U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT Pursuant to SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-21809
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HOME CITY FINANCIAL CORPORATION
(name of small business issuer in its charter)
Ohio 34-1839475
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
63 West Main Street, Springfield, Ohio 45502
(Address of principal executive offices) (zip code)
Issuer's telephone number (937)324-5736
____________________
Securities registered under Section 12(b) of the Exchange Act:
not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Shares (No Par Value),
Preferred Shares (No Par Value)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES _X_ NO ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10- KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year. $8,021,000
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold or
the average bid and asked prices of such stock, as of a specified date
within the past 60 days: As of March 7, 2000, 816,500 common shares of the
Registrant were outstanding. The aggregate market value of the shares held
by non-affiliates was $6,547,917 based upon the closing sale price of
$10.895 per share as quoted by The Nasdaq Stock Market.
Documents Incorporated by Reference
The following sections of the definitive Proxy Statement for the 2000
Annual Meeting of Shareholders of Home City Financial Corporation are
incorporated by reference into Part III of this Form 10-KSB:
1. Proposal One - Election of Directors
2. Compensation of Directors and Executive Officers
3. Voting Securities and Ownership of Certain Beneficial Owners and
Management
4. Section 16(a) Beneficial Ownership Reporting Compliance
Transitional Small Business Disclosure Format YES ___ NO _X_
<PAGE>
PART I
ITEM 1. Description of Business
General
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.
Market Area
Home City conducts business from its main office, located in Springfield,
Ohio. Springfield is located 25 miles east of Dayton, 40 miles west of
Columbus and 80 miles north of Cincinnati. Home City's primary market area
consists of Clark County, Ohio, and adjacent counties. Clark County, Ohio is
characterized by slightly lower than average levels of income and housing
values and an improving lower unemployment level. Its strongest employment
categories are wholesale/retail trade, services and manufacturing, with
smaller numbers of residents employed in the finance, insurance and real
estate industry categories.
Forward-Looking Statements
When used in this Form 10-KSB, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated," "projected,"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties, including
changes in economic conditions in Home City's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in
Home City's market area and competition, that could cause actual results to
<PAGE>
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect HCFC?s financial performance and
could cause HCFC's actual results for future periods to differ materially from
any statements expressed with respect to future periods. See Exhibit 99.2
hereto "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which is incorporated herein by reference.
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 expectation 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.
HCFC does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Change in Fiscal Year
In December 1997, the board of directors of HCFC and Home City determined
to change the fiscal year end of HCFC and Home City from June 30, to December
31, in order to have their fiscal year ends coincide with those of the
financial institutions to which their performance is compared.
Lending Activities
General. Home City's primary lending activity is the origination of
conventional mortgage loans and home equity loans secured by one- to
four-family homes and nonresidential real estate located in Home City's
primary lending area. Loans for the construction of one- to four-family homes
and mortgage loans on multifamily properties containing five units or more are
also offered by Home City. Home City does not originate loans insured by the
Federal Housing Administration or loans guaranteed by the Veterans
Administration. In addition to mortgage lending, Home City makes commercial
loans secured by assets of the borrower other than real estate and secured and
unsecured consumer loans. Home City does not originate its loans in
accordance with traditional secondary market guidelines.
<PAGE>
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of Home City's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998
--------------------- ----------------
(Dollars in thousands)
Percent of Percent of
Amount total loans Amount total loans
------ ----------- ------ ------------
<S <C> <C> <C> <C>
Residential real estate loans:
One- to four-family (first mortgage) $51,887 50.70% $42,521 53.00%
Multifamily 3,423 3.34 2,485 3.10
Home equity (second mortgage) 2,277 2.23 1,965 2.45
Nonresidential real estate loans 9,853 9.63 10,347 12.90
Land loans 1,681 1.64 2,002 2.49
Construction loans 5,580 5.45 4,561 5.68
------- ----- ------ -----
Total real estate loans 74,701 72.99 63,881 79.62
Commercial loans:
Secured by real estate 11,750 11.48 5,418 6.75
Other 9,389 9.18 5,704 7.11
------- ----- ------ ------
Total commercial loans 21,139 20.66 11,122 13.86
Consumer loans:
Loans on deposits 193 0.19 115 0.15
Other consumer loans 6,309 6.16 5,111 6.37
------- ----- ------ ------
Total consumer loans 6,502 6.35 5,226 6.52
------- ----- ------ ------
Total loans 102,342 100.00% 80,229 100.00%
====== ======
Less:
Unearned and deferred income, net (569) (499)
Loans in process (4,438) (2,258)
Allowance for loan losses (491) (486)
------- -------
Net loans $96,844 $76,986
======= =======
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1999, regarding the dollar amount of loans
maturing in Home City's portfolio based on their contractual terms to maturity.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the Due 4-5 Due 6-10 Due 11-15 Due more than 15
year ending December 31, years after years after years after years after
-----------------------
2000 2001 2002 12/31/99 12/31/99 12/31/99 12/31/99 Total
---- ---- ---- -------- -------- -------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $2,148 $ 1,032 $ 119 $ 1,451 $14,755 $28,739 $4,763 $53,007
Nonresidential 332 497 64 191 3,992 7,332 4,279 16,687
Consumer loans 352 297 460 1,191 952 3,162 88 6,502
Commercial loans 5,853 1,108 1,147 4,713 3,490 4,192 636 21,139
------ ------- ------- ------- ------- ------- ------ -------
Total loans $8,685 $ 2,934 $ 1,790 $ 7,546 $23,189 $43,425 $9,766 $97,335
====== ======= ======= ======= ======= ======= ====== =======
</TABLE>
<PAGE>
Of the loans due more than one year after December 31, 1999, loans with
aggregate balances of $59.8 million have fixed rates of interest, and loans
with aggregate balances of $28.9 million have adjustable interest rates.
One- to Four-family Residential Real Estate Loans. The primary lending
activity of Home City has been the origination of permanent conventional loans
secured by one- to four-family residences, primarily single-family residences,
located within Home City's designated lending area. Home City also originates
loans for the construction of one- to four-family residences and home equity
loans. Each of such loans is secured by a mortgage on the underlying real
estate and improvements thereon, if any.
OTS regulations limit the amount that Home City may lend in relationship
to the appraised value of the real estate and improvements at the time of
loan origination. In accordance with such regulations, Home City makes
fixed-rate first mortgage loans on single-family or duplex, owner occupied
residences up to 95% of the value of the real estate and improvements (the
"Loan-to-Value Ratio" or "LTV"). Low to moderate income loans are granted
up to 95% on single-family or duplex, owner occupied residences. Home
Equity loans secured by first or second mortgages are made with a maximum
combined LTV for the first and second mortgage of 100%. Home City makes
adjustable-rate first mortgage loans for investment purposes on one- to four-
family, non-owner occupied residences in amounts up to 75% LTV. Home City
generally requires private mortgage insurance ("PMI") for the amount of loans
in excess of 80% of the value of the real estate securing such loans. PMI is
required for the amount of any loan in excess of 85% of the value of the real
estate and improvements for low-to-moderate income loans. Fixed-rate
residential real estate loans are offered by Home City for terms of up to 15
years.
Home City has been originating adjustable-rate mortgage loans ("ARMs")
for several years. ARMs are offered by Home City for terms of up to 30 years
and with various alternative features. The interest rate adjustment periods
on the ARMs are either one year, three years or a fixed rate for 5 to 10 years
followed by one-year adjustment periods. The interest rate adjustments on
ARMs presently originated by Home City are tied to changes in the weekly
average yield on the one- and three-year U.S. Treasury constant maturities
index, respectively. Rate adjustments are computed by adding a stated margin,
typically 2.75%, to the index. The maximum allowable adjustment at each
adjustment date had been 1% with a maximum adjustment of 3% over the term of
the loan, although Home City now offers an ARM with a 2% maximum adjustment at
each adjustment date and a maximum adjustment of 6% over the term of the
loan. The initial rate is dependent, in part, on how often the rate can be
adjusted. Home City also offers ARMs on one- to four-family properties with a
margin of 3.75% over the index and 2% and 6% maximum adjustments at each
adjustment date and over the term of the loan, respectively. Home City
originates ARMs which have initial interest rates slightly lower than the sum
of the index plus the margin. Such loans are subject to increased risk of
delinquency or default due to increasing monthly payments as the interest
rates on such loans increase to the fully-indexed level, although such
increase is generally lower than industry standards and is considered in Home
City's underwriting of any such loans with a one- to three-year adjustment
period.
