SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For fiscal year ended September 30, 1997
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________________ to ____________________
Commission file number 0-25300
HARVEST HOME FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio 31-1402988
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3621 Harrison Avenue, Cheviot, Ohio 45211
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (513) 661-6612
Securities registered pursuant to 12(b) of the Exchange Act:
None
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
Common shares without par value
(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
X YES NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not 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 its most recent fiscal year. $6.0 million
Based upon the bid price provided by the NASDAQ system, the aggregate
market value of voting stock held by non-affiliates of the issuer on December
26, 1997 was $14.50.
914,857 shares of issuer's common shares were issued and outstanding as of
December 26, 1997, this total is net of 77,018 shares of issuer's common
stock repurchased as treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's annual report to security-holders furnished to the
Commission under Rule 14a-3 or 14c-3; Registrant's definitive proxy statement
filed in accordance with Rule 14a-101, Schedule 14a filed on November 28, 1997.
PART I
Item 1. Description of Business
Harvest Home Financial Corporation ("HHFC", or the "Corporation") was
incorporated in February 1994 under Ohio Law for the purpose of acquiring all of
the capital stock issued by Harvest Home Savings Bank in connection with its
conversion from a state chartered mutual savings bank to a state chartered stock
savings bank (the "Conversion"). The Conversion was consummated on October 7,
1994 and, as a result, the Corporation became a unitary savings and loan holding
company for its wholly owned subsidiary, Harvest Home Savings Bank ("Harvest
Home" or the "Bank"). The Corporation has no significant assets other than the
Bank's common stock acquired in the Conversion and that portion of the net
proceeds of the Conversion retained by the Corporation and has no significant
liabilities. Future references to the Corporation or Harvest Home are utilized
herein as the context requires.
General
As a community oriented financial institution, Harvest Home seeks to serve
the financial needs of the families and community businesses in its market
area. Harvest Home is principally engaged in the business of attracting
deposits from the general public (which are insured to applicable limits by the
Savings Association Insurance Fund) and using such deposits to originate
residential loans in its primary market area. To a lesser extent, Harvest
Home also originates construction loans and loans secured by multi-family
residential real estate, nonresidential real estate, and deposits. In addition,
Harvest Home invests in mortgage-backed securities, other investment grade
securities, and short-term liquid assets. Harvest Home also offers a Visa
credit card program through a commercial bank.
Harvest Home conducts business from its main office in Cheviot, Ohio and
from two full-service branch offices located in the Cincinnati area. Harvest
Home's primary market area consists of western Hamilton County, Ohio, although
its market also extends to the remainder of Hamilton County and to the townships
contiguous to Hamilton County in the counties of Butler, Clermont, and Warren.
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding HHFC at the
dates and for the periods indicated. The financial information should be read
in conjunction with the consolidated financial statements and notes thereto
included elsewhere herein.
<TABLE>
At September 30,
<CAPTION>
Selected Financial condition
and other data: 1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $93,832 $78,718 $69,532 $72,765 $64,925
Cash and cash
Equivalent(1) 5,264 1,708 2,313 16,333 9,541
Investment
Securities at cost -- -- 18,032 9,992 6,125
Investment securities
available for sale
at market 8,039 12,105 -- -- --
Mortgage-backed
Securities at cost -- -- 9,009 8,243 9,545
Mortgage-backed Securities
available for Sale
at Market 32,466 20,429 -- -- --
Loans receivable
- - net 45,229 42,267 38,245 36,319 38,012
Deposits 58,786 57,958 56,425 67,810 60,470
Advances from the FHLB 24,000 10,000 -- -- --
Stockholders'
Equity(2) 10,344 9,725 12,706 4,581 4,166
Number of:
Real estate loans
outstanding 1,054 1,038 1,000 1,052 975
Deposit accounts 8,035 8,466 8,309 6,987 7,536
Full service
offices 3 3 3 3 3
</TABLE>
<TABLE>
Summary of Earnings: Year Ended September 30,
<CAPTION>
1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $5,983 $5,209 $4,872 $4,187 $4,584
Interest expense 3,689 2,969 2,569 2,387 2,676
Net interest income 2,294 2,240 2,303 1,800 1,908
Provision for
loan losses 9 1 12 9 59
Net interest income after
provision for loan losses 2,285 2,239 2,291 1,791 1,849
Other income 64 74 50 53 56
General, administrative
and other expense 1,409 2,136 1,372 1,216 1,158
Earnings before
income taxes 940 177 969 628 747
Federal income taxes 313 45 329 213 257
Net earnings $ 627 $ 132 $ 640 $ 415 $ 490
</TABLE>
(1) Includes cash, federal funds sold and interest-bearing deposits in other
financial institutions.
(2) Consists of only retained earnings at September 30, 1993 through 1994,
inclusive.
<TABLE>
At September 30,
<CAPTION>
Selected Financial
ratios: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest rate spread
(difference between
average yield on interest-
earning assets and
average cost of interest-
bearing liabilities) 2.17% 2.24% 2.48% 2.63% 2.81%
Net interest margin
(net interest income as
a percentage of average
interest earning assets) 2.76 3.07 3.27 2.82 3.07
Return on equity (net
earnings divided
by average equity) 6.09 1.05 5.09 9.49 12.50
Return on assets
(net earnings
divided by average
total assets) 0.73 0.18 0.89 0.64 0.76
Equity-to-assets ratio
(average equity divided
by average
total assets) 12.06 16.94 17.56 6.70 6.10
Loans loss reserve
as a percentage
of non-performing
loans 121.05% 67.68% 76.92% 268.57% N/M(1)
</TABLE>
(1) Not meaningful.
Lending Activities
General. Harvest Home's primary lending activity is the origination
of conventional mortgage loans for its own portfolio secured by one-to four-
family residential properties located in Harvest Home's primary market area. To
a lesser extent, loans for the construction of one- to four-family homes,
mortgage loans on multifamily properties containing five units or more and
nonresidential properties, and secured home equity loans are also offered by
Harvest Home. In addition to mortgage lending, Harvest Home makes a limited
amount of consumer loans secured by deposits.
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of Harvest Home's loan portfolio
at the dates indicated.
<TABLE>
At September 30
1997 1996 1995 1994 1993
<CAPTION>
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Residential real estate
loans:
Construction loans $ 1,513 3.4% $ 3,290 7.8% $ 1,505 3.9% $ 1,660 4.6% $1,022 2.7%
1-4 family and multi-
family (1) 42,353 93.6 38,210 90.4 34,002 88.9 32,898 90.6 34,308 90.2
Nonresidential real
estate and land 2,554 5.7 3,281 7.8 3,341 8.8 3,101 8.5 3,365 8.9
Deposit accounts 45 .1 42 .1 83 .2 90 0.2 127 0.3
46,465 102.8 44,823 106.1 38,931 101.8 37,749 103.9 38,822 102.1
Less:
Loans in process (1,019) (2.3) (2,320) 5.5 (428) (1.1) (1,148) (3.2) (465) (1.2)
Deferred loan
origination fees ( 102) ( .2) ( 125) .3 (148) ( .4) ( 184) (0.5) (253) (0.7)
Allowance for loan losses ( 115) ( .3) ( 111) .3 (110) ( .3) ( 98) (0.2) (92) (0.2)
Total Loans $45,229 100.0% $42,267 100.0% $38,245 100.0% $36,319 100.0% $38,012 100.0%
Type of Security:
Residential real
estate:
1-4 family $42,464 93.9% $39,978 94.6% $34,117 89.2% $32,818 90.4% $33,379 87.7%
Other dwelling 1,402 3.1 1,522 3.6 1,390 3.6 1,740 4.8 1,951 5.2
Nonresidential real estate 2,554 5.7 3,281 7.8 3,341 8.8 3,101 8.5 3,365 8.9
Deposit Accounts 45 .1 42 .1 83 .2 90 0.2 127 0.3
$46,465 102.8% $44,823 106.1% 38,931 101.8% 37,749 103.9 38,822 102.1
Less:
Loans in process (1,019) (2.3) (2,320) 5.5 (428) (1.1) (1,148) (3.2) (465) (1.2)
Deferred loan
origination fees (102) ( .2) ( 125) .3 (148) ( .4) (184) (0.5) (253) (0.7)
Allowance for loan losses (115) ( .3) ( 111) .3 (110) ( .3) ( 98) (0.2) ( 92) (0.2)
Total Loans $45,229 100.0% $42,267 100.0% $38,245 100.0% $36,319 100.0% $38,102 100.0%
(1) Includes home equity lines of credit underwritten on the same basis as
first mortgage loans.
</TABLE>
Loans. The following table sets forth certain information as of
September 30, 1997 regarding the dollar amount of loans maturing in Harvest
Home's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10- Due 20
Due during years years 20 years or more
The years after after after years
September 30, 9/30/97 9/30/97 9/30/97 after
1998 1999 2000 9/30/97 Tota
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2)
One to four family
residential
Adjustable $1,146 $38 $ 30 $126 $703 $10,603 $7,858 $20,504
Fixed 19 18 70 1,185 4,567 12,763 2,102 20,724
Multi-family
residential(2):
Adjustable 60 60 0 22 312 948 0 1,402
Non-residential 31 0 14 185 615 1,709 0 2,554
Deposit Account loans 45 0 0 0 0 0 0 45
Total loans $1,301 $116 $114 $1,518 $6,197 $26,023 $9,960 $45,229
(1) Amounts shown are net of loans in process of $1,019,000, deferred loan
origination fees of $102,000 and allowance for loan losses of $115,000.
(2) Includes construction loans and land loans.
</TABLE>
The following table sets forth the dollar amount of all loans due
after one year from September 30, 1997, which have predetermined interest rates
and floating or adjustable interest rates:
[CAPTION]
Predetermined Floating or
Rates adjustable rate Total
[S] [C] [C] [C]
(In thousands)
Mortgage Loans:
One- to four-
family residential $20,705 $19,358 $40,063
Multi-family
residential 0 1,342 1,342
Nonresidential 0 2,523 2,523
Total loans: $20,705 $23,223 $43,928
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of Harvest Home has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Harvest Home's primary market area. In addition,
Harvest Home makes second mortgage loans, as well as home equity lines of credit
underwritten on the same basis as first mortgage loans. Harvest Home also has a
small percentage of loans secured by property located outside its primary market
area including a small percentage secured by real estate located in nearby south
eastern Indiana and northern Kentucky. Each of such loans is secured by a
mortgage on the underlying real estate and improvements thereon, if any.
Regulations limit the amount which Harvest Home may lend in relationship to
the appraised value of the real estate and improvements at the time of loan
origination. Within the parameters of such regulations, Harvest Home makes
fixed rate loans on single family, owner occupied residences up to 80% of the
value of the real estate and improvements (the "Loan-to-Value Ratio" or "LTV")
for terms not to exceed 15 years and adjustable-rate mortgage loans ("ARMs") up
to 89% LTV. Harvest Home does not require private mortgage insurance for such
loans. Harvest Home recently began offering ARMs for terms not to
exceed 25 years in amounts up to 95% LTV and requires private mortgage
insurance for such loans. Harvest Home also offers loans to low and moderate
income borrowers for first time purchase of single family owner occupied
residences. These loans can be obtained for up to 95% of the property's
purchase price at a discounted fixed interest rate for a period of up to 25
years, and require private mortgage insurance.
