To Our Shareholders,
We are pleased to present to you our Annual Report stating the performance of
Home City Financial Corporation during fiscal year 1999.
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. In the last
quarter of 1999, HCFC announced its third 5% stock repurchase program with
16,000 shares being repurchased to date. The quarterly dividend was increased
for the third consecutive year, moving up to $.105 per share from $.10 per
share starting with the dividend paid December 15, 1999. These programs are
indicative of our continuous efforts to explore various opportunities by
which shareholder value in the company may be increased while attempting to
accomplish the long-term goal of enhancing HCFC's presence as a progressive
financial services provider in its community.
We are also pleased to announce our plans to construct a new main office at
2454 N. Limestone Street, Springfield, Ohio. Our plans are to keep our
downtown office open as a branch banking office while using the new facility
as our main office and operations center. It is our hope to break ground
before the end of the first quarter of 2000 and complete construction by April
2001.
The year of 1999 was one of continuing growth for HCFC with total assets
increasing $22.6 million, or 26.5%, from $85.4 million in 1998. Our financial
results show that the company has experienced strong community demand for all
types of loan products. Net loans receivable for 1999 was $96.8 million, an
increase of $19.9 million, or 25.8%, from $77.0 million in 1998, with much of
the growth attributable to the commercial loan category. The commercial loan
portfolio increased 90.1%, or $10.0 million, from $11.1 million in 1998.
Non-performing loan ratios remain low while reserves have been established for
the increasingly diverse loan portfolio. Deposits continued to grow at a
significant pace, totaling $69.7 million at December 31, 1999. Net income for
the year ended December 31, 1999, was $976,000, an increase of $25,000, or
2.6%, over the $951,000 in net income recorded in 1998.
These results could not have been attained without the confidence and trust of
our shareholders, the commitment and professional work ethic of our management
staff and employees and the support and loyalty of our customers and
community. It is this partnership which sets us apart from the others.
We sincerely thank you.
/s/ Douglas L. Ulery
Douglas L. Ulery
President and Chief Executive Officer
<PAGE>
BUSINESS OF HOME CITY FINANCIAL CORPORATION
Home City Financial Corporation, a unitary savings and loan holding
company incorporated in 1996 under the laws of the State of Ohio ("HCFC"),
owns all of the issued and outstanding common shares of Home City Federal
Savings Bank of Springfield, a savings association chartered under the laws
of the United States ("Home City"). In December 1996, HCFC acquired all of
the common shares issued by Home City upon its conversion from a mutual
savings association to a stock savings association (the "Conversion"). Since
its formation, HCFC's activities have been limited primarily to holding the
common shares of Home City and investing excess funds from the Conversion
in investment securities and savings deposits in Home City.
Home City is a savings association 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.
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 data:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $107,989 $85,355 $71,854 $68,140 $53,225
Cash and cash equivalents (1) 3,483 1,910 1,518 9,839 1,874
Investment securities available-for-sale 3,045 3,091 4,580 2,234 1,661
Mortgage-backed and related securities
available-for-sale 424 559 700 2,748 3,395
FHLB stock 1,372 601 438 408 298
Loans, net 96,844 76,986 62,535 50,558 43,823
Deposits 69,671 60,499 51,689 49,559 45,021
Advances from FHLB of Cincinnati 26,505 11,571 5,712 4,101 2,511
Notes payable --- 1,800 --- --- ---
Shareholders' equity (2) 10,907 10,353 13,672 13,777 4,993
(Footnotes on following page)
<PAGE>
Summary of earnings and other data:
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
(Dollars in thousands)
Total interest income $7,898 $6,808 $5,862 $4,843 $4,208
Total interest expense 4,258 3,486 3,016 2,746 2,326
------ ------ ------ ------ ------
Net interest income 3,640 3,322 2,846 2,097 1,882
Provision for loan losses 34 61 43 87 37
------ ------ ------ ------ ------
Net interest income after
provision for loan losses 3,606 3,261 2,803 2,010 1,845
Noninterest income 123 98 89 75 24
Special SAIF assessment (3) --- --- --- 263 ---
Other noninterest expense 2,341 1,961 1,652 1,180 1,078
------ ------ ------ ------ ------
Income before income tax 1,388 1,398 1,240 642 791
Provision for income tax 412 447 352 181 254
------ ----- ------ ------ ------
Net income $ 976 $ 951 $ 888 $ 461 $ 537
====== ====== ====== ====== ======
Number of full service offices 1 1 1 1 1
</TABLE>
<TABLE>
<CAPTION>
Selected financial ratios:
At or for the year ended December 31,
-------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
Return on assets (4) 1.03% 1.20% 1.28% 0.81% 1.10%
Return on equity (5) 8.85 7.89 6.28 8.62 10.97
Interest rate spread (6) 3.42 3.53 3.13 3.39 3.64
Net interest margin (7) 4.00 4.39 4.23 3.84 4.01
Noninterest expense to average assets (8) 2.46 2.48 2.38 2.54 2.21
Average equity to average assets 11.60 15.24 20.35 9.45 10.04
Equity to assets at year end 10.39 12.74 19.49 20.52 9.69
Non-performing loans to total loans 0.20 0.24 0.41 0.45 0.52
Non-performing assets to total assets (9) 0.18 0.22 0.36 0.34 0.43
Allowance for loan losses to total loans 0.51 0.63 0.72 0.78 0.71
Allowance for loan losses to
non-performing loans 254.40 261.29 174.52 172.73 136.24
Net charge-offs (recoveries) to average loans 0.03 0.04 (0.02) 0.01 0.05
Dividend payout ratio (10) 32.40 31.62 31.13 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Home City converted from a mutual federal savings association to a
stock federal savings association on December 30, 1996. In connection with
the Conversion, 952,200 common shares ofHome City Financial Corporation were
sold, generating net proceeds of $8.3 million after Conversion expenses. Of
this amount, $4.6 million wasutilized to purchase 100% of the common stock of
Home City, 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.
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.
During 1999, HCFC received regulatory approval to repurchase up to 5%
of its outstanding shares. During the year ended December 31, 1999, 16,000
common shares were repurchased at an average price of $13.25. During 1998,
HCFC previously received regulatory approval to repurchase 5% of its
outstanding shares. During the year ended December 31, 1998, 45,200 common
shares were repurchased at an average price of $13.13.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Home City, and
HCFC's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include changes
in the economy and changes in interest rates in the nation and HCFC's primary
market area.
Without limiting the generality of the foregoing, some of the
forward-looking statements included herein are the statements under the
following headings and regarding the following matters:
1. Financial Condition. Management's statements regarding the amount and
adequacy of the allowance for loan losses at December 31, 1999.
2. Comparison of Results of Operations for the Fiscal Years Ended December
31, 1999 and 1998 - "Provision for Loan Losses". Management's
statements regarding the adequacy of the allowance for loan losses at
December 31, 1999.
3. Liquidity and Capital Resources. Management's belief that liquidity
and capital reserves are sufficient to meet its outstanding short- and
long-term needs.
4. New Legislation. Management's expectations that the Gramm-Leach-Bliley
Act will not have a material effect on the activities in which Home City
and HCFC currently engage, except to the extent that competition from
other types of financial institutions may increase as they engage in
activities not permitted prior to the enactment of the Gramm-Leach-
Bliley Act.