The aggregate amount of Home City's one- to four-family residential real
estate loans equaled approximately $51.9 million at December 31, 1999, and
represented 50.70% of loans at such date. The largest individual loan balance
on a one- to four-family loan at such date was $732,000. At such date, loans
secured by one- to four-family residential real estate with outstanding
balances of $193,000, or 0.37% of its one- to four-family residential real
estate loan balance, were more than 90 days delinquent or nonaccruing. See
"Delinquent Loans, Non-performing Assets and Classified Assets."
<PAGE>
Multifamily Residential Real Estate Loans. In addition to loans on one-
to four-family properties, Home City makes loans secured by multifamily
properties containing over four units. Such loans are made with adjustable
interest rates, a maximum LTV of 75% and a maximum term of 15 years.
Multifamily lending is generally considered to involve a higher degree of
risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Home City attempts to reduce the risk associated with multifamily lending by
evaluating the creditworthiness of the borrower and the projected income from
the project and by obtaining personal guarantees on loans made to corporations
and partnerships. Home City currently requires that borrowers agree to submit
financial statements, rent rolls and tax returns annually to enable Home City
to monitor the loans.
At December 31, 1999, loans secured by multifamily properties totaled
approximately $3.4 million, or 3.24% of Home City's total loan portfolio, all
of which were secured by property located within Home City's primary market
area, and all of which were performing in accordance with their terms. The
largest loan secured by a multifamily property had a balance at December 31,
1999, of approximately $691,000.
Home Equity Loans. Home City offers home equity loans secured by first
or second mortgages on one- to four-family residential real estate located
in Clark County, Ohio, and adjacent counties. Such loans are made for various
purposes, including home improvement, debt consolidation and consumer
purchases. The interest rates on loans secured by such mortgages are
adjustable, with a maximum combined LTV for the first and second mortgage of
100%.
At December 31, 1999, home equity loans totaled approximately $2.3 million,
or 2.23% of Home City's total loan portfolio. All of such loans were secured
by property located within Home City's primary market area and all were
performing in accordance with their terms. The balance of the largest single
home equity loan was $91,000 at December 31, 1999.
Nonresidential Real Estate Loans. Home City also makes loans secured by
nonresidential real estate consisting of retail stores, office buildings and
businesses. (The "nonresidential real estate loans" category does not include
loans made for commercial purposes that are secured by real estate, which are
described under the heading "Commercial Loans.") Nonresidential real estate
loans generally are originated with terms of up to 15 years, a minimum loan
amount of $10,000 and a maximum loan amount of $1.5 million. Such loans have
a maximum LTV of 75%.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger
loan amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Home City has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower,
the location of the real estate, the quality of the management constructing
and operating the property, the debt service ratio, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation. Home City also requires personal
guarantees on such loans.
At December 31, 1999, Home City had a total of $9.9 million invested in
nonresidential real estate loans, all of which were secured by property
located within Home City's primary market area. Such loans comprised
approximately 9.63% of Home City's total loans at such date. At such date,
Home City had no nonresidential loans that were 90 days delinquent or
<PAGE>
non-accruing. See "Delinquent Loans, Non-performing Assets and Classified
Assets." The balance of the largest nonresidential real estate loan was
$890,000.
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At December 31,
1999, Home City's nonresidential mortgage loans totaled 93.63% of Home City's
tangible capital.
Land Loans. Home City makes two varieties of land loans. First, loans
are made for the acquisition of land to be developed for construction. Such
loans are usually made for relatively short periods of time, generally not more
than three years, with fixed interest rates. Second, loans are also made to
borrowers who purchase and hold land for various reasons, such as the future
construction of a residence. Such loans are generally originated with fixed
interest rates and terms of up to 15 years. Land loans are secured by the
land being purchased with the loan proceeds and have maximum LTVs of 75 to
80%.
At December 31, 1999, land loans totaled approximately $1.7 million, or
1.64% of Home City's total loan portfolio. The largest land loan at December
31, 1999, had a balance of approximately $274,000. All of such loans were
secured by property located within Home City's primary market area, of which no
loans were more than 90 days delinquent or non-accruing. See "Delinquent
Loans, Non-performing Assets and Classified Assets."
Construction Loans. Home City makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates of interest and for terms of up to 15 years or
adjustable rates of interest and terms up to 30 years. Most of the
construction loans originated by Home City historically were made to owner-
occupants for the construction of single-family homes by a general contractor.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments,
developers, managers and builders. In addition, such loans are more difficult
to evaluate and monitor. Loan funds are advanced upon the security of the
project under construction, which is more difficult to value before the
completion of construction. Moreover, because of the uncertainties inherent
in estimating construction costs, it is relatively difficult to evaluate
accurately the LTV and the total loan funds required to complete a project.
In the event a default on a construction loan occurs and foreclosure follows,
Home City must take control of the project and attempt either to arrange for
completion of construction or dispose of the unfinished project. Additional
risk exists with respect to loans made to developers who do not have a buyer
for the property, as the developer may lack funds to pay the loan if the
property is not sold upon completion. Home City attempts to reduce such risks
on loans to developers by requiring personal guarantees and reviewing current
personal financial statements and tax returns and other projects undertaken by
the developers.
At December 31, 1999, a total of $5.6 million, or approximately 5.45% of
Home City's total loans, consisted of construction loans. All of Home City's
construction loans are secured by property located within Home City's primary
market area, and the economy of such lending area has been relatively stable.
At December 31, 1999, all of such loans were performing in accordance with
their terms.
Commercial Loans. Home City also originates loans for commercial
purposes. Such loans are of two types: those secured by nonresidential real
estate and those secured by assets of the borrower other than real estate,
such as equipment or receivables.
<PAGE>
Commercial loans totaling $11.8 million at December 31, 1999, were secured
by nonresidential real estate. The real estate securing commercial loans at
December 31, 1999, was comprised of warehouses, office buildings and
industrial buildings. This type of loan is made with terms of up to 20 years,
a minimum loan amount of $5,000, a maximum loan amount of $1.2 million, and a
maximum LTV of 80%. These loans are made with adjustable interest rates, with
the interest rates based on prime or one-, three- or five-year treasuries.
The borrowers of commercial loans totaling $9.4 million at December 31,
1999, were classified as "small business borrowers." These loans were
primarily secured by accounts receivable, inventory and equipment. The
commercial loans secured other than by real estate are made with terms of up
to seven years, a minimum loan amount of $5,000, a maximum loan amount of
$900,000, and a maximum LTV of 80%. These loans are made with adjustable
interest rates, with the interest rates based on prime or prime plus.
Commercial lending entails significant risks. The loans are subject to
greater risk of default during periods of adverse economic conditions.
Particularly with respect to loans secured by equipment, inventory, accounts
receivable and other non-real estate assets, the collateral may not be
sufficient to ensure full payment in the event of default. Home City tries
to minimize such risks through its prudent underwriting, which includes
guidelines to determine the acceptability of the collateral to be pledged.
An evaluation is made of the real estate, if any, accounts receivable, inventory
and equipment securing the loan as to their value, marketability, strength of
brand names, stability of conditions and environmental impact in order to
mitigate or minimize the risk of loss. Loan advance amounts are established in
accordance with the type of collateral asset. Credit guidelines have been
established relative to debt service coverage, leveraging, established
profitability, guarantor strength, liquidity and sales concentration. The
guarantee of the principals will generally be required on all loans made to
closely held business entities and affiliates in accordance with Regulation
B requirements. The credit information required includes fully completed
financial statements, two years' federal income tax returns, a current
credit report and generally a formal business plan. Adequate insurance,
appropriate regulatory disclosures and both a preliminary and final
lawyer's Title Opinion or Title Insurance are always required.