ARMs are offered by Harvest Home for terms of up to 30 years. The interest
rate adjustment period on the ARMs is three years which is tied to changes in
the weekly average yield on U.S. Treasury securities, adjusted to a constant
maturity of one year as made available by the Board of Governors of the Federal
Reserve System (the "Index"). The interest rate for the next three-year period
is increased or decreased by the amount of the change in the Index between the
date the interest rate was set and the date of the three-year adjustment rounded
to the nearest one-quarter percent. The maximum allowable adjustment at each
adjustment date is usually 2% with a maximum adjustment of 5% over the term of
the loan. ARMs generally have an increased risk of delinquency in periods of
rising interest rates due to the increasing monthly payments required of
borrowers. Harvest Home has in the past issued three-year ARMs tied to
different indexes. One such index is tied to a one-year (our most current
index) constant maturity U.S. Treasury Index. Another index is tied to the
interest rates being charged by Harvest Home for similar type loans at the time
of the interest rate change. Borrowers are qualified at the contract rate at
the time of origination of the loan.
Harvest Home's one- to four-family residential real estate loan portfolio
was approximately $42.5 million at September 30, 1997, and represented 94% of
total loans at such date. At such date, loans secured by one- to four-family
residential real estate with outstanding balances of $645,000, or 1.5%, of the
total one- to four-family residential real estate loan balance, were delinquent.
See "Delinquent Loans, Non-Performing Assets and Classified Assets."
Multifamily Residential Real Estate Loans. In addition to loans on one-
to four-family properties, Harvest Home makes loans secured by multi-family
properties containing over four units. Multi-family loans generally have terms
of up to 20 years and a maximum LTV of 80%. Such loans are currently made with
adjustable interest rates.
Multi-family 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.
Harvest Home attempts to reduce the risk associated with multi-family lending
by evaluating the credit-worthiness of the borrower and the projected income
from the project, and by obtaining personal guarantees on loans made to
corporations and partnerships, and, where deemed necessary, Harvest Home obtains
additional collateral. Harvest Home currently requires that borrowers agree to
submit financial statements annually to enable Harvest Home to monitor the loan,
although no such requirement existed until 1993.
At September 30, 1997, Harvest Home had $1.4 million of multi-family
residential real estate loans, representing 3% of total loans at that date.
At such date no such loans were delinquent.
Construction Loans. Harvest Home makes construction loans for residential and
non-residential real estate. Such loans are structured to become permanent
loans upon completion of construction. Residential construction loans are
offered at fixed rates for terms up to 15 years, and at adjustable rates up to
30 years. Non-residential construction loans are offered at adjustable rates
for terms up to 20 years. The majority of the construction loans originated by
Harvest Home are made to owner-occupants for construction of single family
homes. The remainder are made for non-owner occupied properties to builders for
small projects, some of which have not been pre-sold, and to other small
commercial developers.
Construction loans for non-owner occupied properties 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,
construction loans in general 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 LTVs and the total loan funds
required to complete a project. In the event a default on a construction loan
occurs and foreclosure follows, Harvest Home would have to take control of the
project and attempt either to arrange for completion of construction or dispose
of the unfinished project. Harvest Home's construction loans generally are
secured by property located in Harvest Home's primary market area. Construction
loans secured by property outside the primary lending area are secured by
property in Eastern Hamilton County and surrounding counties, all within the
State of Ohio; such loans are made on the same terms and conditions as those
within the primary lending area and pose no more risk than those within the
primary lending area.
At September 30, 1997, Harvest Home had $1.5 million of construction loans,
or 3% of its loan portfolio, none of which were delinquent.
Nonresidential Real Estate Loans and Land Loans. Harvest Home also makes
loans secured by nonresidential real estate consisting primarily of retail
stores, warehouses, and office buildings. Such nonresidential loans are made
only with adjustable rates of interest. Such loans have terms of up to 20 years
and a maximum LTV of 75%. The largest loan of this type at September 30, 1996
had a principal balance of $449,354 and was secured by a retail shopping center
and the residence of the borrower, both located in Harvest Home's primary market
area.
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. Harvest Home 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. Harvest Home currently requires borrowers to agree to
submit financial statements annually to allow Harvest Home to monitor the loan,
although no such requirement existed until 1993.
At September 30, 1997, Harvest Home had a total of $2.6 million invested
in nonresidential real estate loans. Such loans comprised approximately 6% of
Harvest Home's total loans at such date. At such date, $31,000 or 1% of
nonresidential real estate loans were non-performing.
Deposit Account Loans. Harvest Home makes consumer loans, exclusively to
depositors on the security of their deposit accounts. Such loans are made at
adjustable rates of interest, and the principal amount of the loan cannot exceed
the face value of the pledged deposit. Interest is due quarterly, and principal
is due on demand.
At September 30, 1997, Harvest Home had approximately $45,000 or .1% of
total loans, invested in deposit loans.
Home Equity Lines of Credit and Second Mortgages. Harvest Home offers home
equity lines of credit. These are typically secured by second mortgages, but
with some being secured by first mortgages. The line of credit agreements
currently being offered by Harvest Home provide that borrowers can obtain
advances up to their credit limit for a period of fifteen years, and after that
time, the borrowers must repay the outstanding balance over a period of the next
ten years. Harvest Home has offered in the past home equity lines of credit
which are open ended and have no required repayment period or fixed termination
date. These lines of credit may, however, be terminated at any time by either
party.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Harvest Home's lending
staff, and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
Harvest Home obtains a credit report, verification of employment, and other
documentation concerning the credit-worthiness of the borrower. An appraisal
of the fair market value of the real estate which will be given as security for
the loan is prepared by an independent fee appraiser approved by the Board of
Directors. For residential properties, an environmental study is conducted only
if the appraiser or a director has reason to believe that an environmental
problem may exist. For most non-residential properties, an environmental report
is required. For most multi-family and nonresidential mortgage loans, a
personal guarantee is required. Upon the completion of the appraisal and the
receipt of information on the borrower, the application for a loan is submitted
to the Executive Committee and/or the Board of Directors for approval or
rejection. Loan applications which do not exceed $100,000 generally can be
approved by the Harvest Home's designated loan officer as long as the loan
conforms to all underwriting requirements.
If a mortgage loan application is approved, an attorney's opinion of title
is obtained on the real estate which will secure the mortgage loan. Harvest
Home does not obtain title insurance. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Harvest Home 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. Harvest Home
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Harvest Home's loans contain provisions that the entire balance of the loan
is due upon sale of the property securing the loan.
Loan Originations, Purchases, and Sales. During the past several years,
Harvest Home has been actively originating new fixed-rate and adjustable-rate
loans. All loans originated during that period have been held in portfolio.
Harvest Home has not sold a loan since 1984. Harvest Home does not process
loans on forms accepted on the secondary market. Management believes other
significant secondary market guidelines are followed. While there are no
current plans to do so, Harvest Home may sell loans in the future if management
deems it in the best interest of Harvest Home. Prior to 1981, Harvest Home
originated mortgage loans only at fixed rates. Beginning in 1981, Harvest Home
originated only adjustable-rate loans. In the late '80s, Harvest Home again
began originating a limited amount of fixed-rate mortgage loans, up to maximum
terms of 15 years, which are held in its portfolio in addition to ARMs.
Harvest Home generally does not participate in loans originated by other
institutions. Harvest Home had in its portfolio participations originated and
serviced for others totalling approximately $250,000 at September 30, 1997.
Harvest Home will consider participation in loans in the future if management
deems it to be in the interest of Harvest Home.
The following table presents Harvest Home's mortgage loan originations and
mortgage-backed securities purchases, and sales activity for the periods
indicated:
<TABLE>
Year Ended September 30,
<CAPTION>
1997 1996 1995 1994
Loans Originated: (In thousands)
<S> <C> <C> <C> <C>
Construction $ 1,625 $ 3,488 $ 962 $1,269
1 to 4 Family 6,261 7,082 5,466 5,480
Home equity line
of credit 532 570 385 242
5 or more units 0 220 0 0
Nonresidential
real estate 485 844 0 188
Deposit Accounts 0 56 85 60
Total loans
Originated $ 8,913 $12,260 $6,898 $7,239
Loans and
mortgage-backed
securities
purchased:
Loans $ 0 $ 0 $ 0 $ 0
Insured,
guaranted or
collaterized
mortgage-backed
securities 18,205 12,972 2,013 1,000
Total loans and
mortgage-backed
securities
purchased $18,205 $12,972 $2,013 $1,000
Loans and mortgage-
backed securities
sold:
Residential real
estate loans $ 0 $ 0 $ 0 $ 0
Mortgage-backed
Securities 141 267 0 0
Total loans and
mortgage-backed
securities sold $ 141 $ 267 $ 0 $ 0
</TABLE>
Regulations generally limit the aggregate amount that a savings bank can lend
to one borrower to an amount equal to 15% of the savings bank's unimpaired
capital and unimpaired surplus (collectively, "Unimpaired Capital"). A savings
bank may loan to one borrower an additional amount not to exceed 10% of the
association's Unimpaired Capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." In applying these limits, the regulations
require that loans to certain related or affiliated borrowers be aggregated.
Based on such limits, Harvest Home could have made loans in an aggregate
principal amount of $1.3 million to one borrower at September 30, 1997.
At that date, Harvest Home had no loans in excess of such limits.
Loan Origination and Other Fees. Harvest Home realizes loan origination fee
and other fee income from its lending activities, and also realizes income from
late payment charges, and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income, varying
with the volume of lending, loan repayments, and general economic conditions.
All nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized in accordance with SFAS No. 91 as an
adjustment to yield over the life of the related loan.
Delinquent Loans, Non-Performing Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Harvest Home attempts to
cause the deficiency to be cured by contacting the borrower. In most cases,
deficiencies have been cured promptly.
Loans originated by Harvest Home before 1981 required payment of interest in
advance. Although the mortgage documents require payments on the first of each
month, borrowers were told that payments would not be treated as delinquent if
made by the last working day of that month.
Loans originated commencing in 1981 require interest in arrears, and payments
are due on the first day of the following month.
The following collection procedures are generally used:
A. When a loan payment is in arrears beyond the late payment date, a
notice of late payment is generated by the on-line computer system and
mailed to the borrower. A copy of the notice is filed in the loan file.
B. When a loan payment exceeds the due date by thirty days, the loan is
scheduled for individual attention. Additional late notices are sent to
the borrower followed by a telephone call, if necessary.
C. When a loan payment exceeds the due date by sixty days and personal
contact has not cured the delinquency, a ten-day collection letter is
sent to the borrower by the Savings Bank's attorney. When a delinquent
loan account is referred to the attorney for collection, the borrower is
restricted from making any payment other than the total amount due as of
the date of payment.
D. If the procedures outlined in C above have not cured the delinquency,
legal action is filed against the borrower.
Real estate acquired by Harvest Home as a result of foreclosure proceedings is
classified as real estate owned ("REO") until it is sold. When property is so
acquired, it is recorded by Harvest Home at the lower of the book value of the
related loan or the estimated fair value of the real estate, less selling
expenses at the date of acquisition, and any write-down resulting therefrom is
charged to the allowance for loan losses. Interest accrual, if any, ceases no
later than the date of acquisition of the real estate, and all costs incurred
from such date in maintaining the property are expensed. Costs relating to the
development and improvement of the property are capitalized to the extent of
fair value. Harvest Home has had only two parcels of REO during the last three
years.
Harvest Home places loans on non-accrual status when the collectibility of the
loan is in doubt or when a loan is more than ninety days delinquent in interest
payments.
The following table reflects the amount of loans in a delinquent status as of
the dates indicated:
<TABLE>
September 30, 1997 September 30, 1996 September 30, 1995
<CAPTION>
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount Loans
(Dollars in Thousands)
Days delinquent for
(1):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 - 59 days 13 $461 1.02% 11 $267 .63% 19 $574 1.50%
0 - 89 days 5 376 .83% 3 132 .31% 1 9 .02%
90 days and over 2 95 .21% 4 164 .39% 6 143 .38%
Total delinquent
loans 20 $932 2.06% 18 $563 1.33% 26 $726 1.90%
(1) At September 30, 1997, delinquencies include 17 one-to-four family
residential loans with principal balances totaling $645,000, 1 multi-residential
loan with a principal balance of $208,000 and 2 non-residential loans with
principal balances totaling $79,000.
