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, 1998
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. $6.5 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
23, 1998 was $14.63.
862,357 shares of issuer's common shares were issued and outstanding as of
December 23, 1998, this total is net of 129,518 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 December 11, 1998.
Page 1 of 40 sequentially numbered pages.
Index to Exhibits on page 41.
<PAGE>
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 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.
2
<PAGE>
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>
<CAPTION>
Selected Financial
condition At September 30,
and other data: 1998 1997 1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $96,894 $93,832 $78,718 $69,532 $72,765
Cash and cash
Equivalents(1) 2,887 5,264 1,708 2,313 16,333
Investment
securities at cost 0 0 0 18,032 9,992
Investment securities
available for sale -
at market 4,032 8,039 12,105 0 0
Mortgage-backed
securities at cost 0 0 0 9,009 8,243
Mortgage-backed securities
available for sale -
at market 37,864 32,466 20,429 0 0
Loans receivable - net 48,497 45,229 42,267 38,245 36,319
Deposits 60,225 58,786 57,958 56,425 67,810
Advances from the FHLB 25,850 24,000 10,000 0 0
Stockholders' equity(2) 9,977 10,344 9,725 12,706 4,581
Number of:
Real estate loans
outstanding 919 1,054 1,038 1,000 1,052
Deposit accounts 9,143 8,035 8,466 8,309 6,987
Full service
offices 3 3 3 3 3
</TABLE>
<TABLE>
<CAPTION>
Summary of Earnings:
Year Ended September 30,
1998 1997 1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $6,367 $5,983 $5,209 $4,872 $4,187
Interest expense 4,143 3,689 2,969 2,569 2,387
----- ----- ----- ----- -----
Net interest income 2,224 2,294 2,240 2,303 1,800
Provision for
loan losses 12 9 1 12 9
----- ----- ----- ----- -----
Net interest income after
provision for loan losses 2,212 2,285 2,239 2,291 1,791
Other income 109 64 74 50 53
General, administrative
and other expense 1,516 1,409 2,136 1,372 1,216
----- ----- ----- ----- -----
Earnings before
income taxes 805 940 177 969 628
Federal income taxes 264 313 45 329 13
------ ------ ------ ------ -----
Net earnings $ 541 $ 627 $ 132 $ 640 $ 415
====== ======= ======= ======= ======
</TABLE>
(1) Includes cash, federal funds sold and interest-bearing deposits in other
financial institutions. (2) Consists of only retained earnings at September 30,
1994.
3
<PAGE>
<TABLE>
<CAPTION>
At September 30,
Selected Financial
ratios: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest rate spread (difference
between average yield on interest-
earning assets and average cost of
interest-bearing liabilities) 1.95% 2.17% 2.24% 2.48% 2.63%
Net interest margin
(net interest income as
a percentage of average
interest earning assets) 2.45 2.76 3.07 3.27 2.82
Return on equity (net
earnings divided
by average equity) 5.28 6.09 1.05 5.09 9.49
Return on assets
(net earnings
divided by average
total assets) 0.58 0.73 0.18 0.89 0.64
Equity-to-assets ratio
(average equity divided
by average
total assets) 11.05 12.06 16.94 17.56 6.70
Loans loss reserve
as a percentage
of non-performing
loans 259.18% 121.05% 67.68% 76.92% 268.57%
</TABLE>
4
<PAGE>
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>
<CAPTION>
At September 30
1998 1997 1996
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Residential real estate
loans:
Construction loans $4,663 9.6% $ 1,513 3.4% $ 3,290 7.8%
1-4 family and multi-
family (1) 43,856 89.8 42,353 93.6 38,210 90.4
Nonresidential real
estate and land 3,024 6.2 2,554 5.7 3,281 7.8
Deposit accounts 25 .1 45 .1 42 .1
------ ----- ------ ----- ------ -----
51,568 105.7 46,465 102.8 44,823 106.1
Less:
Loans in process (2,556) (5.2) (1,019) (2.3) (2,320) (5.5)
Deferred loan
origination fees (88) (.2) ( 102) ( .2) ( 125) (.3)
Allowance for loan losses (127) (.3) ( 115) ( .3) ( 111) (.3)
------- ------ ------- ------ ------- ------
Total Loans $48,797 100.0% $45,229 100.0% $42,267 100.0%
======= ====== ======= ====== ======= ======
