To Our Shareholders,
We are proud to present to you our Annual Report stating the performance
of Home City Financial Corporation during fiscal year 1998.
The contents of this report reflect the concerted efforts of the Board
of Directors and management to provide operating results that enhance
shareholder value while supporting the best interests of HCFC's shareholders,
customers, employees and community. From a capital management perspective,
HCFC successfully completed its second 5% stock repurchase program and a
special capital distribution of $3.50 per share paid in June 1998. The
special capital distribution, as well as each of the quarterly dividends paid
during 1998 (totaling $.37 per share), were determined by HCFC to be
nontaxable returns of capital. We are continually exploring all opportunities
to increase the value of your investment in the company while accomplishing
the long-term goal of increasing HCFC's presence as a responsive financial
services provider in its community.
This year was one of transition and balance sheet restructuring. We
experienced a high volume of mortgage loan repayments while our mortgage loan
originations declined due to competition from traditional and non-traditional
lenders. We took the opportunity to allocate these loan funds to commercial
loans for quality local small businesses at more favorable terms to HCFC than
those provided by mortgage loans. We also were able to grow the consumer loan
portfolio by continuing to offer small loans and introducing a new home equity
line of credit. These new lending products positively impacted HCFC's
financial performance in 1998.
HCFC's financial results show that the company continues to be in the
enviable position of having strong community demand for quality loans. Net
loans receivable increased $14.5 million, or 23.1%, for the year 1998,
totaling $77.0 million at December 31, 1998, with most of the growth in loans
attributable to the commercial loan category. Non-performing loan ratios
remain low while reserves have been established for the increasingly diverse
loan portfolio. Deposits also grew at a faster pace with deposits totaling
$60.5 million at December 31, 1998, an increase of $8.8 million, or 17.0%,
from $51.7 million at December 31, 1997.
These results could not have been attained without the confidence and
trust of our shareholders, the professional work ethic of our management staff
and employees and the support and loyalty of our customers and community.
We sincerely thank you.
/s/ Douglas L. Ulery
Douglas L. Ulery
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding HCFC at
the dates and for the periods indicated. The financial information should be
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere herein. However, in the opinion of management of
HCFC, all adjustments necessary for a fair presentation of such financial data
have been included. All such adjustments are of a normal recurring nature.
Selected financial condition and other data:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $85,355 $71,854 $68,140 $53,225 $45,622
Cash and cash equivalents (1) 1,910 1,518 9,839 1,874 2,209
Investment securities available-for-sale 3,091 4,580 2,234 1,661 228
Investment securities held-to-maturity 0 0 0 0 1,501
Mortgage-backed and related securities
available-for-sale 559 700 2,748 3,395 0
Mortgage-backed and related securities
held-to-maturity 0 0 0 0 3,943
FHLB stock 601 438 408 298 255
Loans, net 76,986 62,535 50,558 43,823 35,574
Deposits 60,499 51,689 49,559 45,021 37,857
Advances from FHLB of Cincinnati 11,571 5,712 4,101 2,511 2,716
Notes payable 1,800 0 0 0 0
Shareholders' equity (2) 10,353 13,672 13,777 4,993 4,548
Number of full service offices 1 1 1 1 1
Summary of earnings:
Year ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Total interest income $6,808 $5,862 $4,843 $4,208 $3,534
Total interest expense 3,486 3,016 2,746 2,326 1,545
----- ----- ----- ----- -----
Net interest income 3,322 2,846 2,097 1,882 1,989
Provision for loan losses 61 43 87 37 90
----- ----- ----- ----- -----
Net interest income after
provision for loan losses 3,261 2,803 2,010 1,845 1,899
Noninterest income 98 89 75 24 10
Special SAIF assessment (3) 0 0 263 0 0
Other noninterest expense 1,961 1,652 1,180 1,078 978
----- ----- ----- ----- -----
Income before income tax 1,398 1,240 642 791 931
Provision for income tax 447 352 181 254 310
----- ----- ----- ----- -----
Net income $ 951 $ 888 $ 461 $ 537 $ 621
===== ===== ===== ===== =====
</TABLE>
(Footnotes on following page)
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended
------------------------
Selected financial ratios: December 31,
-------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
Return on assets (4) 1.20% 1.28% 0.81% 1.10% 1.44%
Return on equity (5) 7.89 6.28 8.62 10.97 14.82
Interest rate spread (6) 3.52 3.13 3.39 3.64 4.88
Net interest margin (7) 4.38 4.23 3.84 4.01 4.48
Noninterest expense to average assets (8) 2.48 2.38 2.54 2.21 2.27
Average equity to average assets 15.24 20.35 9.45 10.04 9.74
Equity to assets at year end 12.74 19.49 20.52 9.69 9.97
Non-performing loans to total loans 0.24 0.41 0.45 0.52 0.28
Non-performing assets to total assets (9) 0.22 0.36 0.34 0.43 0.22
Allowance for loan losses to total loans 0.63 0.72 0.78 0.71 0.79
Allowance for loan losses to
non-performing loans 261.29 174.52 172.73 136.24 279.21
Net charge-offs (recoveries) to average loans 0.04 (0.02) 0.01 0.05 0.00
Dividend payout ratio (10) 31.62 31.13 N/A N/A N/A
</TABLE>
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits in other financial institutions.
(2) Excludes accumulated other comprehensive income, net of applicable
deferred income taxes.
(3) Special one-time charge recorded as a result of legislation enacted
to recapitalize the Savings Association Insurance Fund.
(4) Net income divided by average total assets.
(5) Net income divided by average total equity.
(6) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(7) Net interest income as a percentage of average interest-earning
assets.