The following table sets forth the amounts and categories of Harvest Home's
non-performing assets as indicated by the dates on the accrual status when they
become past due 90 days or more.
</TABLE>
[CAPTION]
At September 30,
1997 1996 1995
(Dollars in Thousands)
[S] [C] [C] [C]
Accruing loans
delinquent 90
days or more $ 0 $ 0 $ 0
Loans accounted for
on a nonaccrual basis:
Real Estate:
Residential 64 132 109
Nonresidential 31 32 34
Deposit Account 0 0 0
Total nonaccrual loans 95 164 143
Other non-performing
assets 0 0 0
Total non-performing
assets $ 95 $164 $143
Total non-performing
assets as a percentage
of total assets .10% .21% .20%
Specific loan loss
allowance $ 0 $ 0 $ 0
General loan loss
allowance (unallocated
as to any specific
loan type) 115 111 110
Total loan loss allowance $115 $111 $110
Loan loss allowance
as a percent of
non-performing loans 121.1% 67.7% 76.9%
Loan loss allowance as
a percent of non-
performing assets 121.1% 67.7% 76.9%
Harvest Home had 2 nonperforming loans at September 30, 1997 and 4 non-
performing loans at September 30, 1996. During the periods shown, Harvest Home
had no restructured loans within the meaning of SFAS No. 15.
Harvest Home's classification policy provides for the classification of loans
and other assets such as debt and equity securities considered to be of lesser
quality as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that Harvest Home will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are designated "special mention" by management.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
Generally, Harvest Home classifies as "substandard" all loans that are more
than 90 days delinquent unless management believes the delinquency status is
short-term due to unusual circumstances. Loans delinquent fewer than 90 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate.
The aggregate amounts of Harvest Home's classified assets at the dates
indicated were as follows:
At September 30,
1997 1996 1995
(In thousands)
Substandard $219 $252 $432
Doubtful 0 0 0
Loss $ 0 $ 0 $ 0
Total classified
assets $219 $252 $432
Federal and state examiners are authorized to classify a savings bank's
assets. If a savings bank does not agree with an examiner's classification of
an asset, it may appeal to regulatory authorities.
Allowance for Loan Losses. The Board of Directors reviews on a quarterly
basis the allowance for loan losses as it relates to 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, and possible losses arising from
specific problem assets. To a lesser extent, management also considers loan
concentrations to single borrowers and changes in the composition of the loan
portfolio. While management believes that it uses the best information
available to determine the allowance for loan losses, unforeseen market
conditions could result in adjustments, and net earnings could be significantly
affected if circumstances differ substantially from the assumptions used in
making the final determination. At September 30, 1997, 1996, and 1995, Harvest
Home's allowance for loan losses totaled $115,000, $111,000, and $110,000,
respectively, none of which was allocated to a particular type of loan at any
such dates. Due to the absence of any material loss on any loan in recent
years, the Board of Directors of Harvest Home does not believe such a specific
allocation is necessary.
The following table sets forth an analysis of Harvest Home's allowance for
losses on loans for the periods indicated. Harvest Home had no recoveries
during such periods.
<TABLE>
<CAPTION>
For the year ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at
beginning of year $111 $110 $ 98
Loans charged-off (5) 0 0
Recoveries 0 0 0
Provision for losses
on loans (charged to
operations) 9 1 12
Balance at end of period $115 $111 $110
Ratio of allowance for
losses on loans to
non-accrual loans 121.1% 67.7% 76.9%
Ratio of allowance
for losses on loans
to total loans 0.25% 0.25% 0.28%
Harvest Home increased its allowance for loan losses from $98,000 at
September 30, 1994, to $115,000 at September 30, 1997, due to (1) Harvest Home's
feeling that its new primary regulator would require an increase although there
is no such current agreement or requirement to increase the allowance, and (2)
an increase in the loan portfolio. There were no disagreements with Harvest
Home's primary regulator as to the amount of the allowance following the 1994
fiscal year provision. Because the loan loss allowance is based on estimates,
it is monitored regularly on an ongoing basis and adjusted as necessary to
provide an adequate allowance.
Mortgage-backed and Related Securities
Harvest Home faces significant competition for loans in its primary market
area. This competitive factor, coupled with the declining interest rate
environment over the past several years has limited the opportunities for
originating adjustable rate mortgage loans. As a result, Harvest Home has
purchased adjustable rate mortgage-backed securities, as well as mortgage
related securities such as CMO/REMICs as interest-rate sensitive portfolio
investments.
Harvest Home's adjustable rate mortgage-backed securities are guaranteed
as to principal and interest by GNMA, FNMA and FHLMC. At September 30, 1997,
$24.1 million, or 74.2% of Harvest Home's mortgage-backed securities were
adjustable rate.
CMO/REMICs are securities derived by reallocating cash flows from mortgage
backed securities or pools of mortgage loans in order to create multiple
classes, or tranches of securities with coupon rates that differ from the
underlying collateral as a whole. Harvest Home invests in these securities as
an interest rate sensitive investment portfolio alternative to mortgage loans.
As of September 30, 1997, Harvest Home's CMO/REMICS had estimated average lives
of approximately 20.9 years and totaled $26.2 million, or 80.7%, of the
mortgage-backed securities portfolio. All of the CMO/REMICs owned by Harvest
Home are insured or guaranteed directly, or indirectly, though mortgage-
backed securities underlying the obligations by FNMA, FHLMC, or GNMA. CMOs
and REMICs can be classified by federal regulators under certain economic
scenarios as "high risk" derivatives and are therefore potentially subject to
forced divestiture. However, due to the nature of Harvest Home's investments,
i.e., relatively short-term to maturity, the probability of such occurrence is
viewed by management as remote.
At September 30, 1997, HHFC's investment and market value information of
mortgage-backed securities designated as available for sale was comprised of the
following:
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Gross Market
Amortized Unrealized Unrealized Value
Cost Gains Losses
(In thousands)
<S> <C> <C> <C> <C>
FHLMC participation
certificiates $ 2,236 $19 $ 37 $2,218
FHLMC CMOs 6,471 10 4 6,477
GNMA participation
certificates -- -- -- --
FNMA participation
certificates 4,058 30 53 4,035
FNMA CMOs 19,709 65 38 19,736
$32,474 $124 $132 $32,466
</TABLE>
Investment Activities
Federal and state regulations require Harvest Home to maintain a prudent
amount of liquid assets to protect the safety and soundness of Harvest Home.
Therefore, the Board of Directors of Harvest Home has established an investment
policy to maintain safety and soundness and to provide control and guidelines
for investments purchased by the institution. In accordance with the investment
policy, Harvest Home invests in U.S. Treasury obligations, U.S. Federal agency
and federally sponsored agency obligations, federal funds sold and certificates
of deposits at insured banks. See "REGULATION".
The following table sets forth the composition of HHFC's interest-bearing
deposits and investment portfolio at the dates indicated:
<TABLE>
September 30,
1997 1996 1995
Amortized % of Market % of Amortized % of Market % of Amortized % of Market % of
Cost Total Value Total Cost Total Value Total Cost Total Value Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Securities:
U.S. Gov't
& Agency
Obligations $ 7,972 57.4% $ 8,039 57.6% $11,992 87.1% $12,105 87.2% $18,032 90.4% $18,328 90.2%
Other
investments:
Interest
bearing
deposits
in other
financial
institution 2,106 15.1% 2,106 15.1% 788 5.7% 788 5.7% 345 1.7% 345 1.7%
Federal funds
Sold 2,600 18.7% 2,600 18.6% 400 2.9% 400 2.9% 1,100 5.5% 1,100 5.4%
Federal Home
Loan Bank
Stock 1,219 8.8% 1,219 8.7% 588 4.3% 588 4.3% 548 2.8% 548 2.7%
Total
Investment
Securities,
Interest-
bearing
Deposits
and Other $13,897 100.0% $13,964 100.0% $13,768 100.0% $13,881 100.0% $20,025 100.0% $20,321 100.0%
</TABLE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Harvest Home's investment securities at
September 30, 1997. All of such securities mature in three years or less.
At September 30, 1997
One year or Less One to Five Years
Amortized Average Amortized Average
Cost Yield Cost Yield
(In thousands)
U.S. Government
and agency
securities $3,971 7.41% $4,001 6.31%
At September 30, 1997
Total Investment Securities
Average Life Amortized Fair Weighted
In Years Cost Value Average Yield
(in thousands)
U.S. Government
and agency
securities 1.5 $ 7,972 $ 8,039 6.77%
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Harvest
Home's funds for use in lending and other investment activities. In addition to
deposits, Harvest Home derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, income on earning assets,
and service charges. 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 Harvest Home's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, Super
NOW accounts, money market deposit accounts, regular passbook savings accounts,
Christmas savings accounts, term certificate accounts, and individual retirement
accounts ("IRAs"). Interest rates paid, maturity terms, service fees, and
withdrawal penalties for the various types of accounts are established
periodically by management of Harvest Home based on Harvest Home's liquidity
requirements, growth goals, and interest rates paid by competitors. Harvest
Home has never used brokers to attract deposits.
At September 30, 1997, Harvest Home's certificates of deposit totaled
$42.3 million, or 72.0% of total deposits. Of such amount, approximately $32.5
million in certificates of deposit will mature within one year. Based on past
experience and Harvest Home's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with Harvest Home
at maturity. If there is a significant deviation from historical experience,
Harvest Home can utilize borrowings from the FHLB of Cincinnati as an
alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the various
types of savings programs offered by Harvest Home at the dates indicated:
<TABLE>
At September 30
1997 1996 1995
<CAPTION>
Percent Percent Percent
of total of total of total
Amount deposit Amount deposit Amount deposit
<S> <C> <C> <C> <C> <C> <C>
Transaction
accounts:
NOW accounts(1) $2,699 4.6% $2,647 4.6% $2,482 4.4%
Super NOW
accounts(1) 300 .5% 192 .3% 263 .5%
Passbook
savings(2) 9,143 15.6% 9,530 16.4% 9,720 17.2%
Money market
Deposit
account(3) 4,332 7.4% 4,721 8.2% 4,874 8.6%
Total
Transaction
accounts 16,474 28.1% 17,090 29.5% 17,339 30.7%
Certificates
Of Deposit(4):
4.00-5.99% 38,031 64.7% 35,004 60.4% 21,407 37.9%
6.00-7.99% 4,281 7.8% 5,864 10.1% 17,314 30.7%
8.00-9.99% 0 0 0 0 365 0.7%
Total
Certificates
of deposit 42,312 71.9% 40,868 70.5% 39,086 69.3%
Total deposits $58,786 100.0% $57,958 100.0% $56,425 100.0%
</TABLE>
(1) Harvest Home's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September 30,
1997, 1996, and 1995, the weighted average rates on NOW accounts were
2.69%, 2.66%, and 2.61%, respectively. At September 30, 1997, 1996, and
1995, the weighted average rates of Super NOW accounts were 2.75%, 2.75%
and 2.75%, respectively.
(2) Harvest Home's weighted average interest rate paid on passbook accounts
fluctuates with the general movement of interest rates. At September 30,
1997, 1996, and 1995, the weighted average rates on passbook accounts
were 2.79%, 2.79%, and 2.79%, respectively.
(3) Harvest Home's weighted average interest rate paid on money market
deposit accounts fluctuates with the general movement of interest rates.
At September 30, 1997, 1996, and 1995, the weighted average rates on
money market accounts were 3.00%, 3.00%, and, 3.00%, respectively.