<PAGE>
Financial Condition
HCFC's consolidated total assets amounted to $108.0 million at December
31, 1999, an increase of $22.6 million, or 26.52%, over the $85.4 million in
total assets at December 31, 1998. Such increase in assets was funded
primarily by the $9.2 million net increase in deposits, $13.1 million net
increase in advances from the Federal Home Loan Bank (the "FHLB"), and
undistributed net earnings of $630,000.
Cash and cash equivalents, time deposits and investment securities
totaled $6.6 million at December 31, 1999, an increase of $1.5 million, or
30.39%, from December 31, 1998. During the year ended December 31, 1999, $1.3
million of investment securities matured. Such securities consisted primarily
of United States Government agency obligations totaling $1.0 million and
tax-free securities totaling $270,000. The proceeds were used primarily to
fund the increased demand for loans and the repurchase of common shares.
Mortgage-backed securities totaled $424,000 at December 31, 1999, a
decrease of $135,000 from December 31, 1998. Due to the composition of the
mortgage-backed securities portfolio coupled with the current loan demand, no
additional purchases were made.
Loans receivable totaled $97.3 million at December 31, 1999, an increase
of $19.9 million, or 25.64%, from the $77.5 million total at December 31,
1998. During the year ended December 31, 1999, loan disbursements amounted to
$44.4 million. Such disbursements were partially offset by principal
repayments of $23.8 million.
Home City's allowance for loan losses totaled $491,000 at December 31,
1999, which represented 0.51% of total loans and 254.40% of non-performing
loans.
At December 31, 1998, the allowance for loan losses totaled $486,000,
an amount which represented 0.63% of total loans and 261.29% of non-performing
loans.
Non-performing loans were $193,000 and $186,000 at December 31, 1999 and
1998, respectively, and represented 0.18% and 0.22% of total assets at each
date. The $7,000 net increase at December 31, 1999, was due to $193,000 in
loans that became classified as non-performing, $34,000 in loans that became
classified as performing, $117,000 that were paid off, $10,000 in principal
charge-offs, and $25,000 in transfers to other real estate owned. All loans
classified as non-performing at December 31, 1999, 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, 1999,
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. Such additions could adversely affect HCFC's results of
operations.
Deposits totaled $69.7 million at December 31, 1999, an increase of $9.2
million, or 15.16%, from $60.5 million at December 31, 1998. The increase is
consistent with the deposit growth trends (averaging over 10%) that Home City
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 $11.6 million at December 31, 1998, to $26.5 million at
December 31, 1999, an increase of 129.06%, 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, 1999 and 1998
General. Net income for the year ended December 31, 1999, was $976,000,
an increase of $25,000, or 2.63%, over the $951,000 in net income recorded in
1998. The increase in net income resulted primarily from a $318,000 increase
in net interest income, a $35,000 decrease in the provision for federal income
taxes, a $27,000 decrease in provisions for loan losses, and a $25,000
increase in noninterest income, which was partially offset by a $380,000
increase in noninterest expense.
<PAGE>
Net Interest Income. Net interest income totaled $3.6 million for the
year ended December 31, 1999, an increase of $318,000, or 9.57%, over the
$3.3 million recorded in 1998. Interest income on loans increased by $1.1
million, or 16.80%, during 1999 due primarily to an increase in the average
balance of the loans outstanding of $15.6 million, or 22.07%, being partially
offset by a 40 basis point (100 basis points equals one percent) decrease in
yield from 9.29% in 1998 to 8.89% in 1999. Interest income on mortgage-backed
securities decreased by $7,000, or 19.44%, due primarily to a $124,000, or
20.00%, decrease in the average balance of mortgage-backed securities
outstanding, which was slightly off-set by an increase in the weighted-
average yield year-to-year, from 5.85% in fiscal 1998 to 5.91% in 1999.
Interest income on investment securities increased by $6,000, or 3.17%, for
the year ended December 31, 1999, compared to fiscal 1998, as the average
balance decreased by $15,000 year-to-year and the related yield increased
by 15 basis points to 4.97% in 1999. Interest income on interest-bearing
deposits and federal funds sold decreased by $7,000 and $3,000, respectively,
for the year ended December 31, 1999, compared to 1998. The average balance
of interest-bearing deposits decreased $82,000, or 15.27%. There were no
investments in federal funds sold during 1999, compared to an average
investment of $66,000 in 1998. The yield on interest-bearing deposits
decreased 69 basis points to 3.97%.
Interest expense on deposits increased by $274,000, or 9.29%, during 1999,
due primarily to an increase in the average balance of deposits outstanding
of $7.2 million, or 13.09%, coupled with a decrease in the weighted-average
rate from 5.38% in 1998 to 5.19% in 1999. Interest expense on FHLB advances
and short-term borrowings increased by $498,000, or 92.57%, primarily due to
an increase in the average balance outstanding of $9.8 million, or 108.83%,
coupled with a decrease in weighted-average rate from 5.95% in 1998 to 5.49%
in 1999.
As a result of the foregoing changes in interest income and interest
expense, the interest rate spread decreased by 11 basis points, to 3.42% for
1999, as compared to 3.53% for 1998, while the net interest margin decreased
by 39 basis points to 4.00% for the year ended December 31, 1999.
Provision for Loan Losses. Home City maintains an allowance for loan
losses in an amount that, in management's judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. The provision
for loan losses is determined by management as the amount to be added to the
allowance for loan losses, after net charge-offs have been deducted, to bring
the allowance to a level 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, 1999.
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 $29,000 and $27,000 during the years
ended December 31, 1999 and 1998, respectively. Home City's charge-off
history is a product of a variety of factors, including Home City's
underwriting guidelines and the composition of its loan portfolio. Loans
secured by real estate made up 73% of Home City's loan portfolio, and loans
secured by first mortgages on one- to four-family residential real estate
made up 51% of total loans at December 31, 1999. 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 $34,000 and $61,000 for the years
ended December 31, 1999 and 1998, respectively. The ratio of non-performing
loans to total loans decreased to 0.20% in 1999 from 0.24% in 1998. At
December 31, 1999 and 1998, Home City had a ratio of allowance for loan
<PAGE>
losses to total loans of 0.51% and 0.63%, respectively, and ratios of
allowance for loan losses to non-performing loans of 254.40% and 261.29%.
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 $34,000 and $61,000 made in
1999 and 1998 were deemed appropriate by management to absorb reasonably
foreseeable loan losses.
Noninterest Income. Noninterest income totaled $123,000 for the year
ended December 31, 1999, an increase of $25,000, or 25.51%, from the $98,000
recorded in 1998. The increase resulted primarily from increases of $8,000
in income from life insurance policies, $6,000 in service charges on
deposit accounts, a $2,000 decrease in net gains recognized on the sale of
securities, and an increase of $13,000 in other miscellaneous fee income.