Type of Security:
Residential real
estate:
1-4 family $47,152 96.6% $42,464 93.9% $39,978 94.6%
Other dwelling 1,367 2.8 1,402 3.1 1,522 3.6
Nonresidential real estate 3,024 6.2 2,554 5.7 3,281 7.8
Deposit accounts 25 .1 45 .1 42 .1
------ ----- ------ ----- ------ -----
51,568 105.7 46,465 102.8 44,823 106.1
Less:
Loans in process (2,556) (5.2) (1,019) (2.3) (2,320) (5.5)
Deferred loan
origination fees (88) (.2) (102) ( .2) ( 125) (.3)
Allowance for loan losses (127) (.3) (115) ( .3) ( 111) (.3)
------- ------ ------- ------ ------- ------
Total Loans $48,797 100.0% $45,229 100.0% $42,267 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At September 30
1995 1994
Percent Percent
of total of total
Amount loans Amount loans
<S> <C> <C> <C> <C>
Type of Loan:
Residential real estate
loans:
Construction loans $ 1,505 3.9% $ 1,660 4.6%
1-4 family and multi-
family (1) 34,002 88.9 32,898 90.6
Nonresidential real
estate and land 3,341 8.8 3,101 8.5
Deposit accounts 83 .2 90 0.2
------ ----- ------ -----
38,931 101.8 37,749 103.9
Less:
Loans in process (428) (1.1) (1,148) (3.2)
Deferred loan
origination fees (148) ( .4) ( 184) (0.5)
Allowance for loan losses (110) ( .3) ( 98) (0.2)
------- ------ ------- ------
Total Loans $38,245 100.0% $36,319 100.0%
======= ====== ======= ======
Type of Security:
Residential real
estate:
1-4 family $34,117 89.2% $32,818 90.4%
Other dwelling 1,390 3.6 1,740 4.8
Nonresidential real estate 3,341 8.8 3,101 8.5
Deposit accounts 83 .2 90 0.2
------ ----- ------ -----
38,931 101.8 37,749 103.9
====== ===== ====== =====
Less:
Loans in process (428) (1.1) (1,148) (3.2)
Deferred loan
origination fees (148) ( .4) (184) (0.5)
Allowance for loan losses (110) ( .3) ( 98) (0.2)
------- ------ ------- -----
Total Loans $38,245 100.0% $36,319 100.0%
======= ====== ======= ======
</TABLE>
(1) Includes home equity lines of credit underwritten on the same basis as
first mortgage loans.
5
<PAGE>
Loans. The following table sets forth certain information as of September
30, 1998 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 10-20 Due 20 or
Due during the years years years years more years
September 30, after after after after
1999 2000 2001 9/30/98 9/30/98 9/30/98 9/30/98 Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2)
One to four family
residential
Adjustable $1,302 $10 $15 $142 $585 $10,853 $8,537 $21,444
Fixed 5 315 598 556 5,239 13,942 2,282 22,937
Multi-family
residential(2):
Adjustable 0 0 4 30 528 805 0 1,367
Non-residential 30 5 7 145 655 2,182 0 3,024
Deposit account loans 25 0 0 0 0 0 0 25
-- - - - - - - --
Total loans $1,362 $330 $624 $873 $7,007 $27,782 $10,819 $48,797
====== ==== ==== ==== ====== ======= ======= =======
</TABLE>
(1) Amounts shown are net of loans in process of $2,556,000, deferred loan
origination fees of $88,000 and allowance for loan losses of $127,000.
(2) Includes construction loans and land loans.
The following table sets forth the dollar amount of all loans due after one
year from September 30, 1998, which have predetermined interest rates and
floating or adjustable interest rates:
<TABLE>
<CAPTION>
Predetermined Floating or
Rates adjustable rate Total
(In thousands)
<S> <C> <C> <C>
Mortgage Loans:
One- to four-
family residential $22,932 $20,142 $43,074
Multi-family
residential 0 1,367 1,367
Nonresidential 0 2,994 2,994
------ ------ ------
Total loans: $22,932 $24,503 $47,435
======= ======= =======
</TABLE>
6
<PAGE>
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
southeastern 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,
including construction loans, was approximately $47.2 million at September 30,
1998, and represented 97% of total loans at such date. At such date, loans
secured by one- to four-family residential real estate with outstanding balances
of $49,000, or .1%, 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, 1998, Harvest Home had $1.4 million of multi-family
residential real estate loans, representing 2.8% of total loans at that date. At
such date, no such loans were delinquent.