At December 31, 1999, Home City had commercial loans in the aggregate
amount of $21.1 million, or approximately 20.66% of Home City's total loans,
each of which was performing in accordance with its terms. The total
indebtedness of the largest single borrower within the commercial portfolio
was $1,235,000 at December 31, 1999.
Consumer Loans. Home City makes various types of loans, including
unsecured loans and loans secured by deposits. Such loans are made only at
fixed rates of interest for terms of up to 15 years. Home City has been
attempting to increase its consumer loan portfolio as part of its interest
rate risk management efforts and because a higher rate of interest is
received on consumer loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS."
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic
conditions. Although Home City has not had significant delinquencies on
consumer loans, no assurance can be provided that delinquencies will not
increase.
At December 31, 1999, Home City had approximately $6.5 million, or 6.35%
of its total loans, invested in consumer loans, and no such loans were more
than 90 days delinquent or nonaccruing. See "Delinquent Loans, Non-performing
Assets and Classified Assets." The balance of the largest consumer loan was $
85,000 at December 31, 1999.
<PAGE>
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, borrowers
and real estate developers, periodic newspaper solicitations by Home City's
lending staff and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
Home City obtains a credit report, verification of employment and other
documentation concerning the credit-worthiness of the borrower. Home City
limits the ratio of mortgage loan payments to the borrower's income to 25% and
the ratio of the borrower's total debt payments to income to 35-42%. An
appraisal of the fair market value of the real estate on which Home City will
be granted a mortgage to secure the loan is prepared by an independent fee
appraiser approved by the Board of Directors.
Unless Home City is aware of factors which may lead to an environmental
concern, Home City generally does not require any form of specific
environmental study at the time a loan secured by one- to four-family
residential real estate is made. If, however, Home City is aware of any such
factor at the time of loan origination, Home City requires the completion and
satisfactory review of a Phase I Environmental Assessment before such loan is
made. For loans secured by multifamily and nonresidential real estate, a
Phase I Environmental Assessment is generally completed and satisfactorily
reviewed before the loan is made.
Upon the completion of the appraisal and the receipt of information on the
borrower, the application for a loan is submitted to various management
officials for approval or rejection if the loan amount does not exceed
$400,000. If the loan amount exceeds $400,000, or if the application does not
conform in all respects with Home City's underwriting guidelines, the
application is submitted to the Executive Loan Committee or the Board of
Directors for review and for final disposition. If a mortgage loan
application is approved, an attorney's opinion of title is obtained on the
title to the real estate which will secure the mortgage loan. Borrowers are
required to carry satisfactory fire and casualty insurance and flood
insurance, if applicable, and to name Home City as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Home
City also evaluates the feasibility of the proposed construction project and
the experience and record of the builder. Consumer loans are underwritten on
the basis of the borrower's credit history and an analysis of the borrower's
income and expenses, ability to repay the loan and the value of the
collateral, if any. Commercial loans are underwritten on the basis of the
source of the cash flow required to service the debt and the value of the
security for the loan.
Home City's loans carry no prepayment penalties, but do provide the entire
balance of the loan is due upon sale of the property securing the loan. Home
City generally enforces such due-on-sale provisions.
Loan Originations, Purchases and Sales. Home City originates a slightly
greater number of fixed-rate loans than adjustable-rate loans. See
"DESCRIPTION OF BUSINESS - Loan Maturity Schedule." Home City occasionally
will participate in loans originated by other institutions. During 1998 and
1999 Home City did not participate in any loans originated by other
institutions.
<PAGE>
The following table presents Home City's loan origination and
participation activity for the years indicated:
December 31,
-------------------
1999 1998
---- ----
(Dollars in thousands)
Loans originated:
One- to four-family residential (1) $21,978 $17,108
Multifamily residential 692 222
Nonresidential 913 5,390
Commercial - secured by real estate 6,362 5,418
Commercial - other 9,726 6,258
Consumer 4,744 3,407
------- -------
Total loans originated 44,415 37,803
Loans purchased 0 0
Reductions:
Principal repayments (23,780) (23,318)
Sales of loans (750) 0
Decrease in other items, net (2) (27) (34)
------- -------
Net increase $19,858 $14,451
======= =======
- ------------------------------
(1) Includes construction loans.
(2) Consists of unearned and deferred fees, costs and the allowance for loan
losses.
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital under the regulatory capital requirements plus any
additional loan reserve not included in total capital. A savings association
may lend to one borrower an additional amount not to exceed 10% of total
capital plus additional reserves if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated
for purposes of such limits. An exception to these limits permits loans to
one borrower of up to $500,000 "for any purpose."
Based on such limits, Home City was able to lend approximately $1.7
million to one borrower at December 31, 1999. The largest amount Home City
had outstanding to one borrower at December 31, 1999, was $1.3 million. Such
loans were secured by commercial real estate properties. All of such loans
were current at December 31, 1999.
The aggregate amount of commercial loans not primarily secured by real
estate that Home City may have outstanding may not exceed 20% of Home City's
total assets, and any amount in excess of 10% of total assets must be for
small business loans. At December 31, 1999, Home City was in compliance with
that limitation.
Delinquent Loans, Non-performing Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Home City attempts to
cause the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly.
<PAGE>
When a loan is fifteen days or more delinquent, the borrower is sent a
delinquency notice. When a loan is thirty days delinquent, Home City
generally telephones the borrower. Depending upon the circumstances, Home
City may also inspect the property and inform the borrower of the availability
of credit counseling from Home City and counseling agencies. Before a loan
becomes 90 days delinquent, Home City will make further contact with the
borrower and, depending upon the circumstances, may arrange appropriate
alternative payment arrangements. After a loan becomes 90 days delinquent,
Home City may refer the matter to an attorney for foreclosure. A decision as
to whether and when to initiate foreclosure proceedings is based on such
factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by Home City.
Real estate acquired, or deemed acquired, by Home City as a result of
foreclosure proceedings is classified as real estate owned ("REO") until
it is sold. When property is so acquired, or deemed to have been acquired,
it is initially recorded by Home City at the lower of cost or fair value of
the real estate, less estimated costs to sell. Any reduction in fair value
is reflected in a valuation allowance account established by a charge to
income. Costs incurred to carry other real estate are charged to expense.
Home City places a loan on nonaccrual status when the principal and
interest is delinquent 90 days or more and deducts from income the interest
previously accrued.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------------------------- -----------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Loans delinquent for (1):
30-59 days 19 $ 738 0.75% 29 $1,635 2.11%
60-89 days 5 289 0.30 19 877 1.13
90 days and over 5 193 0.20 10 192 0.25
-- ------ ---- -- ------ ----
Total delinquent loans 29 $1,220 1.25% 58 $2,704 3.49%
== ====== ==== == ====== ====
</TABLE>
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
<PAGE>
The following table sets forth information with respect to the nonaccrual
status of Home City's loans which are 90 days or more past due and other
non-performing assets at the dates indicated:
December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $193 $186 $259
Nonresidential 0 0 0
Commercial 0 0 0
Consumer 0 0 0
---- ---- ----
Total non-performing loans 193 186 259
Real estate owned 0 0 0
---- ---- ----
Total non-performing assets $193 $186 $259
==== ==== ====
Total loan loss allowance $491 $486 $452
Total non-performing assets as
a percentage of total assets 0.18% 0.22% 0.36%
Loan loss allowance as a percent
of non-performing loans 254.40% 261.29% 174.52%
During the fiscal year ended December 31, 1999, $29,000 in interest
income was recognized and an additional $6,000 would have been recorded as
interest income on nonaccruing loans had such loans been accruing pursuant to
contractual terms. During such period, Home City had no restructured loans
within the meaning of SFAS No. 115. There are no loans which are not
currently classified as nonaccrual, more than 90 days past due or restructured
but which may be so classified in the near future because management has
concerns as to the ability of the borrowers to comply with repayment terms.