Noninterest Expense. Noninterest expense increased by $380,000, or
19.38%, to a total of $2.3 million for the year ended December 31, 1999, as
compared to 1998. Salaries and employee benefit expenses increased $121,000,
or 11.51%, primarily as a result of additional staffing and the employee
benefit programs. Occupancy and equipment expense increased $56,000, or
40.29%, data processing expenses increased $43,000, or 43.88%, and other
operating expenses increased $160,000, or 23.77%. 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 growth of Home City and the
reporting requirements of a public company.
Federal Income Taxes. The provision for federal income taxes totaled
$412,000 for the year ended December 31, 1999, a decrease of $35,000, or
7.83%, from the $447,000 provision recorded in fiscal 1998. HCFC's
effective tax rate decreased to 29.68% in 1999 from 31.97% in 1998 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,
-----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing demand deposits $ 455 $ 18 3.97% $ 537 $ 25 4.66%
Federal funds sold 0 0 0.00 66 3 5.22
Time deposits 24 0 1.25 23 0 1.25
Investment securities (1) 3,911 195 4.97 3,926 189 4.82
Mortgage-backed securities 496 29 5.91 620 36 5.85
Loans receivable (2) 86,092 7,656 8.89 70,525 6,555 9.29
------- ------ -------- -------
Total interest-earning assets (3) 90,978 7,898 8.68 75,697 6,808 8.99
Noninterest-earning assets:
Less: Allowance for loan losses (494) (460)
Other non-earning assets 4,642 3,885
------ -------
Total assets $95,126 $79,122
======= =======
Interest-bearing liabilities:
NOW accounts 1,176 32 2.71% 704 15 2.08%
Money market accounts 427 13 3.11 291 9 3.08
Passbook accounts 11,708 391 3.34 9,223 256 2.78
Certificates of deposit 48,713 2,786 5.72 44,628 2,668 5.98
------- ------ ------- -------
Total deposits 62,024 3,222 5.19 54,846 2,948 5.38
Notes payable 379 25 6.59 723 51 7.02
FHLB advances 18,497 1,011 5.46 8,316 487 5.85
------- ------ ------- -------
Total interest-bearing liabilities 80,900 4,258 5.26% 63,885 3,486 5.46%
Noninterest-bearing liabilities 3,195 3,181
------ -------
Total liabilities 84,095 67,066
Total shareholders' equity 11,031 12,056
------- -------
Total liabilities and
shareholders' equity $95,126 $79,122
======= =======
Net interest income; net interest rate spread $3,640 3.42% $3,322 3.53%
====== ===== ====== =====
Net interest margin (4) 4.00% 4.39%
===== =====
Average interest-earning assets to interest-bearing liabilities 112.46% 118.49%
======= =======
</TABLE>
(1) Includes $33,000 and $40,000 of nontaxable municipal income recorded
in 1999 and 1998, respectively. The tax-equivalent yield on investments
is 6.53% and 6.22% for 1999 and 1998, 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 8.70% and 9.01% for
1999 and 1998, 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 periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in
rate and volume. The combined effects of changes in both volume and rate,
which cannot be separately identified, have been allocated proportionately to
the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------ ----------------------
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 $ (4) $ (3) $ (7) $ (14) $ (1) $ (15)
Federal funds sold (3) 0 (3) (22) 0 (22)
Time deposits 0 0 0 (68) (1) (69)
Investment securities (1) 7 6 (158) (27) (185)
Mortgage-backed and related securities (7) 0 (7) (19) (5) (24)
Loans receivable 1,447 (346) 1,101 1,300 (39) 1,261
------ ------ ------ ------- ----- -------
Total interest income 1,432 (342) 1,090 1,019 (73) 946
Interest expenses attributable to:
NOW accounts 10 7 17 6 3 9
Money market accounts 4 0 4 (1) (1) (2)
Passbook savings accounts 69 66 135 33 38 71
Certificates of deposit 244 (126) 118 213 (85) 128
Notes payable (24) (2) (26) 51 0 51
Borrowed funds 596 (72) 524 260 (47) 213
------ ------- ------- ------- ------ -------
Total interest expense 899 (127) 772 562 (92) 470
------ ------- ------- ------- ------ -------
Increase (decrease) in net interest income $ 533 $ (215) $ 318 $ 457 $ 19 $ 476
====== ====== ======= ======= ====== =======
</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 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, 1999, 2% of the economic value of Home City's assets was
approximately $2.2 million. Because the interest rate risk of a 200 basis
point increase in market rates was a $2.4 million decrease in NPV at December
31, 1999, Home City would have been required to deduct $102,000 from its
capital in determining whether Home City met its risk-based capital
requirement.
<PAGE>
Presented below, as of December 31, 1999, is an analysis of Home City's
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates. The
table also contains the policy limits set by the Board of Directors of Home
City as the maximum changes in NPV that the Board of Directors deems advisable
in the event of various changes in interest rates. Such limits have been
established with consideration of the dollar impact of various rate changes
and Home City's strong capital position.
As illustrated in the table, Home City's NPV is more sensitive to rising
rates than declining rates. Such difference in sensitivity occurs principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as
they do when interest rates are declining. As a result, in a rising interest
rate environment, the amount of interest Home City would receive on its loans
would increase relatively slowly as loans are slowly repaid and new loans at
higher rates are made. Moreover, the interest Home City would pay on its
deposits would increase rapidly because Home City's deposits generally have
shorter periods to repricing. Because Home City has not originated loans in
accordance with traditional secondary market guidelines, the sale of
fixed-rate loans may be difficult. In addition, increases in interest rates
can also result in the flow of funds away from savings institutions into
direct investments or other investment vehicles, such as mutual funds, which
may pay higher rates of return than savings institutions. Assumptions used in
calculating the amounts in this table are OTS assumptions.
At December 31, 1999
--------------------------
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
----------------------- ----------- -------- --------
(Dollars in thousands)
+300 (45)% $(3,762) (26)%
+200 (25) (2,363) (16)
+100 (10) (1,068) (7)
0 0 0 0
-100 (10) 697 5
-200 (25) 1,431 10
-300 (45) 2,264 15
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. In order to maintain Home City's net interest margin management is
continually developing and modifying their strategies to stimulate the demand
for quality loans and tailoring the types of loan products available that can
be adjusted to match the current market conditions. Additional alternative
sources of funding are being explored in anticipation of possible interest
rate fluctuations.
<PAGE>
Liquidity and Capital Resources
Home City's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the years presented:
Year ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
Net income $ 976 $ 951
Adjustments to reconcile net income to net cash
from operating activities 831 299
Net cash provided by operating activities 1,807 1,250
Net cash used in investing activities (21,984) (12,871)
Net cash provided by financing activities 21,750 12,013
Net change in cash and cash equivalents 1,573 392
Cash and cash equivalents at beginning of year 1,910 1,518
------- -------
Cash and cash equivalents at end of year $ 3,483 $ 1,910
======= =======
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, 1999, Home
City's regulatory liquidity ratio was 7.13%. At such date, Home City had
commitments to originate loans totaling $11.2 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 P 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. Home City exceeded all of its capital requirements at
December 31, 1999 and 1998.
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.
<PAGE>
"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 4% 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 $491,000 at December 31, 1999.