7
<PAGE>
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, 1998, Harvest Home had $4.7 million of construction loans,
or 9.6% 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, 1998
had a principal balance of $429,544 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, 1998, Harvest Home had a total of $3.0 million invested in
nonresidential real estate loans. Such loans comprised approximately 6.2% of
Harvest Home's total loans at such date. At such date, none of the
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, 1998, Harvest Home had approximately $25,000 or .1% of
total loans, invested in deposit loans.
8
<PAGE>
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 nonresidential 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.
9
<PAGE>
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 $196,000 at September 30, 1998.
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>
<CAPTION>
Year Ended September 30,
1998 1997 1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans Originated:
Construction $1,540 $ 1,625 $ 3,488 $ 962 $1,269
1 to 4 Family 11,256 6,271 7,082 5,466 5,480
Home equity line
of credit 212 532 570 385 242
5 or more units 433 0 220 0 0
Nonresidential
real estate 438 485 844 0 188
Deposit accounts 43 0 56 85 60
------- ------ ------ ------ ------
Total loans
originated $13,922 $ 8,913 $12,260 $6,898 $7,239
======= ======= ======= ====== ======
Loans and
mortgage-backed
securities
purchased:
Loans $ 0 $ 0 $ 0 $ 0 $ 0
Insured,
guaranteed or
collaterized
mortgage-backed
securities 26,992 18,205 12,972 2,013 1,000
------ ------ ------ ----- -----
Total loans and
mortgage-backed
securities
purchased $26,992 $18,205 $12,972 $2,013 $1,000
======= ======= ======= ====== ======
Loans and mortgage-
backed securities
sold:
Residential real
estate loans $ 0 $ 0 $ 0 $ 0 $ 0
Mortgage-backed
securities 1,878 141 267 0 0
------ ------ ------ ------ -----
Total loans and
mortgage-backed
securities sold $1,878 $ 141 $ 267 $ 0 $ 0
====== ======= ====== ======= =======
</TABLE>
10
<PAGE>
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 $1.4 million to one borrower at September 30, 1998. 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.
11
<PAGE>
The following table reflects the amount of loans in a delinquent status as of
the dates indicated:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997 September 30, 1996
Percent Percent Percent
of of of
total total total
Number Amount Loans Number Amount Loans Number Amount Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Days delinquent for
(1):
30 - 59 days 6 $290 .60% 13 $461 1.02% 11 $267 .63%
60 - 89 days 4 142 .29 5 376 .83 3 132 .31
90 days and over 1 49 .10 2 95 .21 4 164 .39
- -- --- - -- --- - -- ----
Total delinquent
loans 11 $481 0.99% 20 $932 2.06% 18 $563 1.33%
== ==== ===== == ==== ===== == ==== =====
</TABLE>
(1) At September 30, 1998, delinquencies include 11 one-to-four family
residential loans with principal balances totaling $481,000.
12
<PAGE>
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,
1998 1997 1996
(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 49 64 132
Nonresidential 0 31 32
Deposit account 0 0 0
---- ---- ----
Total nonaccrual loans 49 95 164
Other non-performing
assets 0 0 0
---- ---- ----
Total non-performing
assets $ 49 $ 95 $164
==== ==== ====
Total non-performing
assets as a percentage
of total assets .05% .10% .21%
Specific loan loss
allowance $ 0 $ 0 $ 0
General loan loss
allowance (unallocated
as to any specific
loan type) 127 115 111
--- --- ---
Total loan loss allowance $127 $115 $111
==== ==== ====
Loan loss allowance
as a percent of
non-performing loans 259.2% 121.1% 67.7%
Loan loss allowance as
a percent of non-
performing assets 259.2% 121.1% 67.7%
</TABLE>
13
<PAGE>
Harvest Home had 1 non-performing loan at September 30, 1998 and 2
non-performing loans at September 30, 1997. During the periods shown, Harvest
Home had no restructured loans within the meaning of SFAS No. 114.
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:
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Substandard $228 $219 $252
Doubtful 0 0 0
Loss 0 0 0
---- ---- ----
Total classified
assets $228 $219 $252
==== ==== ====
</TABLE>
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, 1998, 1997, and 1996, Harvest Home's allowance
for loan losses totaled $127,000, $115,000, and $111,000, 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.