For additional information, see Note D of the Notes to Financial Statements.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful," or "loss." "Substandard" assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the same weaknesses as "substandard" assets, with the
additional characteristics that (i) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (ii) there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that
its continuance as an asset of the institution is not warranted. The
regulations also contain a "special mention" category, consisting of assets
which do not currently expose an institution to a sufficient degree of risk to
warrant classification but which possess credit deficiencies or potential
weaknesses deserving management's close attention.
Generally, Home City classifies as "substandard" all loans that are
delinquent more than 90 days, unless management believes the delinquency
status is short-term due to unusual circumstances. Loans delinquent fewer
than 90 days may also be classified if the loans have the characteristics
described above rendering classification appropriate.
<PAGE>
The aggregate amount of Home City's classified assets at the dates
indicated were as follows:
December 31,
----------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Classified assets:
Substandard $380 $366 $377
Doubtful 0 0 16
Loss 47 47 77
---- ---- ----
Total classified assets $427 $413 $470
==== ==== ====
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an
asset, it may appeal this determination to the Regional Director of the OTS.
Home City had no disagreements with the examiners regarding the classification
of assets at the time of the last examination.
OTS regulations require that Home City establish prudent general
allowances for loan losses for any classified as substandard or doubtful. If
an asset, or portion thereof, is classified as loss, Home City must either
establish specific allowances for losses in the amount of 100% of the portion
of the asset classified loss, or charge-off such amount.
Allowance for Loan Losses. Home City maintains an allowance for loan
losses based upon a number of relevant factors, including but not limited to,
trends in the level of non-performing assets and classified loans, current
and anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes
in the composition of the loan portfolio.
The single largest component of Home City's loan portfolio consists of one-
to four-family residential real estate loans. Substantially all of these
loans are secured by residential real estate and required down payments of
20% of the lower of the sales price or appraisal value of the real estate.
In addition, these loans are secured by property in Home City's lending area
of a 100-mile radius from Springfield, Ohio. Home City's practice of making
loans only in their market area and requiring a 20% down payment have
contributed to a low historical charge-off history.
In addition to one- to four-family residential real estate loans, Home
City makes additional real estate loans including home equity, multifamily
residential real estate, nonresidential real estate and construction loans.
These loans are secured by property in Home City's lending area and also
require the borrower to provide a down payment. Home City also makes
commercial and consumer loans. Although these types of loans are considered
to involve a higher degree of risk than loans secured by one- to four-family
residential real estate, Home City has experienced charge-offs only from
loans secured by one- to four-family residential real estate.
The allowance for loan losses is reviewed quarterly by the Board of
Directors. The review process includes a credit analysis of loans on the
"watch list," past due loans, new significant borrowings and random samples
of new loans made. The analysis of loans secured by multifamily and
nonresidential real estate and commercial loans includes a review of tax
returns and financial statements, and the review of all loans includes an
estimation of the value of the collateral. The amounts of provisions for loan
losses for the periods shown in the table below were determined based upon
such loan review, past loss experience, anticipated growth and prevailing
economic conditions. While the Board of Directors believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
<PAGE>
earnings could be significantly adversely affected, if circumstances differ
substantially from the assumptions used in making the final determination.
The following table sets forth an analysis of Home City's allowance for loan
losses for the years indicated:
(Dollars in thousands)
1999 1998
---- ----
Balance at beginning of year $ 486 $ 452
Charge-offs (31) (39)
Recoveries 2 12
Provision for loan losses (charged to operations) 34 61
----- -----
Balance at end of year $ 491 $ 486
===== =====
Ratio of net charge-offs (recoveries) to average net
Loans outstanding during the year 0.03% 0.04%
Ratio of allowance for loan losses to total loans 0.51% 0.63%
For the fiscal year ended December 31, 1999, $25,000 of the allowance for
loan losses was allocated to loans secured by nonresidential real estate,
$201,000 was allocated to loans secured by one- to four-family real estate,
$95,000 was allocated to consumer loans, and $103,000 was allocated to
commercial loans.
For the fiscal year ended December 31, 1998, $45,000 of the allowance for
loan losses was allocated to loans secured by nonresidential real estate,
$210,000 was allocated to loans secured by one- to four-family real estate,
$91,000 was allocated to consumer loans, and $59,000 was allocated to
commercial loans.
Mortgage-Backed Securities
Home City maintains a portfolio of mortgage-backed securities in the form
of Government National Mortgage Association ("GNMA") participation
certificates. Mortgage-backed securities generally entitle Home City to
receive a portion of the cash flows from an identified pool of mortgages. GNMA
is a government agency. GNMA securities are backed by Federal Housing Authority-
insured and Veterans Administration-guaranteed loans. The timely payment of
principal and interest on GNMA securities is guaranteed by the GNMA and
backed by the full faith and credit of the U.S. Government.
The following table sets forth the composition of Home City's
mortgage-backed securities at the dates indicated:
December 31, 1999 December 31, 1998
----------------- -----------------
(Dollars in thousands)
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
GNMA certificates $ 429 $ 424 $ 558 $ 559
----- ----- ----- -----
Total mortgage-backed
securities $ 429 $ 424 $ 558 $ 559
===== ===== ===== =====
<PAGE>
The following table sets forth information regarding scheduled maturities,
amortized costs, market value and weighted-average yields of Home City's
mortgage-backed securities at December 31, 1999. Expected maturities will
differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. The following table does not take into consideration
the effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------------------------------------------------------
One year or less After one to After five to After ten years Total mortgage-backed
five years ten years Securities portfolio
----------------- ----------------- ------------------ -------------------- ------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
value yield value yield value yield Value yield value Value yield
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA
Certificates $ 0 0% $ 0 0% $ 424 6.81% $0 0% $ 424 $ 424 6.81%
--- -- ---- -- ----- ----- -- -- ------ ----- -----
Total $ 0 0% $ 0 0% $ 424 6.81% $0 0% $ 424 $ 424 6.81%
=== == ==== == ===== ===== == == ====== ===== =====
</TABLE>
For additional information, see Note C of the Notes to Consolidated
Financial Statements.
Investment Activities
OTS regulations require that Home City maintain a minimum amount of liquid
assets, which may be invested in U.S. Treasury obligations, securities of
various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Home City is also permitted to make investments
in certain commercial paper, corporate debt securities rated in one of the
four highest rating categories by one or more nationally recognized
statistical rating organizations, and mutual funds, as well as other
investments permitted by federal regulations. See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
<PAGE>
The following table sets forth information concerning Home City's investments
at the dates indicated:
<TABLE>
<CAPTION>
At December 31, At December 31,
------------------------------- ------------------------------------
1999 1998
---- ----
Carrying % of Market % of Carrying % of Market % of
value total value total value total value total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
Deposits in other
Financial institutions $282 5.97% $282 5.97% $ 763 17.04% $763 17.05%
Federal funds sold 0 0 0 0 0 0 0 0
Time deposits in other
Financial institutions 24 0.51 21 0.45 24 0.54 21 0.47
Investment securities:
U.S. government and
Federal agencies 1,865 39.49 1,865 39.51 1,501 33.51 1,501 33.53
Municipal securities (1) 629 13.32 629 13.33 779 17.39 779 17.40
Equity securities:
FHLMC stock 523 11.07 523 11.08 779 17.39 779 17.40
Service corporation (2) 28 0.59 28 0.59 28 0.62 28 0.63
Joint venture (3) 0 0.00 0 0.00 4 0.09 4 0.09
FHLB stock 1,372 29.05 1,372 29.07 601 13.42 601 13.43
------ ------ ------ ------ ------ ------ ------ ------
Total investments $4,723 100.00% $4,720 100.00% $4,479 100.00% $4,476 100.00%
====== ====== ====== ====== ====== ======= ====== ======
(1) Bonds issued by local school districts.
(2) Home City owns 100% of Homciti Service Corp., whose assets consist of
common shares of Intrieve, Incorporated, a data service provider, and a
0.875% ownership in a joint venture which owns The Springfield Inn, a
hotel in Springfield, Ohio.