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, 1999:
<TABLE>
<CAPTION>
Excess of actual
capital over Applicable
Actual capital Current requirement current requirement asset total
-------------- ------------------- ------------------- -----------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $10,523 9.73% $1,630 1.50% $8,893 8.23% $108,696
Core capital 10,523 9.73 4,348 4.00 6,175 5.73 108,696
Risk-based capital 11,014 14.85 5,932 8.00 5,082 6.85 74,152
</TABLE>
On February 8, 2000, Home City committed to capital expenditures of $2.8
million for the construction of a new main office and operations center.
New Legislation
On November 12, 1999, the Gramm-Leach Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws which had generally
prevented banks from affiliating with securities and insurance firms and makes
other significant changes in the financial services in which various types of
financial institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad
powers for unitary thrift holding companies in existence on May 4, 1999,
including HCFC. Any thrift holding company formed after May 4, 1999, however,
will be subject to the same restrictions as multiple thrift holding companies,
which generally are limited to activities that are considered incidental to
banking.
The GLB Act authorizes a new "financial holding company," which can own
banks and thrifts and which are also permitted to engage in a variety of
financial activities, including insurance and securities underwriting and
agency activities, as long as the depository institutions it owns are well
capitalized, well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities
in which Home City and HCFC currently engage, except to the extent that
competition from other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and results of operations primarily in terms of historical dollars
without considering changes in the relative purchasing power of money over
time because of inflation.
Virtually all assets and liabilities of HCFC are monetary in nature. As
a result, interest rates have a more significant impact on performance than
the effects of general levels of inflation.
Effect of Year 2000
Home City did not experience any problems as the year changed from 1999
to 2000. Management had placed significant emphasis on ensuring that its
operating systems were Year 2000 ("Y2K") compliant.
In mid-1997, the Board of Directors had appointed a Year 2000 Committee
to address the operating systems that were at risk and to develop an Action
Plan Year 2000. As operating risks were identified, Home City repaired,
replaced or upgraded the related equipment and systems. Home City was
primarily reliant on third-party vendors for its computer output and
processing, so considerable effort was placed on assessing their Y2K
readiness. A business resumption contingency plan was developed inclusive of
cash management aspects to minimize or avoid any possible customer
inconvenience.
Home City had projected costs of $79,000 for Y2K preparedness. Some of
the major factors included were the use of external consultants, purchases of
hardware and software, the purchase, printing and delivery of customer
awareness materials and the borrowing and lost opportunity costs associated
with the build-up of a sufficient source of cash to meet customer needs.
Actual expenses amounted to approximately $83,000, the bulk of which is
reflected in this year's Consolidated Financial Statements.
<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, 1999 and 1998, 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, 1999 and 1998, 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 1, 2000
<PAGE>
HOME CITY FINANCIAL CORPORATION - CONSOLIDATED BALANCE SHEETS
=============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 3,201 $ 1,147
Interest-bearing demand deposits in other banks 282 763
-------- -------
Total cash and cash equivalents 3,483 1,910
Time deposits with original maturities of 90 days or more 24 24
Investment securities available-for-sale, at fair value 3,045 3,091
Mortgage-backed securities available-for-sale, at fair value 424 559
Loans, net 96,844 76,986
Stock in Federal Home Loan Bank 1,372 601
Accrued interest receivable 520 440
Properties and equipment 1,015 584
Cash surrender value of life insurance 1,181 1,129
Deferred income taxes 18 0
Other assets 63 31
-------- -------
TOTAL ASSETS $107,989 $85,355
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 69,671 $60,499
Federal Home Loan Bank advances 26,505 11,571
Notes payable 0 1,800
Accrued interest payable 177 115
Advance payments by borrowers for taxes and insurance 119 74
Deferred income taxes 0 112
Other liabilities 301 314
-------- -------
TOTAL LIABILITIES 96,773 74,485
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 6,033 6,013
Retained earnings, substantially restricted 7,288 6,658
Treasury shares, at cost (1,516) (1,304)
Accumulated other comprehensive income 309 517
Common shares purchased by:
Employee Stock Ownership Plan (533) (609)
Recognition and Retention Plan (365) (405)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 11,216 10,870
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $107,989 $85,355
======== =======
</TABLE>
- -------------------------------
See accompanying notes.
<PAGE>
HOME CITY FINANCIAL CORPORATION - CONSOLIDATED STATEMENTS OF INCOME
===================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans $ 7,656 $ 6,555
Mortgage-backed securities 29 36
Investment securities 195 189
Interest-bearing demand deposits 18 28
------- --------
TOTAL INTEREST INCOME 7,898 6,808
INTEREST EXPENSE
Deposits 3,222 2,948
Borrowed funds 1,036 538
------- --------
TOTAL INTEREST EXPENSE 4,258 3,486
NET INTEREST INCOME 3,640 3,322
Provision for loan losses 34 61
------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,606 3,261
NONINTEREST INCOME
Service charges on deposits 16 10
Life insurance 75 67
Gain on sale of securities, net 0 2
Other income 32 19
------- --------
TOTAL NONINTEREST INCOME 123 98
NONINTEREST EXPENSES
Salaries and employee benefits 1,172 1,051
Supplies, telephone and postage 76 51
Occupancy and equipment 195 139
FDIC deposit insurance 36 34
Data processing 141 98
Legal, accounting and examination 255 219
Franchise taxes 165 181
Other expenses 301 188
------- --------
TOTAL NONINTEREST EXPENSES 2,341 1,961
------- --------
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 1,388 1,398
Federal income tax expense 412 447
------- --------
NET INCOME $ 976 $ 951
======= ========
Earnings per common share - basic $1.25 $1.17
Earnings per common share - diluted $1.12 $1.04
- -----------------------------
See accompanying notes.
</TABLE>
<PAGE>
HOME CITY FINANCIAL CORPORATION-CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
======================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
-------------------------------------- ------------------------------------------------
Accumu-
lated
Common Common other Common Common
shares shares Additional compre- shares shares Compre-
Common Treasury purchased purchased paid-in Retained Treasury hensive purchased purchased hensive
shares shares by ESOP by RRP capital earnings shares income by ESOP by RRP income
------ ------ ------- ------ ------- -------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 952,200 (47,610) (68,558) (6,800) $9,150 $6,037 $(711) $ 332 $(686) $(118)
Net income 951 $ 951
Other comprehensive income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income tax of $97 185 185
-----
Comprehensive income $1,136
======
Purchase of treasury shares (45,200) (593)
Purchase of common shares
by Recognition and
Retention Plan (17,002) (370)
Shares allocated under
Employee Stock
Ownership Plan 7,618 36 77
Shares earned under
Recognition and
Retention Plan 4,761 (7) 83
Distribution of capital
($3.50 per share) (3,166)
Dividends declared
($.37 per share) (330)
------- ------- ------- ------- ------ ------- ------- ----- ----- ------
December 31, 1998 952,200 (92,810) (60,940) (19,041) $6,013 $6,658 $(1,304) $ 517 $(609) $(405)
Net income 976 $976
Other comprehensive income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $108 (208) (208)
----
Comprehensive income $768
====
Purchase of treasury shares (16,000) (212)
Purchase of common shares
by Recognition and
Retention Plan (2,500) (43)
Shares allocated under
Employee Stock
Ownership Plan 7,618 26 76
Shares earned under
Recognition and
Retention Plan 4,761 (6) 83
Dividends declared
($.405 per share) (346)
------- --------- ------- ------- ------ ------ ------- ------- ------ -------
December 31, 1999 952,200 (108,810) (53,322) (16,780) $6,033 $7,288 $(1,516) $ 309 $(533) $(365)
======= ========= ======== ======== ====== ====== ======= ======= ====== =======
</TABLE>
______________________________
See accompanying notes.