(4) IRAs are generally offered under certificate of deposit programs.
The following table shows interest rate and original contractual maturity
information for Harvest Home's certificates of deposit as of September 30, 1997:
Over 1 Over 2
Up to one year to 2 years to 3 Over 3
Rate Year Years Years Years Total
(In thousands)
4.00-5.99% $25,540 $4,634 $4,040 $3,817 $38,031
6.00 - 7.99 0 0 257 4,024 4,281
Total certificates
of deposit $25,540 $4,634 $4,297 $7,841 $42,312
The following table presents the amount of Harvest Home's certificates
of deposit of $100,000, or more by the time remaining until maturity as of
September 30, 1997:
Maturity At September 30, 1997
(In thousands)
Three months or less $ 0
Over 3 months to 6 months 210
Over 6 months to 12 months 1,181
Over 12 months 762
Total $2,153
The following table sets forth Harvest Home's deposit account balance
activity for the periods indicated:
Year ended September 30
1997 1996 1995
(Dollars in thousands)
Beginning balance $57,958 $56,425 $67,810
Deposits 58,930 64,222 59,222
Withdrawals (60,904) (65,494) (73,208)
Interest credited 2,802 2,805 2,601
Ending balance $58,786 $57,958 $56,425
Net increase
(decrease) $ 828 $ 1,533 ($11,385)
Percent increase
(decrease) 1.43% 2.72% (16.8%)
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, Harvest Home is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of creditworthiness have been
met. Under current regulations, a bank must meet certain qualifications to
be eligible for FHLB advances.
Harvest Home's other sources of funds include advances from the FHLB. As
a member of the FHLB, Harvest Home is required to own capital stock in the FHLB
and is authorized to apply for advances from the FHLB. Each FHLB credit program
has its own interest rate, which may be fixed or variable and range of
maturity. The FHLB may prescribe the acceptable uses for these advances as well
as limitations on the size of the advances and repayment provisions.
The following table sets forth certain information as to Harvest Home's FHLB
advances at the date indicated:
At September 30
1997 1996 1995
(Dollars in thousands)
FHLB advances $24,000 $10,000 $--
Weighted average
interest rate
of FHLB Advances 5.82% 5.55% --%
The following table sets forth the maximum balance and average balance of
FHLB advances during the periods indicated:
Year ended September 30,
1997 1996 1995
(Dollars in thousands)
Maximum Balance:
FHLB advances $24,000 $10,000 0
Average Balance:
FHLB advances 15,615 10,000 0
Weighted average
interest rate of
FHLB advances 5.82% 5.37% 0
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of income.
The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. In
managing its interest rate risk, Harvest Home begins with an objective to
increase the interest rate sensitivity of its assets by originating loans with
interest rates subject to period adjustment and market conditions and/or shorter
maturities. Harvest Home has historically had to rely upon retail deposit
accounts as a source of funds and intends to continue to do so. Management
believes that reliance on retail deposit accounts as a source of funds compared
to brokered deposits and long-term borrowings reduces the effects of interest
rate fluctuations because these deposits generally represent a more stable
source of funds.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis presents the projected maturities and
periods to repricing of a savings bank's rate sensitive assets and liabilities.
Harvest Home's cumulative one-year gap, which represents the difference between
the amount of interest sensitive assets maturing or repricing in one year and
the amount of interest sensitive liabilities maturing or repricing in the same
period was a 5.5% at September 30, 1997. A positive cumulative gap indicates
that interest sensitive assets exceed interest sensitive liabilities at a
specific date. In a rising interest rate environment, institutions with
positive maturity gaps generally experience a more rapid increase in interest
income earned on assets than the interest expense paid on liabilities.
Conversely, in an environment of falling interest rates, interest income
earned on assets will generally decrease more rapidly than the interest expense
paid on liabilities. A negative gap will have the opposite effect.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
expected to reprice or mature in each of the future years shown. The analysis
of this interest-rate sensitivity, which is prepared quarterly by a financial
advisory firm, Performance Analysis, Inc., for Harvest Home, incorporates the
assumptions set forth in the footnotes of the following table.
<TABLE>
<CAPTION>
Six
Within Months
Six to One 1-3 3-5 5-10 Over 10
Months Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Loans &
Mortgage-Backed
Securities
Adjustable
Rate(1) $8,953 $5,466 $7,763 $ 0 $ 0 $ 0 $24,182
Fixed Rate(2) 1,916 2,664 5,605 4,722 6,208 2,422 23,222
Non-Residential
Adjustable
Rate(1) 420 904 1,230 0 0 0 2,554
Other Loans
Home Equity 1,130 0 0 0 0 0 1,130
Consumer 45 0 0 0 0 0 45
Investments
Core
Investments(3) 7,967 2,063 4,001 0 0 0 14,031
CMO/REMICs 22,703 1,627 1,850 0 0 0 26,180
TOTAL RATE
SENSITIVE
ASSETS $43,134 $12,724 $22,449 $4,722 $6,208 $2,422 $91,659
Interest-
bearing
liabilities
Deposits
Certificate
of Deposits(4) $ 6,142 $26,472 $6,984 $2,714 $ 0 $ 0 $42,312
Money Market
Deposits(5) 649 518 1,581 624 509 451 4,332
NOW Accts 489 350 724 471 696 269 2,999
Passbook
Accts 1,364 1,057 2,760 1,368 1,949 645 9,143
FHLB Advance 24,000 0 0 0 0 0 24,000
TOTAL RATE
SENSITIVE
LIABILITIES $32,644 $28,397 $12,049 $5,177 $3,154 $1,365 $83,164
Interest
Sensitivity
Gap 10,490 ($15,673) $10,400 ($ 455) $3,054 $1,057 $ 8,873
Cumulative
Interest Rate
Sensitivity
Gap $10,490 ($5,183) $ 5,217 $4,762 $7,816 $8,813 $ 8,873
Cumulative
Interest Rate
Sensitive Gap
as a Percent
of Total
Assets 11.18% (5.52%) 5.56% 5.08% 8.33% 9.46% 9.46%
__________________________________________________
(1) Includes all adjustable rate mortgage loans and mortgage-backed
securities based on contractual term to repricing.
(2) Includes all fixed-rate mortgage loans and mortgage-backed securities
which are assumed to reprice in accordance with prepayment assumptions
supplied by Harvest Home's asset/liability management software provider.
Such prepayment assumptions have been derived from prepayment assumption
models previously utilized by the OTS through December of 1992.
(3) Includes all investment securities, interest-bearing deposits and federal
funds sold.
(4) Certificates of deposit are shown repricing based on contractual terms to
maturity.
(5) Based on an approximation of OTS assumptions supplied by Harvest Home
asset/liability management provider, money market deposits, NOW accounts
and passbook accounts are assumed to decay over a five-year period.
</TABLE>
These assumptions change over time based upon changes in the economy.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable. However, the interest rate
sensitivity of Harvest Home's assets and liabilities illustrated in the table
above would vary substantially if different assumptions were used or if actual
experience differed from that indicated by such assumptions.
Competition
Harvest Home competes for deposits with other savings banks and 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, Harvest Home competes with other savings banks and
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, and other lenders. Harvest Home competes for loan
originations primarily through the interest rates and loan fees it charges, and
through the efficiency and quality of services it provides to borrowers.
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.
Due to Harvest Home's size relative to the many other financial institutions
in its market area, management believes that Harvest Home has a small share of
the deposit and loan markets.
The size of financial institutions competing with Harvest Home 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 Harvest Home.
The following table sets forth, for the years and at the date indicated, the
weighted average yields earned on Harvest Home's interest-earning assets, the
weighted average interest rates paid on interest-bearing liabilities, the
interest rate spread and the net interest margin on interest-earning assets.
Such yields and costs are derived by dividing income or expense by the average
balances of assets or liabilities, respectively, for each period presented.
Year ended September 30,
1997 1996 1995
Weighted average yield on loan portfolio 7.87% 7.81% 8.00%
Weighted average yield on mortgage
backed securities 6.38 6.13 5.74
Weighted average yield on investment
securities 6.86 6.73 6.39
Weighted average yield on other
interest-earning assets 5.57 5.25 3.86
Weighted average yield on all
interest-earning assets 7.19 7.13 6.92
Weighted average interest rate
paid on deposits 4.81 4.87 4.44
Interest rate spread
(spread between weighted average
interest rate on all
interest-bearing assets and all
interest-bearing liabilities) 2.17 2.24 2.48
Net yield (net interest income
as a percentage of average
interest-earning assets 2.76 3.07 3.27
REGULATION
General
Harvest Home is an Ohio chartered savings bank, a member of the FHLB System,
and its deposits are insured by the FDIC through the SAIF. Harvest Home is
subject to examination and regulation by the FDIC and the Superintendent
("Superintendent") of the Ohio Department of Commerce, Division of Savings and
Loans/Savings Banks ("Division") and to regulations governing such matters as
capital standards, mergers, establishment of branch offices, subsidiary
investments and activities, and general investment authority. Such examination
and regulation is intended primarily for the protection of depositors and the
SAIF.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which was enacted on August 9, 1989, effected a major restructuring
of the federal regulatory scheme applicable to savings institutions. Among
other things, FIRREA abolished the Federal Home Loan Bank Board and Federal
Savings and Loan Insurance Corporation ("FSLIC"), many of the previous
regulatory functions of which are now under the control of the Office of Thrift
Supervision ("OTS") and the FDIC. Regulatory functions relating to deposit
insurance and to conservatorship and receiverships of federally insured
savings institutions, including savings banks, are now exercised by the FDIC.
FIRREA contains provisions affecting numerous aspects of the operations and
regulation of federally insured savings banks, and empowered the FDIC to
promulgate regulations implementing the provisions of FIRREA, including
regulations defining certain terms used in the statute as well as regulations
exercising or defining the limits of regulatory discretion conferred by the
statute.
As a creditor and a financial institution, Harvest Home is subject to the
Community Reinvestment Act ("CRA") and to various regulations promulgated by the
Board of Governors of the Federal Reserve System (the "FRB") including, without
limitation, regulations relating to equal credit opportunity, reserves,
electronic fund transfers, truth in lending, availability of funds, and truth in
savings. As creditors of loans secured by real property and as owners of real
property, financial institutions, including Harvest Home, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property. Harvest Home is also subject to the
usury laws of Ohio and other states in which it makes loans. In Ohio, there is
a maximum interest rate applicable to mortgage loans secured by the borrower's
residence which is no greater than eight percent in excess of the discount rate
on ninety-day commercial paper in effect at the federal reserve bank in the
fourth federal reserve district. There are also limitations on interest rates
for other loans, such as consumer loans, and limitations on the amounts of fees
which may be charged in connection with such loans.
The FDIC has extensive enforcement authority over Ohio chartered savings
banks, including Harvest Home. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders, and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a state savings
bank on the basis of an institution's financial condition include: (i)
insolvency, in that the assets of the savings bank are less than its liabilities
to depositors and others; (ii) substantial dissipation of assets or earnings
through violations of law or unsafe or unsound practices; (iii) existence of an
unsafe or unsound condition to transact business; (iv) likelihood that the
savings bank will be unable to meet the demands of its depositors or to pay its
obligations in the normal course of business; and (v) insufficient capital, or
the incurring or likely incurring of losses that will deplete substantially all
the institution's capital with no reasonable prospect of replenishment of
capital without federal assistance.
Division Regulation
The Ohio Superintendent is responsible for the regulation and supervision
of Ohio savings banks in accordance with the laws of the State of Ohio. Ohio
law prescribes the permissible investments and activities of Ohio savings banks,
including the types of lending that such banks may engage in and the investments
in real estate, subsidiaries and corporate or government securities that such
banks may make. The ability of Ohio savings banks to engage in these state
authorized investments generally is subject to oversight and approval by the
FDIC.