(3) Home City had a 50% ownership interest in a joint venture that was
primarily involved in the development of low income housing. The joint
venture was dissolved in August 1999.
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Home City's investment securities
at December 31, 1999:
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------
One year or less After one to five years After five years
---------------- ----------------------- ----------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
Agency securities $ 0 0% $1,865 6.09% $ 0 0%
Municipal securities 55 4.54 398 4.68 176 4.15
Equity securities: (1)
FHLMC stock 0 0 0 0 523 1.38
Service corporation 0 0 0 0 28 0
Joint venture 0 0 0 0 0 0
---- ---- ------ ---- ----- ----
Total investments $ 55 4.54% $2,263 5.84% $ 727 2.00%
==== ==== ====== ==== ===== ====
</TABLE>
(1) By their nature, equity securities have no maturity date.
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------
Average Weighted-
life Carrying Market Average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
Agency securities 3.26 $ 1,865 $ 1,865 6.09%
Municipal securities 3.14 629 629 4.52
Equity securities (1) 551 551 1.31
------- -------
Total $ 3,045 $ 3,045
======= =======
</TABLE>
(1) By their nature, equity securities have no maturity date.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Home
City's funds for use in lending and other investment activities. In addition
to deposits, Home City derives funds from FHLB advances, interest payments
and principal repayments on loans and mortgage-backed and related securities,
income on earning assets, service charges and gains on the sale of assets.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." Loan
payments are a relatively stable source of funds, while deposit inflows and
outflows fluctuate more in response to general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within Home City's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, statement savings
accounts, passbook savings accounts and term certificate accounts. Home City
also offers individual retirement accounts ("IRA"), both in passbook and
certificate form. Interest rates paid, maturity terms, service fees and
withdrawal penalties for the various types of accounts are established
periodically by the management of Home City based on Home City's liquidity
requirements, growth goals and interest rates paid by competitors. Home City
utilizes brokers to attract deposits on a limited basis. Brokered deposits
approximated $4.4 million at December 31, 1999.
At December 31, 1999, Home City's certificates of deposit totaled $54.0
million, or 77.56% of total deposits. Of such amount, approximately $37.2
million in certificates of deposit mature within one year. Based on past
experience and Home City's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with Home City
at maturity. If there is a significant deviation from historical experience,
Home City can utilize borrowings from the FHLB and commercial banks as
alternatives to this source of funds.
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Home City at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1999 1998
------------------ -------------------
Percent Percent
of total of total
Amount deposits Amount deposits
------ -------- ------ --------
(Dollars in thousands)
<C> <C> <C> <C> <C>
Transaction accounts:
Demand $ 1,912 2.75% $ 1,605 2.65%
NOW accounts (1) 1,480 2.12 1,439 2.38
Passbook savings accounts (2) 12,241 17.57 11,084 18.32
------- ----- ------- -----
Total transaction accounts 15,633 22.44 14,128 23.35
Certificates of deposit:
4.01 - 6.00% 29,702 42.63 22,157 36.62
6.01 - 8.00% 24,336 34.93 24,214 40.03
Total certificates of deposit 54,038 77.56 46,371 76.65
------- ------ -------- ------
Total deposits (3) $69,671 100.00% $60,499 100.00%
======= ====== ====== =======
(1) Home City's weighted-average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At December 31,
1999 and 1998, the weighted-average rates on NOW accounts were 2.71% and
2.08%, respectively.
(2) Home City's weighted-average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted-
average interest rate on passbook accounts was 3.34% and 2.78% at December
31, 1999 and 1998, respectively.
(3) IRAs are included in the various certificates of deposit balances.
IRAs totaled $6.7 million and $6.6 million as of December 31, 1999 and
1998, respectively.
The following table shows rate and maturity information for Home City's
certificates of deposit as of December 31, 1999:
</TABLE>
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate 1 year 2 years 3 years 3 years Total
---- ------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
4.01 - 6.00% $19,390 $6,243 $3,614 $455 $29,702
6.01 - 8.00% 17,784 1,435 4,769 348 24,336
------- ------ ------ ---- -------
Total certificates of deposit $37,174 $7,678 $8,383 $803 $54,038
======= ====== ====== ==== =======
<PAGE>
The following table presents the amount of Home City's certificates of
deposit of $100,000 or more by the time remaining until maturity as of December
31, 1999:
Maturity Amount
-------- ------
(Dollars in thousands)
Three months or less $ 4,395
Over 3 months to 6 months 1,791
Over 6 months to 12 months 3,527
Over 12 months 2,969
-------
Total $12,682
=======
The following table sets forth Home City's deposit account balance
activity for the years indicated:
Year ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
Beginning balance $60,499 $51,689
Deposits 119,853 76,525
Withdrawals (113,933) (70,664)
-------- -------
Net increase (decrease) before
Interest credited 5,920 5,861
Interest credited 3,252 2,949
------- -------
Ending balance $69,671 $60,499
======= =======
Net increase $ 9,172 $ 8,810
Percentage increase 15.16% 17.04%
Borrowings. The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See "REGULATION - Federal Home Loan Banks." As a member in good standing of
the FHLB of Cincinnati, Home City is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of credit worthiness have been
met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which an
association is eligible for such advances will depend on whether it meets the
Qualified Thrift Lender Test (the "QTL Test"). See "REGULATION - Qualified
Thrift Lender Test." If an association meets the QTL Test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets. At December 31, 1999,
Home City was in compliance with the QTL Test.
<PAGE>
Home City obtained advances from the FHLB of Cincinnati, as set forth in
the following table:
Year ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
Average balance outstanding $18,497 $ 8,316
Maximum amount outstanding at any month end
during the year $26,505 $11,571
Balance outstanding at end of year $26,505 $11,571
Weighted-average interest rate during the year 5.46% 5.85%
Weighted-average interest rate at end of year 5.67% 5.48%
Based upon Home City's eligible mortgage collateral, total FHLB advances
are limited to approximately $33.0 million.
Subsidiaries
Home City owns all of the outstanding shares of Homciti Service Corp.,
an Ohio corporation ("Homciti"). Homciti owns common stock in Intrieve,
Incorporated ("Intrieve"), a data processing company which services Home City,
and an 0.875% ownership interest in a joint venture which owns the Springfield
Inn, a local hotel. At December 31, 1999, the aggregate value of the Intrieve
stock and the joint venture investment equaled approximately $28,000.
Competition
Home City competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Home City competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Home City competes
for loan originations primarily through the interest rates and loan fees
offered and through the efficiency and quality of services provided.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable. Three savings
associations, seven banks and seven credit unions have offices in Clark
County. At June 30, 1999, Home City had approximately 5.37% of all financial
institution deposits in Clark County.
The size of financial institutions competing with Home City is likely to
increase as a result of changes in statutes and regulations eliminating
various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon Home
City.
Personnel
As of December 31, 1999, Home City had twenty-five full-time employees and
three part-time employees. Home City believes that relations with its
employees are good. Home City offers health and life insurance benefits.
None of the employees of Home City is represented by a collective bargaining
unit.
<PAGE>
Regulation
General. As a savings association organized under the laws of the United
States, Home City is subject to regulatory oversight by the OTS. The OTS is
an office in the Department of the Treasury and is responsible for the
regulation and supervision of all savings associations the deposits of which
are insured by the FDIC in the SAIF and all federally-chartered institutions.
The OTS issues regulations governing the operation of savings associations
regularly examines such institutions and imposes assessments on savings
associations based on their asset size to cover the costs of this supervision
and examination. It also promulgates regulations that prescribe the
permissible investments and activities of federally-chartered savings
associations, including the type of lending that such associations may engage
in and the investments in real estate, subsidiaries and securities they may
make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws
or regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
Because Home City's deposits are insured by the FDIC, Home City is also
subject to examination and regulation by the FDIC. Home City must file
periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by the OTS to determine
whether Home City is in compliance with various regulatory requirements and is
operating in a safe and sound manner. Home City is a member of the FHLB of
Cincinnati.