<PAGE>
HOME CITY FINANCIAL CORPORATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
=======================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 976 $ 951
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion (4) 2
Provision for loan losses 34 61
(Gain) loss on sale of securities 0 (2)
Depreciation 70 50
Deferred income taxes (42) (9)
Life insurance income, net of expenses (52) (44)
Employee Stock Ownership Plan compensation expense 101 113
Recognition and Retention Plan compensation expense 77 76
FHLB stock dividends (66) (34)
Proceeds from sales of loans 750 0
Net change in:
Accrued interest receivable (80) (31)
Accrued interest payable 62 36
Other assets (6) 9
Other liabilities (13) 72
------ -----
Net cash provided by operating activities 1,807 1,250
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in time deposits 0 1
Purchases of securities available-for-sale (1,777) (1,070)
Proceeds from sales of securities available-for-sale 236 617
Proceeds from maturities of securities available-for-sale 1,276 2,220
Collections on mortgage-backed securities available-for-sale 128 143
Net increase in loans (20,642) (14,512)
Purchases of properties and equipment (501) (141)
Purchase of FHLB stock (704) (129)
------- -------
Net cash used in investing activities (21,984) (12,871)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 9,172 8,810
Net decrease in short-term FHLB advances (713) (473)
Proceeds from new long-term FHLB advances 16,065 6,875
Payments on long-term FHLB advances (418) (543)
Net increase in advance payments by borrowers for taxes
and insurance 45 3
Proceeds from notes payable 0 1,800
Payments on notes payable (1,800) 0
Distribution of capital 0 (3,166)
Purchase of common shares for Recognition And Retention Plan (43) (370)
Purchase of treasury shares (212) (593)
Cash dividends paid (346) (330)
------- -------
Net cash provided by financing activities 21,750 12,013
------- -------
Net increase in cash and cash equivalents 1,573 392
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,910 1,518
------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,483 $ 1,910
======= =======
</TABLE>
<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 unitary savings and
loan holding company which was organized in August of 1996. 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.
<PAGE>
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the corporation
considers cash and due from banks, interest-bearing demand deposits in other
banks and federal funds sold to be cash equivalents. The following are
supplemental disclosures for the consolidated statements of cash flows for the
years ended December 31, 1999 and 1998:
(Dollars in thousands)
1999 1998
---- ----
Cash paid during the year for interest $4,196 $3,450
Cash paid during the year for income taxes 517 459
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.
Declines in the fair value of individual securities below their cost that are
other than temporary result in write-downs of individual securities to their
value. The related write-downs are included in earnings as realized losses.
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.
<PAGE>
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is computed principally on the
straight-line method over their estimated useful lives. The estimated lives
of buildings and improvements ranged from 10 to 50 years. The estimated lives
of equipment ranged from 5 to 25 years.
Real Estate Owned
Real estate owned is stated at fair value less estimated costs to sell. When
a property is acquired, the excess of the recorded investment in the property
over fair value, if any, is charged to the allowance for loan losses.
Subsequent declines in the estimated fair value, net operating results and
gains or losses on disposition of the property are included in other expenses.
Stock Options
The corporation has elected to continue accounting for employee stock
compensation plans under APB Opinion 25 and related interpretations. However,
the Corporation discloses in the Notes to Consolidated Financial Statements in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and the equity instruments based on
the fair value of those instruments.
Derivative Financial Instruments
The corporation has no derivative financial instruments.
Income Taxes
The corporation, bank and service corporation each filed separate tax returns
during 1998, but will file on a consolidated basis for the calendar year ended
December 31, 1999. 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
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.
Reclassifications
Certain amounts have been reclassified to conform with the 1999 presentation.
<PAGE>
NOTE B - BUSINESS CONVERSION
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, 1999 At December 31, 1998
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
Federal
agencies $1,890 $ 0 $(25) $1,865 $1,500 $ 2 $(1) $1,501
State &
municipal
securities 642 4 (17) 629 764 15 0 779
Equity
securities 39 512 0 551 45 766 0 811
------ ---- ----- ------ ------ --- --- ------
Total 2,571 516 (42) 3,045 2,309 783 (1) 3,091
Mortgage-backed securities
GNMA's 429 0 (5) 424 558 1 0 559
------ ---- ----- ------- ------- --- --- ------
Total $3,000 $516 $(47) $3,469 $2,867 $784 $(1) $3,650
====== ==== ===== ====== ====== ==== ==== ======
</TABLE>
<PAGE>
The amortized cost and estimated fair value of investment and mortgage-backed
securities available-for-sale at December 31, 1999, 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 $ 55 $ 55 $ 0 $ 0
After one year through five years 2,286 2,263 0 0
After five years through ten years 191 176 429 424
Equity securities 39 551 0 0
------ ------ ----- ------
Total $ 2,571 $ 3,045 $ 429 $ 424
</TABLE>
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 a carrying value of approximately $500,000 and
$500,000 were pledged at December 31, 1999 and 1998, respectively, to secure
certain deposits.
During 1999, the corporation sold securities available-for-sale for total
proceeds of approximately $236,000 resulting in no gross realized gains or
losses. 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.
<PAGE>
NOTE D - LOANS
Loans at December 31, 1999 and 1998, are summarized as follows:
(Dollars in thousands)
1999 1998
---- ----
Loans secured by real estate:
One-to four-family residential properties $ 50,771 $ 42,485
Multifamily (five or more) residential properties 2,249 2,463
Nonresidential properties 9,714 9,894
Land 1,392 1,721
Construction 5,580 4,561
Consumer 6,490 5,226
Commercial:
Secured by real estate 11,750 5,418
Other 9,389 5,704
-------- --------
Total 97,335 77,472
Allowance for loan losses (491) (486)
-------- --------
Net loans $ 96,844 $ 76,986
======== ========
An analysis of the allowance for loan losses is as follows:
(Dollars in thousands)
1999 1998
---- ----
Balance, beginning of year $ 486 $ 452
Provision for loan losses 34 61
Loans charged off (31) (40)
Recoveries 2 13
-------- --------
Balance, end of year $ 491 $ 486
======== ========
At December 31, 1999 and 1998, 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 $0 and $54,000, respectively. The
average recorded investment in impaired loans amounted to approximately
$16,000 and $68,000 for the years ended December 31, 1999 and 1998,
respectively. The allowance for loan losses related to impaired loans
amounted to approximately $0 and $54,000 at December 31, 1999 and 1998,
respectively. Interest income on impaired loans of $0 and $16,000 was
recognized for cash payments received for the years ended December 31, 1999
and 1998.