(8) Noninterest expense divided by average total assets.
(9) Non-performing assets consist of nonaccruing loans, accruing
loans 90 days or more past due and real estate acquired (or deemed
acquired) in foreclosure proceedings or in lieu thereof.
(10) Dividends declared per share divided by basic earnings per share. Does
not include the special $3.50 capital distribution paid in fiscal year
1998.
<PAGE>
BUSINESS OF HOME CITY FINANCIAL CORPORATION
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), 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, 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.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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.
The table on the following page, 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.
<PAGE>
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.
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
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
The deposit accounts of Home City and other savings associations are
insured up to applicable limits by the FDIC in the SAIF. Legislation to
recapitalize the SAIF was enacted on September 30, 1996. Such legislation
provided that the SAIF will be merged into the Bank Insurance Fund if there
are no longer any federally chartered savings associations. Such legislation
also requires the Department of Treasury to submit a report to Congress on the
development of a common charter for all financial institutions. In addition,
legislation has been introduced to address this charter unification by
elimination of the federal thrift charter and the separate federal regulation
of savings associations.
Pursuant to such legislation, Congress may eliminate the OTS, and Home
City may be regulated under federal law as a bank or may be required to change
its charter. Such change in regulation or charter would likely change the
range of activities in which Home City may engage and may subject Home City to
additional regulation by the FDIC. In addition, HCFC might become subject to
a different form of holding company regulation, which may limit the activities
in which HCFC may engage, and subject HCFC to other additional regulatory
requirements, including separate capital requirements. HCFC cannot predict at
this time when or whether Congress may actually pass legislation regarding
HCFC's and Home City's regulatory requirements or charter. Although such
legislation may change the activities in which HCFC and Home City may engage,
it is not anticipated that the current activities of HCFC or Home City will be
materially affected by those activity limits.
<PAGE>
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 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
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Total assets $12,678 $14,025
======= =======
Liabilities and Shareholders' Equity
Notes payable $ 1,800 $ 0
Accrued expense and other liabilities 8 21
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Total liabilities 1,808 21
Shareholders' equity 10,870 14,004
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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
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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
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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)
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Net cash provided by operating activities 36 7
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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)
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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)
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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
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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
<PAGE>
CORPORATE INFORMATION
================================================================================
Directors of HCFC and Home City
John D. Conroy, Owner and President of Conroy
Funeral Homes, Inc., Springfield, Ohio
P. Clark Engelmeier, Self-employed Life Insurance
Agent and Securities Broker
James Foreman, President and CEO of Foreman-
Blair Pontiac, Buick, GMC, Springfield, Ohio
Terry A. Hoppes, Owner and President of Hoppes
Engineering and Surveying Co.; President of
Hoppes Builders and Development Co.,
Springfield, Ohio
Douglas L. Ulery, President and CEO of Home City
Financial Corporation and Home City Federal
Savings Bank of Springfield
Executive Officers of HCFC
P. Clark Engelmeier Chairman of the Board
Douglas L. Ulery President and CEO
Jo Ann Holdeman Secretary
Charles A. Mihal Treasurer and CFO
Executive Officers of Home City
P. Clark Engelmeier Chairman of the Board
Douglas L. Ulery President and CEO
Don E. Lynam Senior Vice President
Jo Ann Holdeman Vice President and Secretary
Charles A. Mihal Treasurer and CFO
Annual Meeting
Wednesday, April 28, 1999, at 3:00 p.m.
The Springfield Inn
100 S. Fountain Avenue
Springfield, Ohio
Independent Auditors
Robb, Dixon, Francis, Davis, Oneson & Company
1205 Weaver Drive
Granville, Ohio 43023
Special Counsel
Vorys, Sater, Seymour and Pease LLP
Suite 2100, Atrium Two
221 East Fourth Street
P.O. Box 0236
Cincinnati, Ohio 45201-0236
General Counsel
Douglas A. Henson
Gorman, Veskauf, Henson & Wineberg
National City Bank Bldg.
4 West Main Street, Suite 723
Springfield, Ohio 45502
<PAGE>
There were 859,390 common shares of HCFCoutstanding on March 1, 1999, held of
record by approximately 363 shareholders. Since December 30, 1996, HCFCs
common shares have traded on the Nasdaq SmallCap Market. The following
represents high and low trading prices and dividends declared during each
respective quarter during 1997 and 1998. The trading prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission.
Dividends
1997 HIGH LOW Declared
- ------------------------------------------------------------------------------
First Quarter $14.250 $12.000 $0.08
Second Quarter $14.438 $12.750 $0.08
Third Quarter $16.250 $14.188 $0.08
Fourth Quarter $18.500 $15.250 $0.09
Dividends
1998 HIGH LOW Declared
First Quarter $19.250 $18.250 $0.09
Second Quarter $23.000 $14.750 $0.09
Special Capital Distribution $3.50
Third Quarter $15.500 $11.000 $0.09
Fourth Quarter $15.000 $11.500 $0.10
A copy of HCFCs Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon
request to:
Home City Federal Savings Bank
of Springfield
63 West Main Street
Springfield, Ohio 45502
Attn: Jo Ann Holdeman, Secretary
Ivestor Information
Investors, analysts and others seeking financial information may contact:
Douglas L. Ulery, President and CEO or
Charles A. Mihal, Treasurer and CFO
Home City Financial Corporation
63 West Main Street
Springfield, Ohio 45502
(937) 324-5736
Transfer Agent
Communications regarding change of address, transfer of shares, lost
certificates and dividends should be sent to:
Fifth Third Bank
Corporate Trust Administration
38 Fountain Square Plaza MD-1090D2
Cincinnati, Ohio 45263
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