HCFC is also subject to regulation, examination and oversight by the OTS
as the holding company of Home City and is required to submit periodic reports
to the OTS.
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 the HCFC and Home City 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.
Regulatory Capital Requirements. Home City is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital
(which for Home City is equal to tangible capital) of 4% of adjusted total
assets, except for association's with the highest examination rating and
<PAGE>
acceptable levels of risk, and risk-based capital (which for Home City consists
of core capital and general valuation allowances) equal to 8% of risk-weighted
assets. Assets and certain off-balance-sheet items are weighted at percentage
levels ranging from 0% to 100% depending on their relative risk.
Home City's core capital ratio at December 31, 1999, was 9.73%. For
information concerning Home City's capital, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION - Liquidity and Capital Resources."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade
an association's designation notwithstanding its capital level, based on less
than satisfactory examination ratings in areas other than capital or, after
notice and an opportunity for hearing, if the institution is deemed to be in
an unsafe or unsound condition or to be engaging in an unsafe or unsound
practice. Each undercapitalized association must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. A critically
undercapitalized institution must be placed in conservatorship or receivership
within 90 days after reaching such capitalization level, except under limited
circumstances. Home City's capital at December 31, 1999, met the standards
for the highest level, a " well capitalized association".
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases and
certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other
association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (I) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
that income for the preceding two years, (ii) if the savings association will
not be at least adequately capitalized following the capital distribution;
(iii) if the proposed distribution would violate a prohibition contained in
any applicable statue, regulation or agreement between the savings association
and the OTS (or the FDIC), or a condition imposed on the savings association
has not received certain favorable examination ratings for the OTS. If a
savings association subsidiary of a holding company is not required to file
an application, it must file a notice with OTS.
Qualified Thrift Lender Test. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test
requires a savings association to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTIs").
Generally, QTIs are assets related to domestic residential real estate and
manufactured housing, although they also include credit card, student and small
business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under the
QTL test, 65% of an institution's "portfolio assets" (total assets less
goodwill and other intangibles, property used to conduct business and 20% of
liquid assets) must consist of QTI on a monthly average basis in nine out of
every 12 months. The second test permits a savings association to qualify as
a QTL by meeting the definition of "domestic building and loan association"
under the Internal Revenue Code of 1986, as amended (the "Code"). In order
for an institution to meet the definition of a "domestic building and loan
association" under the Code at least 60% of its assets must consist of
specified types of property, including cash loans secured by residential real
estate or deposits, educational loans and certain governmental obligations.
<PAGE>
The OTS may grant exceptions to the QTL tests under certain circumstances. If
a savings association fails to meet either one of the QTL tests, the
association and its holding company become subject to certain operating and
regulatory restrictions and the savings association will not be eligible for
new FHLB advances. At December 31, 1999, Home City had QTIs equal to
approximately 76.7% of its total portfolio assets.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to the lending limits on loans to one borrower and the total of such loans
cannot exceed an association's total regulatory capital plus additional loan
reserves (or 200% of such capital amount for qualifying institutions with less
than $100 million in deposits). Most loans to directors, executive officers
and principal shareholders must be approved in advance by a majority of the
"disinterested" members of the board of directors of the association with any
"interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the
same as offered in comparable transactions to the general public or as offered
to all employees in a company-wide benefit program, and loans to executive
officers are subject to additional limitations. Home City was in compliance
with such restrictions at December 31, 1999.
Savings associations must also comply with Sections 23A and 23B of the
Federal Reserve Act (the "FRA") pertaining to transactions with affiliates.
An affiliate of a savings association is any company or entity that controls,
is controlled by or is under common control with the savings association.
HCFC is an affiliate of Home City. Generally, Sections 23A and 23B of the FRA
limit the extent to which the savings institution or its subsidiaries may
engage in specified transactions with affiliates and require that all such
transactions be on terms substantially the same, or at least as favorable to
the institution, as those provided in transactions with a non-affiliate. Home
City was in compliance with these requirements and restrictions at December
31, 1999.
Holding Company Regulation. HCFC is a savings and loan holding company
within the meaning of the Home Owners' Loan Act (the "HOLA"). As such, HCFC
has registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting requirements, in addition to the reporting
requirements of the Securities and Exchange Commission (the "SEC").
HCFC is a unitary savings and loan holding company, (i.e., it owns only
one savings association). There are generally no restrictions on the
activities of a unitary savings and loan holding company, and such companies
are the only financial institution holding companies that may engage in
commercial, securities and insurance activities without limitation. The broad
latitude to engage in activities under current law can be restricted, however,
if the OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness or stability of its subsidiary
savings association. Notwithstanding the foregoing rules as to permissible
business activities of a unitary savings and loan holding company, if the
savings association subsidiary of a holding company fails to meet the QTL Test,
then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. At December 31, 1999,
Home City met the QTL Test. See "Qualified Thrift Lender Test."
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured banks
and thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
Home City is a member of the SAIF and its deposit accounts are insured by
the FDIC up to the prescribed limits. The FDIC has examination authority over
<PAGE>
all insured depository institutions, including Home City, and has authority to
initiate enforcement actions against federally-insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the BIF and members of the SAIF. The FDIC
may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time and may decrease such rates if such target level has been
met.
Federal legislation, which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks holding SAIF deposits
were required to pay the same special assessment on 80% of deposits at March
31, 1995. In addition, the cost of prior thrift failures is now being shared
by both the SAIF and the BIF. Home City had $40.1 million in deposits at
March 31, 1995. Home City paid a special assessment of $263,000 on November
27, 1996, which was recorded as of September 30, 1996.
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts)
of 3% of deposits in net transaction accounts for that portion of accounts up
to $44.3 million (subject to an exemption of up to $5.0 million), and to
maintain reserves of 10% of deposits in net transaction accounts against that
portion of total transaction accounts in excess of $44.3 million. These
percentages are subject to adjustment by the FRB. At December 31, 1999, Home
City was in compliance with its reserve requirements.
Federal Home Loan Banks. The FHLBs, under the regulatory oversight of the
Federal Housing Financing Board, provide credit to their members in the form
of advances. Home City is a member of the FHLB of Cincinnati and must
maintain an investment in the capital stock of the FHLB of Cincinnati in an
amount equal to the greater of 1.0% of the aggregate outstanding principal
amount of Home City's residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 5% of its advances from
the FHLB. Home City is in compliance with this requirement with an investment
in FHLB of Cincinnati stock of $1,372,000 at December 31, 1999.
FHLB advances to members such as Home City who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At December 31, 1999, Home City's
maximum limit on advances was approximately $33.0 million and Home City's
advances totaled $26.5 million. The granting of advances is subject also to
the FHLB's collateral and credit underwriting guidelines.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States government or an agency thereof; deposits in
any FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
<PAGE>
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance.
Taxation
Federal Taxation. HCFC and Home City each are subject to the federal tax
laws and regulations which apply to corporations generally. In addition to
the regular income tax, HCFC and Home City may be subject to alternative
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986.
In addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its alternative minimum taxable income computed without
regard to this preference item and prior to reduction by net operating
losses, is included in alternative minimum taxable income. Net operating
losses can offset no more than 90% of alternative minimum taxable income.
The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5 million or less for the three tax years ending with its first
tax year beginning after December 31, 1996. Once a corporation is recognized
as a small corporation, it will continue to be exempt from the alternative
minimum tax for as long as its average gross receipts for the prior three-year
period does not exceed $7.5 million. In determining if a corporation meets
this requirement, the first year that it achieved small corporation status is
not taken into consideration. HCFC and Home City have both qualified as small
corporations. Both corporations' average gross receipts were less than
$7.5 million for the year ending December 31, 1999.