In addition, at December 31, 1999 and 1998, the bank had other nonaccrual
loans of approximately $287,000 and $164,000, 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, 1999 and 1998, the bank serviced loans for others with
principal balances of $1,694,000 and $2,132,000, respectively.
<PAGE>
In the ordinary course of business, the bank has and expects to continue to
have transactions, including borrowings, with its officers, directors,
shareholders, and their affiliates. In the opinion of management, such
transactions were on substantially the same terms, including interest rates
and collateral, as those prevailing at the time of comparable transactions
with other persons and did not involve more than a normal risk of
collectibility or present any other unfavorable features to the bank. All
loans to such borrowers are summarized as follows:
(Dollars in thousands)
Balance, December 31, 1998 $ 966
New loans 203
Payments (108)
--------
Balance, December 31, 1999 $ 1,061
=========
NOTE E - PROPERTIES AND EQUIPMENT
A summary of properties and equipment at December 31, 1999 and 1998 follows:
(Dollars in thousands)
1999 1998
---- ----
Land $ 114 $ 118
Buildings and improvements 442 437
Equipment 543 464
Construction in process 421 0
--------- --------
1,520 1,019
Accumulated depreciation (505) (435)
--------- --------
Total $ 1,015 $ 584
========= ========
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, 1999 and 1998, there were no notes payable to the insurance company.
<PAGE>
NOTE G - DEPOSITS
Deposit account balances at December 31, 1999 and 1998, are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing accounts $ 1,912 2.7% $ 1,605 2.7%
NOW and money market accounts 1,480 2.1 1,439 2.4
Savings accounts 12,241 17.6 11,084 18.3
Certificates of deposit 54,038 77.6 46,371 76.6
-------- ----- ------ ------
Totals $ 69,671 100.0% $60,499 100.0%
======== ===== ======= ======
</TABLE>
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was approximately $12,682,000 and $8,999,000 at
December 31, 1999 and 1998, respectively. Deposits in excess of $100,000 are
not insured by the FDIC.
At December 31, 1999, the scheduled maturities of certificates of deposit are
as follows:
(Dollars in thousands)
2000 $37,174
2001 7,678
2002 8,383
2003 498
2004 and thereafter 305
-------
Total $54,038
=======
The bank held related party deposits of approximately $740,000 and $553,000 at
December 31, 1999 and 1998, respectively.
<PAGE>
NOTE H - FEDERAL HOME LOAN BANK ("FHLB") ADVANCES
Federal Home Loan Bank advances are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current
interest Balance
------------------
rate 1999 1998
---- ---- -----
<S> <C> <C> <C>
Variable-rate advances, with monthly interest payments:
Advance due in 1999 $ 0 $ 1,526
Advance due in 2003 4.64% 1,500 1,500
Advance due in 2007 6.47 1,600 0
Advance due in 2008 5.28 5,000 5,000
Advance due in 2009 5.61 12,500 0
Fixed-rate advances, with monthly principal
and interest payments:
Advance due in 2000 5.98 1,047 234
Advance due in 2001 6.30 131 197
Advance due in 2002 5.95 728 0
Advance due in 2003 6.36 745 233
Advance due in 2004 8.35 300 360
Advance due in 2005 8.30 581 673
Advance due in 2006 6.35 1,809 1,261
Advance due in 2010 3.30 564 587
_______ _______
Total Federal Home Loan Bank advances 5.70% $26,505 $11,571
======= =======
</TABLE>
FHLB advances are collateralized by all shares of FHLB stock owned by the bank
(totaling $1,372,000) and by a portion of the bank's mortgage loan portfolio
(totaling approximately $40,865,000). As of December 31, 1999, the bank had
approximately an additional $8,635,000 of qualified mortgage loans that could
be used to collateralize additional borrowings. Based upon the bank's
eligible mortgage collateral, total FHLB advances are limited to approximately
$33,017,000.
The aggregate minimum future annual principal payments on FHLB advances are
$1,950,000 in 2000, $897,000 in 2001, $862,000 in 2002, $2,090,000 in 2003,
and $20,706,000 after 2003.
<PAGE>
NOTE I - NOTES PAYABLE
Notes payable are comprised of the following at December 31:
(Dollars in thousands)
Balance
-----------------------
1999 1998
---- ----
Note due February 26, 1999 $ 0 $ 1,500
Note due June 26, 1999 0 300
------- -------
Total notes payable $ 0 $ 1,800
======= =======
At December 31, 1998, the corporation had indebtedness to a bank for
$1,800,000. The notes had floating interest rates tied to prime. The notes
were unsecured. These notes were paid off in 1999.
NOTE J - FEDERAL INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1999, 1998 and 1997 are as follows:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Federal income tax expense
Current tax expense $ 454 $ 456 $ 421
Deferred tax expense (42) (9) (69)
----- ----- -----
Total $ 412 $ 447 $ 352
===== ===== =====
A reconciliation of the federal statutory tax rate to the corporation's
effective tax rate for the years ended December 31, 1999, 1998 and 1997, are
as follows:
1999 1998 1997
---- ---- ----
Federal income tax statutory rate 34.0% 34.0% 34.0%
Tax-exempt income, less disallowed
interest expense (2.5) (1.9) (3.2)
Other, net (1.8) (0.1) (2.4)
----- ----- -----
Actual effective income tax rate 29.7% 32.0% 28.4%
===== ===== =====
<PAGE>
The tax effect of temporary differences which comprise the significant
portions of the corporation's deferred tax assets and deferred tax liabilities
as of December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets
Nonaccrual loan interest $ 2 $ 5
Allowance for loan losses 149 130
Employee benefits 86 85
Other 38 0
----- -----
275 220
----- -----
Deferred tax liabilities
Accumulated depreciation (39) (32)
Net deferred loan costs (59) (28)
Net unrealized gain on securities available-for-sale (159) (267)
Other 0 (5)
----- -----
(257) (332)
----- -----
Total net deferred tax assets (liabilities) $ 18 $(112)
===== =====
Included in retained earnings at December 31, 1999 and 1998, 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 set forth by the Office of Thrift Supervision (the "OTS"). Under
regulations of the OTS applicable to converted savings associations, the bank
is not permitted to pay a cash dividend on its capital stock if its regulatory
capital would, as a result of the payment of such dividend, be reduced below
the amount required for the Liquidation Account or the applicable regulatory
capital requirements prescribed by the OTS.
As disclosed in NOTE 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 declaring any dividend on its common shares.
The OTS may object to the dividend during that 30-day period based on safety
and soundness concerns. Moreover, the OTS may prohibit any capital
distribution otherwise permitted by regulation if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
<PAGE>
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 weighted-average number of
shares (denominator) for the basic and diluted EPS calculations. There are no
adjustments to net income.
1999 1998
---- ----
Weighted-average common shares outstanding - basic 776,547 812,070
Effect of dilutive securities on number of shares
RRP shares 20,208 17,027
ESOP shares 60,940 68,558
Stock options 17,497 19,869
------- -------
Total dilutive securities 98,645 105,454
------- -------
Weighted- average common shares outstanding - diluted 875,192 917,524
======= =======
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, 1999 and 1998, was $15,000 and $10,000, 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, 1999 and 1998, was $53,000 and $28,000, 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, 1999 and 1998, was $53,000 and $46,000, respectively.