The Ohio Superintendent must approve any mergers involving, or acquisitions
of control of, Ohio savings banks. The Ohio Superintendent may initiate certain
supervisory measures or formal enforcement actions against Ohio savings banks.
Ultimately, if the grounds provided by law exist, the Superintendent may place
an Ohio savings bank in conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of Harvest Home
approximately once a year. Such examinations are usually conducted jointly with
the FDIC. The Ohio Superintendent imposes assessments on Ohio savings banks
based on the savings bank's asset size to cover the cost of supervision and
examination.
In addition to being governed by the laws of Ohio specifically governing
savings banks Harvest Home is also governed by Ohio corporate law, to the extent
such law does not conflict with the laws specifically governing savings banks.
Since the enactment of FIRREA, all state-chartered institutions have
generally been limited to activities and investments of the type and in the
amount authorized for federally chartered institutions, notwithstanding state
law. The FDIC is authorized to permit such associations to engage in state
authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments and investment in junk bonds) for institutions
that meet fully phased-in capital requirements if it is determined that such
activities or investments do not to pose a significant risk to the SAIF. All
non-subsidiary equity investments and junk bonds must be divested by July 1,
1994, pursuant to an FDIC-approved divestiture plan. The FDIC restrictions on
state-chartered institutions have not been material to the operations of Harvest
Home.
Transactions with Affiliates with the laws specifically governing savings banks.
Since the enactment of FIRREA, all state-chartered institutions have generally
been limited to activities and investments of the type and in the amount
authorized for federally chartered institutions, notwithstanding state law. The
FDIC is authorized to permit such associations to engage in state authorized
activities or investments that do not meet this standard (other than
non-subsidiary equity investments and investment in junk bonds) for institutions
that meet fully phased-in capital requirements if it is determined that such
activities or investments do not to pose a significant risk to the SAIF. All
non-subsidiary equity investments and junk bonds must be divested by July 1,
1994, pursuant to an FDIC-approved divestiture plan. The FDIC restrictions on
state-chartered institutions have not been material to the operations of Harvest
Home.
Transactions with Affiliatestantially the same, or at least favorable, to the
savings institution or the subsidiary as those provided to a nonaffiliate. The
term "covered transaction" includes the making of loans or other extensions of
credit to an affiliate, the purchase of assets from an affiliate, the purchase
of, or an investment in, the securities of an affiliate, the acceptance of
securities of an affiliate as collateral for a loan or extension of credit to
any person, or issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. In addition to the restrictions imposed by Section
23A and 23B, no savings institution may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities that are
permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes, or similar obligations of any affiliate,
except for affiliates that are subsidiaries of the savings institution.
Further, current federal law has extended to savings institutions the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers, and principal stockholders. Under
Section 22(b), loans to directors, executive officers and stockholders who own
more than 10% of a savings institution (18% in the case of institutions located
in an area with less than 30,000 in population), and certain affiliated entities
of any of the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the savings institution's loan-to
borrower limit as established by federal law (as discussed below). Section
22(h) also prohibits loans above amounts prescribed by the appropriate federal
banking agency to directors, executive officers, and shareholders who own more
than 10% of a savings institution, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
savings institution. Any "interested" director may not participate in the
voting. The FRB has prescribed the loan amount (which includes all other
outstanding loans to such person) as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, pursuant to Section 22(h), the FRB requires
that loans to directors, executive officers, and principal shareholders be made
on terms substantially the same as offered in comparable transactions to other
persons.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital ratio
guidelines to which Harvest Home is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations. Risk
based capital ratios are determined by allocating assets and specified off
balance sheet commitments to four risk weighted categories, with higher levels
of capital being required for the categories perceived as representing greater
risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, certain non-cumulative perpetual
preferred stock (excluding auction rate issues) and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card
relationships, subject to certain limitations). Supplementary ("Tier II")
capital includes, among other items, cumulative perpetual and long-term limited-
life preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan and lease losses,
subject to certain limitations, less required deductions. Savings banks are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier I capital. The FDIC may, however, set higher capital requirements when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the
minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
The following is a summary of Harvest Home's regulatory capital at September
30, 1997:
At September 30, 1997
Total Capital to Risk-Weighted Assets 25.1%
Tier I Capital to Risk-Weighted Assets 24.8%
Tier I Leverage Ratio 9.3%
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires each federal banking agency, including the FDIC, to revise
its risk-based capital standards within 18 months of enactment of the statute to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risk of nontraditional activities, as well
as reflect the actual performance and expected risk of loss on multi-family
mortgages. In September 1993, the FRB, the FDIC and the Office of the
Comptroller of the Currency issued a joint proposed rulemaking implementing
these revisions with respect to interest rate risk. Under the proposed rules,
an institution's assets, liabilities, and off-balance sheet positions would be
weighted by risk factors that approximate the instruments' price sensitivity to
a 200 basis point change in interest rates. Institutions with interest rate
risk exposure in excess of a threshold level could be required to hold
additional capital proportional to that risk, based either on an automatic
formula to be integrated with the risk-based capital requirements or on more
subjective recommendations of a bank's examiner. In August 1992, the
regulatory agencies requested comments on how the risk-based capital guidelines
of each agency may be revised to take account of concentration of credit risk
and the risk of nontraditional activities. The agencies indicated in September
1993 that separate rulemaking proposals on those areas would be forthcoming.
Management cannot assess at this point the impact the proposal would have on the
capital requirements of Harvest Home.
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
Management is unable to predict whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
Dividend Limitations. Under FRB supervisory policy, a bank holding company
generally should not maintain its existing rate of cash dividends on common
shares unless (i) the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends, and (ii) the
prospective rate of earnings retention appears consistent with the institution's
capital needs asset quality, and overall financial condition. The FDIC has
authority under the Financial Institutions Supervisory Act to prohibit a savings
bank from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice in light of the financial condition of
the savings bank. Under Ohio law HHFC and Harvest Home are prohibited from
paying a dividend which would result in insolvency. Ohio law requires Harvest
Home to obtain Division approval before payment of dividends in excess of net
profits for the current and two prior fiscal years, with certain adjustments.
The Plan provides for establishment of a liquidation account, and Harvest Home
will not be able to pay dividends which would impair regulatory capital in
liquidation accounts.
Liquidity. FDIC policy requires that savings banks maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state, or federal agency
obligations) in an amount which it deems adequate to protect the safety and
soundness of the savings bank. FDIC currently has no specific level which is
required.
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 banking and thrift
industries. FIRREA established two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations,
to be maintained and administered by the FDIC. Upon the enactment of FIRREA,
Harvest Home became a member of the SAIF and its deposit accounts became insured
by the FDIC, up to the prescribed limits.
Depository institutions are generally prohibited from converting from one
insurance fund to the other until the SAIF is recapitalized such that it reaches
a 1.25% reserve ratio, except with the prior approval of the FDIC in certain
limited cases, provided applicable exit and entrance fees are paid. The
insurance fund conversion provisions do not prohibit a SAIF member from
converting to a bank charter or merging with a bank during the moratorium, as
long as the resulting bank continues to pay the applicable insurance assessments
to the SAIF during that period and certain other conditions are met. Harvest
Home converted from a savings association charter to a savings bank charter
effective October 1, 1993. However, it does not presently intend to convert to
the BIF.
The FDIC is authorized to establish separate annual rates for deposit
insurance for members of the BIF and 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 its target level within a reasonable time. Such rates must
be announced by September 30 of the succeeding calendar year. Pursuant to the
FedICIA, the FDIC has established a risk-based assessment system for both SAIF
and BIF members. Such risk is determined based on the institution's capital and
the FDIC's level of supervisory concern about the institution.
SAIF members are expected to be required to pay higher deposit insurance
premiums in the future to fund the SAIF, although it cannot be determined how
long such increased premiums would continue. By contrast, financial
institutions which are members of the BIF, are likely to experience lower
deposit insurance premiums in the future. Any such difference could place
savings banks at a competitive disadvantage.
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. Harvest Home 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%
of the aggregate outstanding principal amount of Harvest Home's residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 5% of its advances from the FHLB. Harvest Home is
in compliance with this requirement, with an investment in FHLB of Cincinnati
stock having a book value of $588,000 at September 30, 1996.
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. The FHLBs have established an "Affordable Housing Program" to
subsidize the interest rate of advances to member associations engaged in
lending for long-term, low-and moderate-income, owner-occupied and affordable
rental housing subsidized rates. The FHLB of Cincinnati reviews and accepts
proposals for subsidies under that program twice a year. Harvest Home has not
participated in such program.
FedICIA
FedICIA requires, among other things, federal bank regulatory authorities
to take "prompt corrective action" with respect to banks that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At September
30, 1996, Harvest Home was categorized as "well capitalized."
The FDIC has adopted regulations to implement the prompt corrective action
provisions of FedICIA, effective December 19, 1992. Among other things, the
regulations define the relevant capital measures for the five capital
categories. An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio
of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio of
4% or greater. An institution is deemed to be "undercapitalized" if it has a
total risk-based capital ratio of less than 8%, a Tier I risk-based capital
ratio of less than 4%, or generally a leverage ratio of less than 4%. An
institution is deemed to be "significantly undercapitalized" if it has a
total risk-based capital ratio of less than 6%, a Tier I risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%. An institution is
deemed to be "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%.
"Undercapitalized" banks are subject to growth limitations and are required to
submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by any company that controls the undercapitalized
institutions as described above. See "Banking Holding Company Act." If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of requirements and restrictions,
including an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks, and restrictions on compensation of executive
officers. "Critically undercapitalized" institutions may not, beginning 60 days
after becoming "critically undercapitalized," make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any transaction outside the ordinary course of
business. In addition, "critically undercapitalized" institutions are subject
to appointment of a receiver or conservator.
FedICIA further directs that each federal banking agency prescribe standards
for depository institutions and depository institution holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value
to book value for publicly traded shares and such other standards as the
agency deems appropriate. The federal banking agencies have issued proposed
rulemakings, soliciting comments on the implementation of these FedICIA
provisions. HHFC cannot predict in what form such rules will eventually be
adopted or what effect such rules will have on HHFC or Harvest Home.
Bank Holding Company Act
HHFC is registered as a bank holding company and is subject to the regulations
of the Board of Governors of the Federal Reserve System the ("FRB") under the
Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies
are required to file periodic reports with, and are subject to periodic
examination by, the FRB. The FRB has issued regulations under the BHCA
requiring a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. It is the policy of the FRB
that, pursuant to this requirement, a bank holding company should stand ready to
use its resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity. Additionally, under the
FedICIA, a bank holding company is required to guarantee the compliance of any
insured depository institution subsidiary that may become "undercapitalized" (as
defined in the statute) within the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency up to the lesser
of (i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under the BHCA, the FRB has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
FRB's determination that such activity or control constitutes a serious risk to
the financial soundness and stability of any bank subsidiary of the bank holding
company.
HHFC is prohibited by the BHCA from acquiring direct or indirect control of
more than 5% of the outstanding shares of any class of voting stock or
substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the FRB. The BHCA also
prohibits HHFC from acquiring control of any bank operating outside the State of
Ohio unless such action is specifically authorized by the statutes of the state
where the bank to be acquired is located. Additionally, HHFC is prohibited by
BHCA from engaging in or from acquiring ownership or control of more than 5% of
the outstanding shares of any class of voting stock of any company engaged in a
nonbanking business unless such business is determined by the FRB to be so
closely related to banking as to be a proper incident thereto. The BHCA does
not place territorial restrictions on the activities of such nonbanking-related
activities.