Certain thrift institutions such as Home City were, prior to the
enactment of the Small Business Jobs Protection Act, which was signed into law
on August 21, 1996, allowed deductions for bad debts under methods more
favorable to those granted to other taxpayers. Qualified thrift institutions
could compute deductions for bad debts using either the specific charge-off
method of Section 166 of the Code or the reserve method of Section 593 of
the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income (determined
without regard to this deduction and with additional adjustments). Under
the experience method, a thrift institution was generally allowed a deduction
for an addition to its bad debt reserve equal to the greater of (i) an amount
based on its actual average experience for losses in the current and five
preceding taxable years, or (ii) an amount necessary to restore the reserve
to its balance as of the close of the base year. A thrift institution could
elect annually to compute its allowable addition to bad debt reserves for
qualifying loans either under the experience method or the percentage of
taxable income method. For tax years 1993, 1992 and 1991, Home City used the
percentage of taxable income method because such method provided a higher bad
debt deduction than the experience method.
The Small Business Jobs Protection Act eliminated the percentage of
taxable income reserve method of accounting for bad debts by thrift
institutions, effective for taxable years beginning after 1995. Thrift
institutions that would be treated as small banks are allowed to utilize the
experience method applicable to such institutions, while thrift institutions
that are treated as large banks are required to use only the specific
charge-off method.
<PAGE>
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Any adjustments under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable-year period, beginning with the first
taxable year beginning after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that becomes a large
bank, the amount of the institution's applicable excess reserves generally is
the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its
reserve for losses on nonqualifying loans (all other types of loans) as of the
close of its last taxable year beginning before January 1, 1996, over (ii) the
balances of such reserves as of the close of its last taxable year beginning
before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a
thrift institution that becomes a small bank, like Home City, the amount of
the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and
its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken
into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax
year, the principal amount of residential loans made by the thrift during the
year is not less then its base amount. The "base amount" generally is the
average of the principal amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996. A
residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of
the property to acquire, construct or improve the property.
The balance of the pre-1988 reserves is subject to the provisions of Section
593(e) as modified by the Small Business Jobs Protection Act, which require
recapture in the case of certain excessive distributions to shareholders. The
pre-1988 reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated
earnings and profits; second, out of the pre-1988 reserves; and third, out of
such other accounts as may be proper. To the extent a distribution by Home
City to HCFC is deemed paid out of its pre-1988 reserves under these rules,
the pre-1998 reserves would be reduced and Home City's gross income for tax
purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of December
31, 1999, Home City's pre-1988 reserves for tax purposes totaled approximately
$1.1 million. Home City believes it had approximately $5.2 million of
accumulated earnings and profits for tax purposes as of December 31, 1999,
which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. No
representation can be made as to whether Home City will have current or
accumulated earnings and profits in subsequent years.
The tax returns of Home City have been audited or closed without audit
through fiscal year 1995. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Home City.
<PAGE>
Ohio Taxation. HCFC is subject to the Ohio corporation franchise tax,
which, as applied to HCFC, is a tax measured on either net earnings or net
worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed taxable income in excess
of $50,000 or (ii) 0.04% times taxable net worth.
A special litter tax is also applicable to all corporations, including
HCFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the
litter tax is equal to 0.11% of the first $50,000 of computed Ohio taxable
income and 0.22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to
0.014% times taxable net worth.
Due to legislative changes enacted July 1, 1997, HCFC may elect to be a
"qualifying holding company" and as such be exempt from the net worth tax. To
be exempt it must satisfy all the requirements of the enacted law which
includes related member adjustments that could affect the taxable net worth of
HCFC's subsidiary Home City.
Home City is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which for tax year 1999 is imposed at a rate of 1.4% of Home
City's book net worth determined in accordance with GAAP, less statutory
deductions. This rate decreases in tax year 2000 and thereafter to 1.3%. As
a "financial institution" Home City is not subject to any tax based upon net
income or net profits imposed by the State of Ohio.
Impact of Recent Accounting Pronouncements
SFAS No. 128, "Earnings Per Share." In February 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share." This statement established standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This statement simplifies the standards for
computing earnings per share previously in APB Opinion No. 15, "Earnings Per
Share", and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior period EPS data
presented.
SFAS No. 130, "Reporting Comprehensive Income." In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement does
not require a specific format for the financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
The statement also requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of statements of
financial position.
<PAGE>
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers.
This statement requires that a public business enterprise report financial and
descriptive information about its reportable segments and requires that a
public business enterprise report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. It also requires a
reconciliation of segment information presented to corresponding amounts in
the enterprise's general-purpose financial statements.
This statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. This statement need not be
applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application.
Impact of Inflation and Changing Prices
The 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.
ITEM 2. Properties
Home City's office is located at 63 West Main Street, Springfield, Ohio
45502. Such property is owned by Home City. HCFC operates out of Home City's
office. HCFC reimburses Home City for the fair value of the space occupied.
Home City also leases administrative office space across the street.
The following table sets forth certain information at December 31, 1998,
regarding the ownership by Home City of the land, building, and improvements
at 63 West Main Street, Springfield, Ohio, the office of Home City:
Year Square Net
acquired footage book value (1)
-------- ------- --------------
1975 5,839 $344,000
- ------------------------
(1) At December 31, 1999, Home City's properties and equipment had a total net
book value of $1,015,000.
(2) For additional information regarding Home City's properties and equipment,
see Notes A and E of Notes to Consolidated Financial Statements.
ITEM 3. Legal Proceedings
On September 23, 1996, a civil suit was filed in the Common Pleas Court of
Clark County, Ohio, against Home City, Douglas L. Ulery, President of Home
City, and two other individuals (the "Other Individuals") by a Springfield,
Ohio, church (the "church"), which obtained a mortgage loan from Home City,
and two members of the Church. Among other allegations in the lawsuit, the
plaintiffs allege that the Other Individuals wrongfully represented to Mr.
Ulery that they were the newly elected officers of the Church; that Mr. Ulery
allowed the Other Individuals access to confidential information about the
Church; and that, as a result, Church membership and income decreased. The
plaintiffs are seeking damages in an amount not less than $10,000. Home City
and Mr. Ulery filed an Answer to the Complaint on October 24, 1996, denying
the substantive allegations contained in the Complaint and raising a number of
affirmative defenses. This matter is currently still pending.
Neither Home City nor HCFC is presently involved in any other legal
proceedings of a material nature. From time to time, Home City is party to
legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by Home City.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
There were 843,390 common shares of HCFC outstanding on December 31, 1999,
held of record by approximately 353 shareholders. Price information with
respect to HCFC's common shares is quoted on The Nasdaq SmallCap Market
("Nasdaq") under the symbol "HCFC." The high and low trading prices for the
common shares of HCFC, as quoted by Nasdaq, by quarter are shown below. HCFC
declared a cash dividend of $0.10 per share on each of February 18, 1999, May
24, 1999, and August 23, 1999, as well as $0.105 per share on November 22,
1999. HCFC declared a cash dividend of $0.09 per share on each of February 23,
1998, May 27, 1998, and July 27, 1998, as well as $0.10 per share on October
26,1998. On April 22, 1998, the Board of Directors of HCFC declared a special
cash distribution in the amount of $3.50 per share.
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1999 September 30,1999 December 31,1999
-------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
High $17.500 $16.375 $14.000 $14.000
Low $13.500 $14.000 $12.750 $12.000
Dividend
declared $0.10 $0.10 $0.10 $0.105
March 31, 1998 June 30, 1998 September 30,1998 December 31,1998
-------------- ------------- ----------------- ----------------
High $19.250 $23.000 $15.500 $15.000
Low $18.250 $14.750 $11.000 $11.500
Dividend
declared $0.09 $0.09 $0.09 $0.10
Capital
distribution $3.50
<PAGE>
The income of HCFC consists of dividends that may periodically be declared
and paid by the Board of Directors of Home City on the common shares of Home
City held by HCFC and earnings on the net proceeds retained by HCFC from the
sale of HCFC's common shares in connection with the Conversion. In addition
to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations.