<PAGE>
NOTE N - STOCK REPURCHASE PROGRAM
During 1999, the corporation received regulatory approval to repurchase up to
5% of its outstanding shares. During the year ended December 31, 1999, 16,000
common shares were repurchased at an average price of $13.25. During 1998,
the corporation previously received regulatory approval to repurchase 5% of
its outstanding shares. During the year ended December 31, 1998, 45,200
common shares were repurchased at an average price of $13.13.
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 and interest payments made by the ESOP on the loan. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the corporation's discretionary contributions to the ESOP
and earnings on ESOP assets. Principal payments are scheduled to occur in
even annual amounts over a ten year period. However, in the event
contributions exceed the minimum debt service requirements, additional
principal payments will be made. During 1999, an additional 16,696 shares
were acquired by the ESOP Plan with the proceeds from the $3.50 special
capital distribution. ESOP compensation expense for the years ended December
31, 1999 and 1998, was $75,000 and $113,000, respectively. Shares held by the
ESOP at December 31, 1999 and 1998, are as follows:
1999 1998
---- ----
Allocated shares 15,236 7,618
Shares allocated 9,448 7,618
Additional shares acquired 2,051 0
Shares distributed (101) 0
-------- --------
Total allocated shares 26,634 15,236
Unallocated shares 60,940 68,558
Shares released for allocation (9,448) (7,618)
Additional shares acquired 14,645 0
-------- --------
Total unallocated shares 66,137 60,940
-------- --------
Total ESOP shares 92,771 76,176
-------- --------
Fair value of unallocated shares $827,000 $823,000
======== ========
<PAGE>
Recognition and Retention Plan ("RRP")
A recognition and retention plan was authorized 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 award 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, 1999 and 1998, was $85,000 and
$76,000, 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 authorized 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 with a maximum term of ten years for each option 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 distribution of
capital 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.
Option activity under the SOP is as follows:
Weighted-
average
Number of exercise
shares price
------ -----
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
Granted 0 0.00
Exercised 0 0.00
Canceled 0 0.00
------ ------
Outstanding December 31, 1999 98,565 $11.70
====== ======
At December 31, 1999, 32,857 shares were available for future grants under the
SOP.
<PAGE>
Additional information regarding options outstanding as of December 31, 1999,
is as follows:
Weighted-average
Exercise Options Options remaining
price outstanding exercisable contractual life
----- ----------- ----------- ----------------
$11.70 98,565 39,426 7.8 years
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the standard's fair value method been used to measure compensation cost for
the SOP. In future years, the pro forma effect of not applying this standard
is expected to increase as additional options are granted.
The 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: 1999 1998
- ---------- ---- ----
As reported $976 $951
Pro forma $935 $901
Earnings per common share - basic
As reported $1.25 $1.17
Pro forma $1.20 $1.11
Earnings per common share - diluted
As reported $1.12 $1.04
Pro forma $1.07 $0.98
<PAGE>
NOTE P- REGULATORY MATTERS
The bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the OTS. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the bank and the consolidated financial statements. Under
the regulatory capital adequacy guidelines and the regulatory framework for
prompt corrective action, the bank must meet specific capital guidelines that
involve quantitative measures of the bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The bank's capital amounts and classification under the prompt corrective
action guidelines are also subject to qualitative judgements by the regulators
about components, risk-weightings, and other factors.
The capital adequacy regulations of the OTS require that the bank maintain
tangible capital equal to at least 1.5% of adjusted total assets, core capital
of at least 4.0% of adjusted total assets, and risk-based capital of at least
8.0% of risk-weighted assets. At December 31, 1999, the bank's capital
exceeded all of such requirements.
As of December 31, 1999, the most recent notification from the OTS, the bank
was categorized as "Well Capitalized" under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized under
the prompt corrective action regulations, the bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
following tables. There are no conditions or events since the most recent
notification that management believes have changed the bank's prompt
corrective action category.
The following reconciliation compares the bank's capital under GAAP to its
regulatory capital, at December 31, 1999:
<TABLE>
<CAPTION>
(Dollars in thousands)
Risk-based Tier I
capital capital
------- -------
<S> <C> <C>
Equity per GAAP $ 10,860 $ 10,860
Less unrealized gain on securities available-for-sale,
net of applicable income taxes (309) (309)
Less advance to subsidiary (28) (28)
Plus allowance for loan losses 491 N/A
-------- ---------
Regulatory capital $ 11,014 $ 10,523
======== ========
The bank's actual and required capital amounts and ratios are as follows:
</TABLE>
<PAGE>
<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, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) $11,014 14.9% $5,932 8.0% $7,415 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 10,523 14.2 N/A N/A 4,449 6.0
Tier 1 Capital
(to Total Assets) 10,523 9.7 4,348 4.0 5,435 5.0
Tangible Capital
(to Total Assets) 10,523 9.7 1,630 1.5 N/A N/A
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
</TABLE>
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.
<PAGE>
The bank had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At December 31, 1999 At December 31, 1998
Fixed- Adjustable- Fixed- Adjustable-
rate rate Total rate rate Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Undisbursed balance
of loans closed-
mortgage loans $4,438 $ 0 $4,438 $1,865 $ 393 $2,258
First mortgage
loans 316 259 575 1,933 508 2,441
Consumer and
other loans 81 0 81 100 0 100
Open-end consumer loans 0 1,455 1,455 0 1,476 1,476
Commercial loans 0 4,672 4,672 0 3,192 3,192
------ ------ ------- ------ ------ ------
Total $4,835 $6,386 $11,221 $3,898 $5,569 $9,467
====== ====== ======= ====== ====== ======
</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. The bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the bank upon extension of credit,
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 bank accounts at four banks. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
$100,000. Cash at two of these institutions exceeded Federally insured
limits. The amount in excess of the FDIC limit totaled $987,000.
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.
<PAGE>
The following methods and assumptions were used by the bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate those assets'
fair values.
Time deposits: Fair values for time deposits are estimated using a discounted
cash flow analysis that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For adjustable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed-rate commercial real
estate and rental property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. Fair values for impaired
loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
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.