FRB Regulations
Reserve Requirements. FRB regulations require savings and loan associations
to maintain reserves against their transaction accounts (primarily NOW accounts)
and non-personal time deposits. Such regulations generally require that
reserves of 3% be maintained against deposits in transaction accounts up to a
specified amount, presently $49 million (subject to an exemption of up to $4.3
million), and that reserves of 10% be maintained against the portion of total
transaction accounts in excess of $49.3 million. These percentages are subject
to adjustment by the FRB. At June 30, 1997, Harvest Home was in compliance
with its reserve requirements.
Truth in Savings. FedICIA included the Truth in Savings Act, which requires
the FRB to establish regulations providing for clear and uniform disclosure of
the rates, fees and terms of deposit accounts. The FRB has adopted regulations
requiring specific disclosure before an account is opened, in regularly provided
statements and in advertisements, announcements and solicitations initiated by
a depository institution. The regulations also impose substantive limits on the
methods used to determine the balance of an amount in which interest is
calculated. The regulations became effective in June 1993. The regulations
prescribe detailed disclosure of deposit account yield information, minimum
balance requirements and fees. The regulations also establish certain
recordkeeping requirements.
Capital Adequacy Guidelines for Bank Holding Companies
The FRB is the federal regulatory and examining authority for bank holding
companies. The FRB has adopted capital adequacy guidelines for bank holding
companies.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines which require a minimum ratio of total capital to risk
weighted assets (including certain off-balance sheet activities such as standby
letters of credit) of 8%. At least half of the total required capital must be
"Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder
("Tier II capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which
the bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of 3% in the case of bank holding companies
which have the highest regulatory examination ratings and are not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.
At September 30, 1997, HHFC was in compliance with this requirement.
Dividend Limitations Applicable to Bank Holding Companies
Under FRB supervisory policy, a bank holding company generally should not
maintain its existing rate of cash dividends on common stock unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fully fund dividends and (ii) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition.
Taxation
Federal Taxation
HHFC and Harvest Home will file federal income tax returns on a separate
company basis, for the fiscal year ended September 30, 1997. HHFC is subject to
the federal tax laws and regulations which apply to corporations generally. With
certain exceptions, Harvest Home is also subject to the federal tax laws and
regulations which apply to corporations generally. One such exception permits
thrift institutions such as Harvest Home, which meet certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Code, to establish a reserve for bad debts and to make annual additions thereto
which may, within specified limits, be taken as a deduction in computing taxable
income. For purposes of the bad debt reserve deduction, loans are categorized
as "qualifying real property loans," which generally include loans secured by
improved real estate, and "nonqualifying loans," which include all other types
of loans. The amount of the bad debt reserve deduction for "nonqualifying
loans" is computed under the experience method. A thrift institution may elect
annually to compute its allowable addition to its bad debt reserves for
qualifying loans under either the experience method or the percentage of taxable
income method. For the past several years, Harvest Home used the percentage of
taxable income method because such method provided a higher bad debt deduction
than the experience method.
Under the experience method, the bad debt deduction for an addition to the
reserve for "qualifying real property loans" or nonqualifying loans" is an
amount determined under a formula based upon a moving average of the bad debts
actually sustained by a thrift institution over a period of years, or an amount
necessary to maintain a minimum reserve level amount for a statutory base year.
The percentage of taxable income used to compute the bad debt deduction is 8%.
The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for nonqualifying loans under the experience method.
The availability of the percentage of taxable income method permits qualifying
thrift institutions to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally. The effective maximum federal
income tax rate applicable to a qualifying thrift institution with taxable
income under $10 million (exclusive of any minimum tax or environmental tax),
assuming the maximum percentage bad debt deduction, is approximately 31.3%.
If less than 60% of the total dollar amount of an institution's assets (on
a tax basis) consist of specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash, and certain
governmental obligations), such institution may not deduct any addition to a bad
debt reserve and generally must include reserves in excess of that allowable
under the experience method in income over a four-year period. At September 30,
1997, at least 70% of Harvest Home's total assets were specified assets. No
representation can be made as to whether Harvest Home will meet the 60% test for
subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year. Additionally, the total bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method, or (ii)
the amount which, when added to the bad debt deduction for "nonqualifying
loans," equals the amount by which 12% of the amount comprising savings
accounts at year-end exceeds the sum of surplus, undivided profits and reserves
at the beginning of the year. At September 30, 1996, and for all prior years,
the 6% and 12% limitations did not restrict the percentage bad debt deduction
available to Harvest Home.
In addition to the regular income tax, HHFC and Harvest Home are subject to a
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 (i) 100% of the
excess of a thrift institution's bad debt deduction over the amount that would
have been allowable based on actual experience, and (ii) 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" exceed its alternative minimum
taxable income computed without regard to this adjustment 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. In addition,
for taxable years after 1986 and before 1996, HHFC and Harvest Home are also
subject to an environmental tax equal to 0.12% of the excess of alternative
minimum taxable income for the taxable year (determined without regard to net
operating losses and deduction for the environmental tax) over $2.0 million.
To the extent earnings appropriated to a thrift institution's bad debt
reserves for qualifying real property loans and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method, and to the extent of the institution's supplemental reserves
for losses on loans (the "Excess"), such Excess may not, without adverse tax
consequences, 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 Excess; and third, out of such other accounts as may be proper. To the
extent a distribution by Harvest Home to HHFC is deemed paid out of its Excess
under these rules, the Excess would be reduced and Harvest Home'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 Excess. As of September 30,
1997, Harvest Home's Excess for tax purposes totaled approximately $1.7
million. Harvest Home believes it had approximately $3.3 million of
accumulated earnings and profits for tax purposes as of September 30, 1997,
which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. See "DIVIDEND
POLICY."
The tax returns of Harvest Home have been audited or closed without audit
through fiscal year 1993. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the consolidated financial condition of HHFC.
Ohio Taxation
HHFC is subject to the Ohio corporation franchise tax, which, as applied to
HHFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth.
In computing its tax under the net worth method, HHFC may exclude 100% of
its investment in the capital stock of Harvest Home after the Conversion, as
reflected on the balance sheet of HHFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of
Harvest Home. The calculation of the exclusion from net worth is based on the
ratio of the excludable investment (net of any appreciation or goodwill included
in such investment) to total assets multiplied by the net value of the stock.
As a holding company, HHFC may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including HHFC,
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 .11% of the first $50,000 of computed Ohio taxable income and
.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 .014% times taxable
net worth.
Harvest Home is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Harvest Home's
book net worth determined in accordance with GAAP. As a "financial
institution," Harvest Home is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
Item 2. Properties
The following table sets forth certain information at September 30, 1996,
regarding the properties on which the main office and each branch office of
Harvest Home is located:
<TABLE>
<CAPTION>
Approx.
Owned Date square Net
Location or leased acquired footage book value(1)
(In thousands)
<S> <S> <S> <C> <C>
Main office:
3621 Harrison Ave.
Cheviot, OH 45211 Owned Various 6,000 $430
from
1926 to
present
Branch offices:
7030 Hamilton Ave.
Cinti., OH 45231 Owned 1975 1,200 $122
3663 Ebenezer Road
Cinti., OH 45248 Owned 1985 1,000 $296
(1) At September 30, 1997, Harvest Home's office premises and equipment had
a total net book value of $981,000. For additional information regarding
Harvest Home's office premises and equipment, see Notes A-6 and E of
Notes to Consolidated Financial Statements.
Harvest Home has contracted for the data processing and reporting services
of NCR Corporation. The cost of these data processing services is approximately
$7,000 per month.
Item 3. Legal Proceedings
Neither HHFC nor Harvest Home is presently involved in any legal proceedings
of a material nature. From time to time, Harvest Home is a party to legal
proceedings incidental to its Business to enforce its security interest in
collateral pledged to secure loans made by Harvest Home.
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
The no par Common Stock was issued for the first time pursuant to
subscription orders on October 7, 1994. 991,875 shares were issued. The shares
are traded on the NASDAQ market. The stock opened at $10.00 per share. As of
December 26, 1997, the stock was trading at $14.50 per share.
As of December 26, 1997, there are approximately 350 holders of record of
the no par Common Stock of HHFC.
Presented below are the high and low bid prices for the Corporation's common
stock, as well as the amount of cash dividends paid on the common stock, for
each quarter of fiscal 1996. Such values do not include retail markups,
markdowns or commissions. Information relating to prices has been obtained
by the Corporation from NASDAQ for fiscal 1997.
Cash
Dividends
Fiscal year ending September 30, 1997 High Low
Quarter ending December 31, 1996 $9.875 $9.25
Quarter ending March 31, 1997 $13.00 $10.25
Quarter ending June 30, 1997 $11.25 $10.50
Quarter ending September 30, 1997 $12.125 $11.75
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Since its formation, the Corporation's activities have been primarily limited
to holding the stock of Harvest Home. As a result, the discussion that follows
focuses largely on the operations of Harvest Home.
Harvest Home's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income on loans
and investments and interest expense on deposits and borrowings. Like most
thrift institutions, the interest income and interest expense of Harvest Home
changes as interest rates fluctuate and assets and liabilities reprice.
Interest rates may fluctuate because of general economic conditions, the
policies of various regulatory authorities and other factors beyond Harvest
Home's control. Assets and liabilities will reprice in accordance with the
contractual terms of the asset or liability instrument and in accordance with
customer reaction to general economic trends.
Harvest Home's interest-earning assets repricing within one year after
September 30, 1997, are less than interest-bearing liabilities repricing
within the same period by approximately $5.1 million, resulting in a negative
cumulative one year gap of 5.5% of total assets. The Corporation's interest-
earning assets repricing within three years of September 30, 1997, were $5.4
million greater than interest bearing liabilities repricing during the same
period, resulting in a positive cumulative gap for such period of 5.9% of
total assets.
In the event that interest rates rise during the forthcoming year, Harvest
Home's negative cumulative one-year gap may negatively affect earnings because
interest-bearing liabilities may reprice at a faster pace than interest-earning
assets. Further, rising interest rates could also affect Harvest Home's
earnings in a negative manner as a result of diminished loan demand and the
increased risk of delinquencies resulting from increased payment amounts on
adjustable-rate loans.
Harvest Home's earnings are also vulnerable to changes in interest rates due
to the amount of adjustable-rate mortgage loans ("ARMs") originated with low
margins and adjustment caps. In the 1980s, Harvest Home originated ARMs which
provide for interest rate adjustments every three years. Moreover, many of
these loans have adjustment caps of 2% in any three year period. Therefore, if
interest rates rise rapidly, Harvest Home may be unable to increase the interest
rates on such loans as rapidly as the cost of liabilities increase.
Notwithstanding the foregoing risks, the Bank is operating within management's
predetermined level of interest rate risk and management believes that Harvest
Home's interest rate risk posture and the strategies discussed below will result
in the Bank maintaining acceptable operating results in the current interest
rate environment.
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of income.
The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. In
managing its interest rate risk, Harvest Home begins with an objective to
increase the interest rate sensitivity of its assets by originating loans with
interest rates subject to period adjustment and market conditions and/or shorter
maturities. Harvest Home has historically had to rely primarily upon retail
deposit accounts as a source of funds and intends to continue to do so.
Management believes that reliance on retail deposit accounts as a source of
funds compared to brokered deposits and long-term borrowings may reduce the
effects of interest rate fluctuations because these deposits generally
represent a more stable source of funds. However, in fiscal 1997 and 1996,
Harvest Home has utilized FHLB advances as a source of financing to fund
purchases of certain mortgage-backed securities when favorable spreads became
available.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis presents the projected maturities and
periods to repricing of a savings bank's rate sensitive assets and liabilities.