Under OTS regulations applicable to converted savings associations, Home
City is not permitted to pay a cash dividend on its common shares if the
regulatory capital of Home City would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Home City, in the event of a complete liquidation, to those
members of Home City before the Conversion who maintain a savings account at
Home City after the Conversion) or applicable regulatory capital requirements
prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a
savings association that immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital
to assets ratio exceeded its required capital to assets ratio at the beginning
of the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need
of more than normal supervision will be subject to restrictions on dividends.
<PAGE>
A savings association that fails to meet current minimum capital requirements
is prohibited from making any capital distributions without prior approval of
the OTS. Home City currently meets all of its regulatory capital requirements
and, unless the OTS determines that Home City is an institution requiring more
than normal supervision, Home City may pay dividends in accordance with the
foregoing provisions of the OTS regulations.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
General
Home City converted from a mutual federal savings bank to a stock federal
savings bank (the "Conversion") on December 30, 1996. In connection with the
Conversion, 952,200 common shares of HCFC were sold, generating net proceeds
of $8.3 million after Conversion expenses. Of this amount, $4.6 million was
utilized to purchase 100% of the common stock of 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 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 expectation 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, which 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,
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
<PAGE>
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.
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, 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.
<PAGE>
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 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 expense 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.
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.
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 & other borrowings 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 (100 basis points equals
1.00%) 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.
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 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 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:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
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 provided by (used in) investing activities (21,984) (12,871)
Net cash provided by (used in) 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
======= =======
</TABLE>
Home City's principal sources of funds are deposits, loan and mortgage-
backed securities repayments, maturities of securities and other funds
provided by operations. Home City also 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. See "REGULATION - Regulatory Capital Requirements."
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 current
Actual capital Current requirement requirement Applicable
------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent asset total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $10,523 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>
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>
- ------------------------------------
See accompanying notes.
<PAGE>
HOME CITY FINANCIAL CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Home City Financial Corporation (the "corporation") is a 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
======== ========
</TABLE>
<PAGE>
The bank's actual and required capital amounts and ratios are as follows:
<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>
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act of the Registrant
The information set forth under the caption "PROPOSAL ONE - ELECTION OF
DIRECTORS" of the Definitive Proxy Statement of the Corporation dated March
23, 2000, filed with the United States Securities and Exchange Commission (the
"Proxy Statement") is incorporated by reference herein.
ITEM 10. Executive Compensation
The information set forth under the caption "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS" of the Definitive Proxy Statement is incorporated by
reference herein.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "VOTING SECURITIES AND
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Definitive
Proxy Statement is incorporated by reference herein.
ITEM 12. Certain Relationships and Related Transactions
The information set forth under the caption "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS - Certain Transactions with Home City" of the Definitive
Proxy Statement is incorporated by reference herein.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (Incorporated by reference)
3.2 Code of Regulations (Incorporated by reference)
10.1 Employment Agreement with Mr. Ulery (Incorporated by reference)
10.2 Home City Financial Corporation 1997 Stock Option and
Incentive Plan (Incorporated by reference)
10.3 Home City Financial Corporation Recognition and Retention Plan
and Trust Agreement (Incorporated by reference)
21 Subsidiaries (Incorporated by reference)
27 Financial Data Schedule
99.1 Proxy Statement ( Incorporated by reference)
99.2 Safe Harbor Under the Private Securities Litigation Reform Act
of 1995
(b) Reports on Form 8-K
HCFC has not filed any reports on Form 8-K during the last quarter of
1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HOME CITY FINANCIAL CORPORATION
/s/ Douglas L. Ulery
_____________________________
Douglas L. Ulery
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities on the
dates indicated.
/s/ John D. Conroy /s/ P. Clark Engelmeier
____________________________ _____________________________
John D. Conroy P. Clark Engelmeier
Director Chairman of the Board
March 23, 2000 March 23, 2000
____________________________ _____________________________
Date Date
/s/ Terry A. Hoppes
____________________________ _____________________________
James Foreman Terry A. Hoppes
Director Director
March 23, 2000
____________________________ _____________________________
Date Date
/s/ Douglas L. Ulery /s/ Charles A. Mihal
____________________________ _____________________________
Douglas L. Ulery Charles A. Mihal
Director Treasurer and
President and Chief Financial Officer
Chief Executive Officer
March 23, 2000 March 23, 2000
____________________________ _____________________________
Date Date
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
3.1 Articles of Incorporation Incorporated by reference to the Registrant's
of Home City Financial Corporation Quarterly Report on Form 10-QSB for the
Quarter Ended March 31, 1997 (the "March
31, 1997, 10-QSB"), Exhibit 3(I)
3.2 Code of Regulations of Home City Incorporated by reference to the March 31,
Financial Corporation 1997, 10-QSB, Exhibit 3 (ii)
10.1 Employment Agreement with Incorporated by reference to the June 30,
Mr. Ulery 1997, 10-KSB, Exhibit 10.1
10.2 Home City Financial Corporation Incorporated by reference to the Registrant's
1997 Stock Option and Incentive 1997 Definitive Proxy Statement dated
Plan September 19, 1997, Exhibit A
10.3 Home City Financial Corporation Incorporated by reference to the Registrant's
Recognition and Retention Plan 1997 Definitive Proxy Statement dated
and Trust Agreement September 19, 1997, Exhibit B
21 Subsidiaries of Home City Incorporated by reference to the June 30,
Financial Corporation 1997, 10-KSB, Exhibit 21
27 Financial Data Schedule
99.1 Proxy Statement Incorporated by reference to the definitive
Proxy Statement of the Registrant for the
2000 Annual Meeting of Shareholders of
Home City Financial Corporation, filed with
the Securities and Exchange Commission
99.2 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
<PAGE>
</TABLE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
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The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Home City
Financial Corporation ("HCFC") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information regarding
future economic performance and finances and plans and objectives of
management, contained or incorporated by reference in HCFC's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999, is forward-looking.
In some cases, information regarding certain important factors that could cause
actual results of operations or outcomes of other events to differ materially
from any such forward-looking statement appears together with such statement.
In addition, forward-looking statements are subject to other risks and
uncertainties affecting the financial institutions industry, including, but
not limited to, the following:
Interest Rate Risk
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HCFC's operating results are dependent to a significant degree on its net
interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on
deposits, borrowings and other interest-bearing liabilities. The interest
income and interest expense of HCFC change as the interest rates on
interest-earning assets and interest-bearing liabilities change. Interest
rates may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond HCFC's control. In a
rising interest rate environment, loans tend to prepay slowly and new loans at
higher rates increase slowly, while interest paid on deposits increases
rapidly because the terms to maturity of deposits tend to be shorter than the
terms to maturity or prepayment of loans. Such differences in the adjustment
of interest rates on assets and liabilities may negatively affect HCFC's
income.
Possible Inadequacy of the Allowance for Loan Losses
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HCFC maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of HCFC believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from
the operation of the property, which may be negatively affected by national
and local economic conditions. Construction loans may also be negatively
affected by such economic conditions, particularly loans made to developers who
do not have a buyer for a property before the loan is made. The risk of
default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions. When consumers have
trouble paying their bills, they are more likely to pay mortgage loans than
consumer loans. In addition, the collateral securing such loans, if any, may
decrease in value more rapidly than the outstanding balance of the loan.
<PAGE>
Competition
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Home City Federal Savings Bank of Springfield ("Home City") competes for
deposits with other savings associations, commercial banks and credit unions
and issuers of commercial paper and other securities, such as shares in money
market mutual funds. The primary factors in competing for deposits are
interest rates and convenience of office location. In making loans, Home City
competes with other savings associations, commercial banks, consumer finance
companies, credit unions, leasing companies, mortgage companies and other
lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable. The
size of financial institutions competing with Home City is likely to increase
as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions.
Such increased competition may have an adverse effect upon Home City.
Legislation and Regulation that may Adversely Affect HCFC's Earnings
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Home City is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan
holding company, HCFC is also subject to regulation and examination by the
OTS. Such supervision and regulation of HCFC and Home City are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company to engage in
various business activities. The assessments, filing fees and other costs
associated with reports, examinations and other regulatory matters are
significant and may have an adverse effect on HCFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such
system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
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 the Company. 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.