<PAGE>
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31
-----------------------
1999 1998
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $3,483 $3,483 $1,910 $1,910
Time deposits 24 22 24 21
Investment securities 3,045 3,045 3,091 3,091
Mortgage-backed securities 424 424 559 559
Loans 96,844 98,066 76,986 80,430
Borrowed funds 520 520 440 440
Life insurance 1,181 1,181 1,129 1,129
Financial liabilities:
Deposits 69,671 70,485 60,499 60,372
Borrowed funds 26,505 26,531 13,371 13,178
Accrued interest payable 177 177 115 115
</TABLE>
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:
<TABLE>
<CAPTION>
Balance Sheets
(Dollars in thousands)
December 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Assets
Interest-bearing savings deposit with subsidiary bank $ 202 $ 151
Investment in subsidiary bank 10,860 12,414
Other assets 158 113
------- -------
Total assets $11,220 $12,678
------- -------
Liabilities and Shareholders' Equity
Note payable $ 0 $ 1,800
Accrued expense and other liabilities 4 8
------- -------
Total liabilities 4 1,808
Shareholders' equity 11,216 10,870
------- -------
Total liabilities and shareholders' equity $11,220 $12,678
======= =======
Statements of Income
(Dollars in thousands)
Year ended December 31,
1999 1998
---- ----
Income
Dividends from subsidiary $ 2,390 $ 0
Interest income 60 127
Other income 0 3
-------- -------
Total income 2,450 130
Expense
Interest expense 25 51
Other expense 139 156
------- -------
Total expense 164 207
Income (loss) before income taxes and undistributed
earnings of subsidiary 2,286 (77)
Income tax benefit (35) (15)
Income (loss) before undistributed earnings of subsidiary 2,321 (62)
Undistributed earnings of subsidiary (1,345) 1,013
------- -------
Net income $ 976 $ 951
</TABLE>
======= ======
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
(Dollars in thousands)
Year ended December 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income from operating activities $ 976 $ 951
Adjustments to reconcile net income to net cash
flows from operating activities:
Equity in undistributed earnings of subsidiary 1,345 (1,013)
Discount accretion, net 0 0
Loss on sale of securities available-for-sale 0 (2)
Deferred income taxes 2 (9)
Compensation expense for ESOP 101 113
Compensation expense for RRP 77 76
Net increase in other assets (45) (67)
Net decrease in other liabilities (4) (13)
Net cash from operating activities 2,452 36
Cash flows from investing activities
Net decrease in time deposits 0 2,027
Sale of securities available-for-sale 0 600
------ ------
Net cash flows provided by investing activities 0 2,627
Cash flows from financing activities
Proceeds from notes payable 0 1,800
Payments on notes payable (1,800) 0
Distribution of capital 0 (3,166)
Purchase of treasury shares (212) (593)
Purchase of common shares by RRP (43) (370)
Cash dividends paid (346) (330)
------- -------
Net cash used in financing activities (2,401) (2,659)
Net increase in cash and cash equivalents 51 4
Cash and cash equivalents at beginning of year 151 147
------ ------
Cash and cash equivalents at end of year $ 202 $ 151
====== =====
</TABLE>
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, 1999:
Interest income $ 1,826 $ 1,920 $ 2,000 $ 2,152
Interest expense 968 1,009 1,081 1,200
------- ------- ------- -------
Net interest income 858 911 919 952
Provision for loan losses 17 12 5 0
Other income 21 38 31 33
Other expense 539 582 576 644
Provision for income taxes 104 105 110 93
------- ------- ------- -------
Net income $ 219 $ 250 $ 259 $ 248
======= ======= ======= =======
Earnings per share - basic $0.28 $0.32 $0.33 $0.32
Earnings per share - diluted $0.25 $0.28 $0.30 $0.29
Weighted-average common
Shares outstanding 778,465 776,909 776,909 773,904
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
</TABLE>
NOTE U - SUBSEQUENT EVENT
On February 8, 2000, the bank entered into an agreement with DEI, Inc. of
Cincinnati, Ohio for the construction of a new main office facility on North
Limestone Street in Springfield. Per the agreement, the total cost of this
new facility is estimated to be just over $2.8 million.
<PAGE>
<TABLE>
<CAPTION>
<S><C> <C>
CORPORATE INFORMATION
===========================================================================
DIRECTORS OF HCFC AND HOME CITY There were 816,500 common shares of HCFC outstanding on March
John D. Conroy, Owner and President of Conroy 2, 2000, held of record by approximately 349 shareholders. Since
Funeral Home, Inc., Springfield, Ohio December 30, 1996, HCFC's common shares have traded on the
P. Clark Engelmeier, Self-employed Life Insurance Nasdaq SmallCap Market under the symbol "HCFC". Five broker-
Agent and Securities Broker age firms currently serve as market makers: Friedman, Billings,
James Foreman, President and CEO of Foreman- Ramsey & Co., Inc.; Keefe, Bruyette & Woods, Inc.; Sweney
Blair Pontiac, Buick, GMC, Springfield, Ohio Cartwright & Co., Inc.; McDonald Investments, Inc.; and Spear, Leeds
Terry A. Hoppes, Owner and President of Hoppes & Kellog Capital Markets. The following represents high and low
Engineering and Surveying Co.; President of trading prices and dividends declared during each respective quar-
Hoppes Builders and Developement Co., ter during 1998 and 1999. The trading prices reflect inter-dealer
Springfield, Ohio prices, without retail mark-up, mark-down or commission.
Douglas L. Ulery, President and CEO of Home City
Financial Corporation and Home City Federal Dividends
Savings Bank of Springfield 1998 High Low declared
-------------------------------------------------
First Quarter $19.250 $18.250 $0.090
Second Quarter $23.000 $14.750 $0.090
Special Capital Distribution $3.500
Third Quarter $15.500 $11.000 $0.090
EXECUTIVE OFFICERS OF HCFC Fourth Quarter $15.000 $11.500 $0.100
P. Clark Engelmeier Chairman of the Board
Douglas L. Ulery President and CEO
Dividends
Jo Ann Holdeman Secretary 1999 High Low declared
-------------------------------------------------
Don E. Lynam Senior Vice President
First Quarter $17.500 $13.500 $0.100
Charles A. Mihal Treasurer and CFO Second Quarter $16.375 $14.000 $0.100
Third Quarter $14.000 $12.750 $0.100
EXECUTIVE OFFICERS OF HOME CITY Fourth Quarter $14.000 $12.000 $0.105
P. Clark Engelmeier Chairman of the Board
Douglas L. Ulery President and CEO A copy of HCFC's Annual Report on Form 10-KSB, as filed with the
Don E. Lynam Senior Vice President Securities and Exchange Commission, will be available at no charge to
Jo Ann Holdeman Vice President and Secretary shareholders' upon request to:
Charles A. Mihal Treasurer and CFO
ANNUAL MEETING Home City Financial Corporation
Wednesday, April 26, 2000, at 3:00 p.m. 63 West Main Street
The Springfield Inn Springfield, Ohio 45502
100 S. Fountain Avenue Attn: Jo Ann Holdeman, Secretary
Springfield, Ohio
INDEPENDENT AUDITORS INVESTOR INFORMATION
Robb, Dixon, Francis, Davis, Oneson & Company Investors, analysts and others seeking financial information
1205 Weaver Drive may contact:
Granville, Ohio 43023 Douglas L. Ulery , President and CEO or
Charles A. Mihal, Treasurer and CFO
SPECIAL COUNSEL Home City Financial Corporation
63 West Main Street
Vorys, Sater, Seymour and Pease LLP Springfield, Ohio 45502
Suite 2100, Atrium Two (937) 324-5736
221 East Fourth Street
P.O. Box 0236
Cincinnati, Ohio 45201-0236 TRANSFER AGENT
Communications regarding change of address, transfer of
shares, lost certificates and dividends should be sent to:
GENERAL COUNSEL
Douglas A. Henson
Gorman, Veskauf, Henson & Wineberg Illinois Stock Transfer Company
National City Bank Bldg. 209 West Jackson Blvd., Suite 903
4 West Main Street, Suite 723 Chicago, Illinois 60606
Springfield, Ohio 45502 (312) 427-2953
</TABLE>