As stated previously, Harvest Home's cumulative one-year gap, which represents
the difference between the amount of interest sensitive assets maturing or
repricing in one year and the amount of interest sensitive liabilities maturing
or repricing in the same period was a negative 5.5% of total assets at September
30, 1997. A positive cumulative gap indicates that interest sensitive assets
exceed interest sensitive liabilities at a specific date. In a rising interest
rate environment, institutions with positive repricing or maturity gaps
generally experience a more rapid increase in interest income earned on assets
than the interest expense paid on liabilities. Conversely, in an environment of
falling interest rates, interest income earned on assets will generally decrease
more rapidly than the interest expense paid on liabilities. A negative gap will
have the opposite effect.
Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and the
Corporation'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 interest rates in the nation and the Corporation's market area
generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for losses on loans and the effect of certain accounting pronouncements.
Discussion of Changes in Financial Condition from September 30, 1996 to
September 30, 1997
The Corporation's assets totaled $93.8 million at September 30, 1997, an
increase of $15.1 million, or 19.2%, from September 30, 1996. The increase in
total assets was funded primarily by a $14.0 million increase in Federal Home
Loan Bank advances, an $828,000, or 1.4%, increase in deposits and a $619,000
increase in stockholders' equity.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions totaled $5.3 million at September 30, 1997, an increase of $3.6
million, or 208.2%, from 1996 levels. Federal funds sold increased by $2.2
million, while interest-bearing deposits and cash increased by $1.4 million, or
103.7%. Investment securities totaled $8.0 million at September 30, 1997, a
decline of $4.1 million, or 33.6%, from the balance at September 30, 1996. This
decline resulted primarily from the maturity of $2.0 million and the sale of
$2.0 million of investment securities during the 1997 period. The proceeds were
primarily redeployed to fund new loan originations.
Mortgage-backed securities increased by $12.0 million, or 58.9%, to a total of
$32.5 million at September 30, 1997, compared to September 30, 1996, as
purchases of $18.2 million exceeded principal repayments and sales of $2.6
million and $138,000, respectively. During fiscal 1997, management purchased
$18.2 million of long-term, adjustable-rate U.S. Government agency
collateralized mortgage obligations with a weighted-average yield of 6.77%. Such
purchases were funded with proceeds from Federal Home Loan Bank advances.
Loans receivable increased by $3.0 million, or 7.0%, to a total of $45.2
million at September 30, 1997, compared to September 30, 1996 levels. Loan
disbursements totaled $8.9 million during fiscal 1997, as compared to $12.3
million during fiscal 1996, and were partially offset by principal repayments
totaling $6.0 million. Growth in the loan portfolio consisted primarily of one
to four-family loans, which increased by $4.3 million, or 12.2%, year to year.
At September 30, 1997, Harvest Home's allowance for loan losses totaled
$115,000, representing .2% of total loans and 121.1% of nonperforming loans. At
September 30, 1996, the allowance for loan losses totaled $111,000, or .2% of
total loans, and 67.7% of nonperforming loans. Nonperforming loans amounted to
$95,000, or .1%, and $164,000, or .2%, of total assets at September 30, 1997 and
1996, respectively. Although management believes that its allowance for loan
losses at September 30, 1997, was adequate based on the available facts and
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which could adversely affect Harvest Home's
results of operations.
Deposits totaled $58.8 million at September 30, 1997, an increase of $828,000,
or 1.4%, over the $58.0 million total at September 30, 1996. The increase
resulted primarily from management's continuing efforts to maintain a moderate
rate of growth through marketing and pricing strategies.
Federal Home Loan Bank advances totaled $24.0 million at September 30, 1997,
an increase of $14.0 million, or 140.0%, over September 30, 1996, as management
elected to fund the purchase of mortgage-backed securities with variable rate,
long-term advances. These advances and the related mortgage-backed securities
reprice monthly based upon the LIBOR index. At September 30, 1997, the advances
carried a 5.82% weighted-average interest rate and are scheduled to mature
through fiscal 2007.
Shareholders' equity totaled $10.3 million at September 30, 1997, an increase
of $619,000, or 6.4%, over September 30, 1996 levels. The increase resulted
primarily from net earnings of $627,000 and a $49,000 increase in unrealized
gains on securities designated as available for sale, which were partially
offset by dividends of $371,000 and the purchase of treasury shares totaling
$223,000.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1997 and 1996
General
Net earnings for the year ended September 30, 1997, totaled $627,000, an
increase of $495,000, or 375.0%, over the $132,000 in net earnings reported for
the fiscal year ended September 30, 1996. The increase in net earnings resulted
primarily from a $727,000 decline in general, administrative and other expense,
including a one-time charge to recapitalize the Savings Association Insurance
Fund ("SAIF") totaling $368,000 which was recorded in fiscal 1996, coupled with
a $54,000 increase in net interest income, which were partially offset by a
$268,000 increase in the provision for federal income taxes.
Net Interest Income
Total interest income amounted to $6.0 million for the fiscal year ended
September 30, 1997, an increase of $774,000, or 14.9%, over fiscal 1996.
Interest income on loans totaled $3.5 million in fiscal 1997, an increase of
$298,000, or 9.4%. This increase was due primarily to a $3.5 million increase
in the weighted-average balance outstanding, coupled with an 6 basis point
increase in weighted-average yield, to 7.87% in 1997. Interest income on
mortgage-backed securities increased by $887,000, or 115.6%, as a result of a
$13.4 million increase in the weighted-average balance outstanding, coupled with
an 25 basis point increase in weighted-average yield, to 6.38% in fiscal 1997.
Interest income on investment securities and interest-bearing deposits decreased
by $411,000, or 32.0%, due primarily to a $6.8 million decrease in the weighted
average balance outstanding, which was partially offset by a 15 basis point
increase in the weighted-average yield year-to-year.
Interest expense totaled $3.7 million for the fiscal year ended September 30,
1997, an increase of $720,000, or 24.3%, over the $3.0 million total recorded in
fiscal 1996. Interest expense on deposits decreased by $28,000, or 1.0%, due
primarily to a 6 basis point decrease in the weighted-average cost of funds, to
4.81% during fiscal 1997. Interest expense on borrowings totaled $903,000
during fiscal 1997, an increase of $748,000 over fiscal 1996, due to a $12.7
million increase in the weighted-average balance of advances outstanding from
the Federal Home Loan Bank, as previously discussed.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $54,000, or 2.4%, from $2.2 million for the
fiscal year ended September 30, 1996, to $2.3 million for fiscal 1997. The
interest rate spread declined by 7 basis points during fiscal 1997 to 2.17%,
while the net interest margin declined by 31 basis points year-to-year,
amounting to 2.76% in fiscal 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management
recorded a $9,000 provision for losses on loans during the fiscal year ended
September 30, 1997, as compared to $1,000 for fiscal 1996. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other Income
Other income declined by $10,000, or 13.5%, from $74,000 for the fiscal year
ended September 30, 1996 to $64,000 for fiscal 1997. The decline was due
primarily to a $12,000 decline in the recovery from the Ohio Deposit Guarantee
Fund which totaled $2,000 in fiscal 1997, as compared to $14,000 in fiscal 1996.
General, Administrative and Other Expense
General, administrative and other expense decreased by $727,000, or 34.0%, to
a total of $1.4 million for the year ended September 30, 1997, as compared to
$2.1 million for fiscal 1996. The decrease resulted primarily from a $368,000
charge recorded in fiscal 1996 to recapitalize the SAIF, a decrease of $229,000,
or 22.2%, in employee compensation and benefits and a $28,000, or 12.3%
decrease in other operating expenses. The decrease in employee compensation and
benefits resulted primarily from management's decision to accelerate expenses
related to the ESOP during fiscal 1996, which resulted in a $200,000 charge
during that period. The decrease in other operating expenses resulted from a
decrease in professional and reporting expenses year-to-year.
Federal Income Taxes
The provision for federal income taxes totaled $313,000 for the fiscal year
ended September 30, 1997, an increase of $268,000 over the $45,000 total in
fiscal 1996. The increase resulted primarily from a $763,000, or 431.1%,
increase in pre-tax earnings. The effective tax rates for the years ended
September 30, 1997 and 1996 were 33.3% and 25.4%, respectively.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1996 and 1995
General
Net earnings for the year ended September 30, 1996, totaled $132,000, a
decline of $508,000, or 79.4%, from the $640,000 in net earnings reported for
the fiscal year ended September 30, 1995. The decline in net earnings resulted
primarily from a $368,000 charge recorded in the fourth quarter reflecting the
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"),
coupled with a $396,000 increase in other general, administrative and other
expense and a $63,000 decrease in net interest income, which were partially
offset by a $284,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income amounted to $5.2 million for the fiscal year ended
September 30, 1996, an increase of $337,000, or 6.9%, over fiscal 1995.
Interest income on loans totaled $3.2 million in fiscal 1996, an increase of
$187,000, or 6.3%. This increase was due primarily to a $3.3 million increase
in the weighted-average balance outstanding, which was partially offset by a 19
basis point decrease in weighted-average yield to 7.81% in 1996. Interest
income on mortgage-backed securities increased by $202,000, or 35.8%, as a
result of a $2.7 million increase in the weighted-average balance outstanding,
coupled with a 39 basis point increase in weighted-average yield, to 6.13% in
fiscal 1996. Interest income on investment securities and interest-bearing
deposits decreased by $52,000, or 3.9%, due primarily to a $3.2 million decrease
in the weighted-average balance outstanding, which was partially offset by a 166
basis point increase in weighted-average yield year-to-year.
Interest expense totaled $3.0 million for the fiscal year ended September 30,
1996, an increase of $400,000, or 15.6%, over the $2.6 million total recorded in
fiscal 1995. Interest expense on deposits increased by $245,000, or 9.5%, due
primarily to a 43 basis point increase in the weighted-average cost of funds, to
4.87% during fiscal 1996. Interest expense on borrowings totaled $155,000
during fiscal 1996, due to an increase in advances from the Federal Home Loan
Bank, as previously discussed.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $63,000, or 2.7%, from $2.3 million for the
fiscal year ended September 30, 1995, to $2.2 million for fiscal 1996. The
interest rate spread declined by 24 basis points during fiscal 1996, to 2.24%,
while the net interest margin declined by 20 basis points year-to-year,
amounting to 3.07% in fiscal 1996.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management
recorded a $1,000 provision for losses on loans during the fiscal year ended
September 30, 1996. There can be no assurance that the allowance for loan
losses of the Savings Bank will be adequate to cover losses on nonperforming
assets in the future.
Other Income
Other income increased by $24,000, or 48.0%, from $50,000 for the fiscal year
ended September 30, 1995 to $74,000 for fiscal 1996. The increase was due
primarily to an increase in service fees and other charges during fiscal 1996,
coupled with a recovery from the Ohio Deposit Guarantee Fund totaling $14,000.
General, Administrative and Other Expense General, administrative and other
expense increased by $764,000, or 55.7%, to a total of $2.1 million for the year
ended September 30, 1996, as compared to $1.4 million for fiscal 1995. The
increase resulted primarily from a $368,000 charge recorded in the fourth
quarter reflecting the assessment to recapitalize the SAIF, an increase of
$340,000, or 49.1%, in employee compensation and benefits and a $44,000, or
55.0% increase in franchise taxes. The increase in employee compensation and
benefits resulted primarily from management's decision to accelerate
approximately $200,000 in expenses related to the Employee Stock Ownership Plan.
The increase in franchise taxes resulted from the increase in stockholders'
equity year-to-year.
Federal Income Taxes
The provision for federal income taxes totaled $45,000 for the fiscal year
ended September 30, 1996, a decrease of $284,000, or 86.3%, from the $329,000
total in fiscal 1995. The decline resulted primarily from a $792,000, or 81.7%,
decrease in pre-tax earnings. The effective tax rates for the years ended
September 30, 1996 and 1995 were 25.4% and 34.0%, respectively.
