during the last quarter
of 1998.
<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
------------------------- -----------------------
Date Date
/s/ James Foreman /s/ Terry A. Hoppes
------------------------- ----------------------
James Foreman Terry A. Hoppes
Director Director
------------------------- ----------------------
Date Date
/s/ Douglas L. Ulery /s/ Charles A. Mihal
------------------------- ----------------------
Douglas L. Ulery Charles A. Mihal
Director Treasurer and Chief
President and Chief Executive Officer Financial Officer
-------------------------- -----------------------
Date Date
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation Incorporated by reference to the
of Home City Financial Corporation Registrant's Quarterly Report on
Form 10-QSB for the Quarter
Ended March 31, 1997 (the "March
31, 1997, 10-QSB"), Exhibit 3(i)
3.2 Code of Regulations of Home City Incorporated by reference to the
Financial Corporation Registrant's Financial Corporation
March 31, 1997, 10-QSB, Exhibit
3 (ii)
10.1 Employment Agreement with Incorporated by reference to the
Mr. Ulery Registrant's Form 10-KSB for the
Year Ended June 30, 1997 (the
"June 30, 1997, 10-KSB")
Exhibit 10.1
10.2 Home City Financial Corporation Incorporated by reference to the
1997 Stock Option and Incentive Registrant's 1997 Definitive
Plan Proxy Statement dated September
19, 1997, Exhibit A
10.3 Home City Financial Corporation Incorporated by reference to the
Recognition and Retention Plan Registrant's 1997 Definitive
and Trust Agreement Proxy Statement dated September
19, 1997, Exhibit B
21 Subsidiaries of Home City Incorporated by reference to the
Financial Corporation June 30, Financial Corporation
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 1999
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
<PAGE>
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 encourgage
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 fiscal year ended December 31, 1998 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-bearing assts and interest
expense on deposts, 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 condtions, 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 then the terms or 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 is uses the best information available to determine the
allowance for loan losses, unforseen 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 effect of
general economic conditions. The repayment of multifamily residential
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 the periods of recession, high unemployment
and other adverse economic conditions. When consumers have trouble paying
such loans, if any, decrease in value more rapidly than the outstanding
balance of the loan.
Competition
- -----------
Home City Federal Savings Bank of Springfield, Ohio ("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 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 acquistions. Such increased competition
may have an adverse effect upon Homes 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.
For several years, Congress has been considering various changes to
the bank and savings association charters. The activities in which banks
and savings associations and their holding companies and subsidiaries may
engage and the authority of various regulatory authorities over the
financial institutions and their holding companies and subsidiaries. HCFC
cannot predict at this time whether and when Congress will actually adopt
such "financial modernization legislation" or in what form it will be
adopted. It is expected, however, that the range of activities in which
banks and their affiliated companies may engage will be expanded, and it
is possible that the range of activities in which HCFC and Home City may
engage will be restricted. It is not anticipated that the current
activities of HCFC or Home City will be materially affected by any such
legislation.
Legislation to recapitalize the SAIF, which was enacted in 1996,
provided that the SAIF and the Bank Insurance Fund (the "BIF") would be
merged if the federal saivngs association charter was eliminated.
Although the elimination of the federal savings association charter
has not occurred and is not now expected in the near future, Congress
is still discussing the merger of the SAIF and the BIF. Although the
merger could be expected to change the deposit insurance premiums paid
by Home City, the effect on Home City and HCFC cannot be predicted at
this time.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31,1998 and 1997, and the
related Consolidated Statements of Income for the twelve months ended
December 31, 1998 and 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> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,147
<INT-BEARING-DEPOSITS> 787
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,251
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 77,472
<ALLOWANCE> 486
<TOTAL-ASSETS> 85,355
<DEPOSITS> 60,499
<SHORT-TERM> 3,326
<LIABILITIES-OTHER> 615
<LONG-TERM> 10,045
0
0
<COMMON> 0
<OTHER-SE> 10,870
<TOTAL-LIABILITIES-AND-EQUITY> 85,355
<INTEREST-LOAN> 6,555
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<INTEREST-TOTAL> 6,808
<INTEREST-DEPOSIT> 2,948
<INTEREST-EXPENSE> 3,486
<INTEREST-INCOME-NET> 3,322
<LOAN-LOSSES> 61
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 1,961
<INCOME-PRETAX> 1,398
<INCOME-PRE-EXTRAORDINARY> 951
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 951
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 4.38
<LOANS-NON> 186
<LOANS-PAST> 0
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<LOANS-PROBLEM> 897
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<ALLOWANCE-CLOSE> 486
<ALLOWANCE-DOMESTIC> 486
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 81
</TABLE>