Item 7. Consolidated Financial Statements
Incorporated by reference is the 1997 Annual Report to Shareholders
filed on November 28, 1997.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes or disagreements with regard to
accountants.
Effect of Recent Accounting Pronouncements
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights. SFAS No. 122 requires that Harvest Home recognize as separate assets
rights to service mortgage loans for others, regardless of how those servicing
rights were acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights. SFAS No. 122 also requires that an
enterprise allocate the cost of purchasing or originating the mortgage loans
between the mortgage servicing rights and the loans when mortgage loans are
securitized, if it is practicable to estimate the fair value of mortgage
servicing rights. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment would be measured based on fair value. SFAS No. 122 is
effective for the Corporation's fiscal year beginning October 1, 1996, to
transactions in which an entity acquires mortgage servicing rights and to
impairment evaluations of all capitalized mortgage servicing rights and
capitalized excess servicing receivables whenever acquired. Retroactive
application is prohibited. On October 1, 1996, management adopted SFAS No. 122
without effect on Harvest Home's consolidated financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board ( FASB ) issued
Statement of Financial Accounting Standards ( SFAS ) No. 123, Accounting for
Stock-Based Compensation, establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that the Corporation will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore SFAS No. 123 will have no effect on its consolidated financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities , that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include,
among others, transfers involving repurchase agreements, securitizations of
financial assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Corporation s consolidated financial position or results
of operations.
Additional recent accounting pronouncements are contained in HHFC's Annual
Report to Shareholders. Thus, these provisions are incorporated by reference in
the 1997 Annual Report to Shareholders filed on November 28, 1997.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein
have been prepared in accordance with generally accepted accounting principles,
which require the Corporation to measure financial position and results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time because of inflation.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in
the inflation rate, they do not change at the same rate or in the same magnitude
as the inflation rate. Rather, interest rate volatility is based on changes in
the expected rate of inflation, as well as on changes in monetary and fiscal
policies.
Recapitalization of the Deposit Insurance Fund
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC in the Savings Association Insurance Fund ( SAIF ). The
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund were used to pay the cost of prior
thrift failures. The deposit accounts of commercial banks are insured by the
FDIC in the Bank Insurance Fund ( BIF ), except to the extent such banks have
acquired SAIF deposits. The reserves of the BIF met the level required by law
in May 1995. As a result of the respective reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996, no BIF assessments are required for healthy commercial banks except for
a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a
special assessment totaling $.657 per $100 of SAIF deposits held at March 31,
1995, in order to increase SAIF reserves to the level required by law.
The Savings Bank had $56.0 million in deposits at March 31, 1995, resulting
in an assessment of approximately $368,000, or $243,000 after tax, which was
charged to operations in 1996.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999. The SAIF recapitalization legislation also
provides for an elimination of the thrift charter or of the separate federal
regulation of thrifts prior to the merger of the deposit insurance funds. As a
result, the Savings Bank would be regulated as a bank under Federal laws
which would subject it to the more restrictive activity limits imposed on
national banks. Under separate legislation related to the recapitalization
plan, the Savings Bank is required to recapture as taxable income approximately
$370,000 of its bad debt reserve, which represents the post-1987 additions to
the reserve, and will be unable to utilize the percentage of earnings method to
compute its reserve in the future. The Savings Bank has provided deferred taxes
for this amount and will be permitted to amortize the recapture of its bad debt
reserve over six years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
</TABLE>
<TABLE>
<CAPTION>
POSITION WITH DATE OF TERMS
NAME AGE HARVEST HOME SERVICE EXPIRE
<S> <C> <S> <C> <C>
John E. Rathkamp 54 President, 1971 1999
Secretary, Director,
Managing Officer
Dennis J. Slattery 45 Executive Vice 0 0
President
Richard F. Hauck 68 Vice President, 1985 2000
Director
Walter A. Schuch 80 Chairman of Board, 1955 1998
Director
Thomas L. Eckert 74 Director 1973 2000
Marvin J. Ruehlman 76 Director 1955 1998
Herbert E. Menkhaus 69 Director 1985 1999
George C. Eyrich 78 Director 1954 1999
The business experience of each director of HHFC is set forth below.
John E. Rathkamp joined Harvest Home in 1965 as Treasurer. He became
Secretary and Managing Officer in 1976. He has been a Director of Harvest Home
since 1971. In 1991 he was elected President of the Bank and currently is
serving as President, Secretary and Managing Officer of Harvest Home and
President of HHFC.
Thomas Eckert joined Victoria Savings & Loan Co. in 1954 as Treasurer and
served as Managing Officer from 1956 to 1973. In 1973 Victoria Savings & Loan
Co. merged with Harvest Home and Mr. Eckert became Vice President of Harvest
Home until his retirement in 1990. Mr. Eckert has been a member of the Board of
Directors of Harvest Home since 1973.
Walter A. Schuch joined Harvest Home as a Board member in 1955. He became
President in 1976 and Chairman of the Board in 1983. He retired as President in
1991 and is currently serving as Chairman of the Board.
George C. Eyrich joined Harvest Home as a Board member in 1954. Mr. Eyrich
is an attorney and the law firm has represented the Bank since its inception in
1919. He is currently of counsel with Kepley, Gilligan and Eyrich which acts as
general counsel of Harvest Home.
Herbert E. Menkhaus joined Baltimore Savings & Loan Co. as a Director in
1971. He served as Treasurer, President and Director of Baltimore Savings &
Loan until it merged with Harvest Home in 1985. Mr. Menkhaus has been a
Director of Harvest Home since 1985.
Marvin J. Ruehlman joined Harvest Home in 1955 and has served as a Board
member since then. He is currently on the Appraisal Committee and the Asset
Classification Committee. He retired from the construction business in 1990.
Richard F. Hauck joined Baltimore Savings & Loan Co. as a Director in 1971 and
became Secretary and Managing Officer in 1983. In 1985 Baltimore Savings & Loan
Co. merged with Harvest Home and Mr. Hauck became Vice President and Director of
Harvest Home. He is Vice President of HHFC.
Dennis J. Slattery joined Harvest Home in 1978 and became Treasurer in 1981.
In 1991, Mr. Slattery was elected Executive Vice President and served as
Treasurer and Executive Vice President in 1994. He is currently serving as
Executive Vice President.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and executive officers, and persons who own more than
ten percent (10%) of a registered class of the Corporation's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Corporation.
Officers, directors and greater than ten percent (10%) shareholders are required
by SEC regulation to furnish the Corporation with copies of all Section 16(a)
forms they file.
To the Corporation's knowledge, based solely on a review of the copies of
such reports furnished to the Corporation, all Section 16(a) filing requirements
for officers, directors and greater than ten percent (10%) beneficial owners
were complied with and the requisite Forms 5 were filed on November 14, 1997.
All Section 16(a) filing requirements applicable to its officers, directors and
greater than ten (10) percent beneficial owners were complied with the during
the fiscal year endered September 30, 1997.
Item 10. Executive Compensation
The following table presents certain information regarding the cash and non
cash compensation for each of the last three fiscal years awarded to or earned
by the Chief Executive Officer. No other executive officers received a salary
and bonus in excess of $100,000 during the fiscal year ended September 30,
1997.
Name and Principal Position Fiscal Annual Compensation
Year-End
Salary Bonus All Other
John E. Rathkamp, President,
Secretary, Managing Officer 1995 $92,700 $4,300 $23,026
1996 $96,412 $2,380 $35,416
1997 $100,350 $3,295 $77,952
Item 11. Security Ownership of Certain Beneficial Owners and Management
Amount and Nature Percent of
Name and Address of Beneficial Ownership Shares Outstanding
John E. Rathkamp 14,959 1.7%
Dennis J. Slattery 7,475 .8%
Richard F. Hauck 11,983 1.3%
Walter A. Schuch 14,959 1.7%
Thomas L. Eckert 14,959 1.7%
Marvin J. Ruehlman 14,959 1.7%
Herb E. Menkhaus 14,959 1.7%
George C. Eyrich 14,959 1.7%
Total of all directors
and officers as a group 109,212 11.7%
Item 12. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K have been filed during the last
quarter of the fiscal year covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HARVEST HOME
/s/John E. Rathkamp
John E. Rathkamp
President and Director (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By/s/Dennis J. Slattery By/s/Richard F. Hauck
Dennis J. Slattery Richard F. Hauck
Executive Vice President Vice President and Director
(Principal Accounting Officer)
Date December 29, 1997 Date December 29, 1997
By/s/Walter A. Schuch By/s/Thomas L. Eckert
Walter A. Schuch Thomas L. Eckert
Director Director
Date December 29, 1997 Date December 29, 1997
By/s/Marvin J. Ruehlman By/s/Herbert E. Menkhaus
Marvin J. Ruehlman Herbert E. Menkhaus
Director Director
Date December 29, 1997 Date December 29, 1997
By/s/George C. Eyrich
George C. Eyrich
Director
Date December 29, 1997
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
3.1 Articles of Incorporation of
Harvest Home Financial Corporation
Incorporated by reference to the Registration Statement on Form S-1
filed by HHFC on February 26, 1994 (the "S-1") with the Securities
and Exchange Commission (the "SEC"), Exhibit 3.1
3.2 Code of Regulations of Harvest
Home Financial Corporation Incorporated by reference to the S-1,
Exhibit 3.1
4 Forms 10-QSB for the first three
quarters of FY 1997
Incorporated by reference filed by HHFC on August 14, 1997; June 13,
1997; February 14, 1997
10.1 The Stock Ownership Plan
Incorporated by reference to S-1, Exhibit 10.4
10.2 The Stock Option and Incentive Plan
Incorporated by reference to the S-1, Exhibit 10.2 and as Exhibit A
to
the Definitive Proxy Statement
filed by HHFC on December 2, 1995.
10.3 The Recognition and Retention Plan
Incorporated by reference to the S-1, Exhibit 10.3 and as Exhibit B
to the Definitive Proxy Statement filed by HHFC on December 2, 1995
10.4 Employment Agreements, Incorporated by reference to the S-1,
16 Letter of the Predecessor Accountant Incorporated by reference to
the S-1, Exhibit 10
22 Subsidiary of Harvest Home Financial Corporation
SUBSIDIARY OF HARVEST HOME FINANCIAL CORPORATION
Exhibit # 22
Name: Harvest Home Savings Bank d/b/a Harvest Home Savings Bank
State of Incorporation: Ohio
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 558
<INT-BEARING-DEPOSITS> 2,106
<FED-FUNDS-SOLD> 2,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,505
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 45,229
<ALLOWANCE> 115
<TOTAL-ASSETS> 93,832
<DEPOSITS> 58,786
<SHORT-TERM> 0
<LIABILITIES-OTHER> 702
<LONG-TERM> 24,000
0
0
<COMMON> 0
<OTHER-SE> 10,344
<TOTAL-LIABILITIES-AND-EQUITY> 93,832
<INTEREST-LOAN> 3,457
<INTEREST-INVEST> 2,329
<INTEREST-OTHER> 197
<INTEREST-TOTAL> 5,983
<INTEREST-DEPOSIT> 2,786
<INTEREST-EXPENSE> 3,689
<INTEREST-INCOME-NET> 2,294
<LOAN-LOSSES> 9
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 1,409
<INCOME-PRETAX> 940
<INCOME-PRE-EXTRAORDINARY> 940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
<YIELD-ACTUAL> 2.17
<LOANS-NON> 95
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 111
<CHARGE-OFFS> (5)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 115
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 115
</TABLE>