14
<PAGE>
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,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Balance at
beginning of year $115 $111 $110
Loans charged-off 0 (5) 0
Recoveries 0 0 0
Provision for losses
on loans (charged to
operations) 12 9 1
---- ---- ----
Balance at end of period $127 $115 $111
==== ==== ====
Ratio of allowance for
losses on loans to
non-accrual loans 259.2% 121.1% 67.7%
Ratio of allowance
for losses on loans
to total loans 0.25% 0.25% 0.25%
</TABLE>
Harvest Home increased its allowance for loan losses from $110,000 at
September 30, 1995, to $127,000 at September 30, 1998, due primarily 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 1995 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, 1998, $29.3
million, or 77.3% 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, 1998, Harvest Home's CMO/REMICS totaled $28.7 million, or
75.8%, 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.
15
<PAGE>
At September 30, 1998, HHFC's investment and market value information of
mortgage-backed securities designated as available for sale was comprised of the
following:
<TABLE>
<CAPTION>
Gross Gross Gross Market
Amortized Unrealized Unrealized Value
Cost Gains Losses
(In thousands)
<S> <C> <C> <C> <C>
FHLMC participation
certificates $ 6,140 $ 3 $ 26 $ 6,117
FHLMC CMOs 15,358 8 29 15,337
GNMA participation
certificates 0 0 0 0
FNMA participation
certificates 3,068 29 37 3,060
FNMA CMOs 13,193 172 15 13,350
------ ---- ---- ------
$37,759 $212 $107 $37,864
======= ==== ==== =======
</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".
16
<PAGE>
The following table sets forth the composition of HHFC's interest-bearing
deposits and investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
September 30,
1998 1997
Amortized % of Market % of Amortized % of Market % of
Cost Total Value Total Cost Total Value Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Securities:
U.S. Gov't
& Agency
obligations $ 4,005 57.2% $ 4,032 57.4% $7,972 57.4% $ 8,039 57.6%
Other
investments:
Interest-
bearing
deposits
in other
financial
institutions 1,182 16.9% $1,182 16.8% 2,106 15.1% 2,106 15.1%
Federal funds sold 200 2.9% 200 2.8% 2,600 18.7% 2,600 18.6%
Federal Home
Loan Bank Stock 1,606 23.0% 1,606 23.0% 1,219 8.8% 1,219 8.7%
----- ----- ----- ----- ----- ---- ----- ----
Total Investment
Securities,
Interest-
bearing
Deposits and
Other $6,993 100.0% $7,020 100.0% $13,897 100.0% $13,964 100.0%
====== ====== ====== ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
1996
Amortized % of Market % of
Cost Total Value Total
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment
Securities:
U.S. Gov't
& Agency
obligations $11,992 87.1% $12,105 87.2%
Other
investments:
Interest-
bearing
deposits
in other
financial
institutions 788 5.7% 788 5.6%
Federal funds sold 400 2.9% 400 2.9%
Federal Home
Loan Bank Stock 588 4.3% 588 4.3%
--- ---- --- ----
Total Investment
Securities,
Interest-
bearing
Deposits and
Other $13,768 100.0% $13,881 100.0%
======= ====== ======= ======
</TABLE>
17
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Harvest Home's investment securities at
September 30, 1998. All of such securities mature in three years or less.
<TABLE>
<CAPTION>
At September 30, 1998
One year or Less One to Five Years
Amortized Average Amortized Average
Cost Yield Cost Yield
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government
and agency
securities $4,005 6.13% $ 0 0%
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998
Total Investment Securities
Average Life Amortized Fair Weighted
In Years Cost Value Average Yield
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government
and agency
securities .6 $4,005 $4,032 6.13%
</TABLE>
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, 1998, Harvest Home's certificates of deposit totaled $43.2
million, or 71.7% of total deposits. Of such amount, approximately $30.1 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.
18
<PAGE>
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>
<CAPTION>
At September 30,
1998 1997 1996
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) $ 3,208 5.3% $2,699 4.6% $2,647 4.6%
Super NOW
accounts(1) 253 .4% 300 .5% 192 .3%
Passbook
savings(2) 9,494 15.8% 9,143 15.6% 9,530 16.4%
Money market
Deposit
account(3) 4,107 6.8% 4,332 7.4% 4,721 8.2%
----- ---- ----- ---- ----- -----
Total
Transaction
accounts 17,062 28.3% 16,474 28.1% 17,090 29.5%
Certificates
Of Deposit(4):
4.00-5.99% 38,275 63.6% 38,031 64.7% 35,004 60.4%
6.00-7.99% 4,888 8.1% 4,281 7.2% 5,864 10.1%
----- ---- ----- ---- ----- -----
Total
Certificates
of deposit 43,163 71.7% 42,312 71.9% 40,868 70.5%
====== ===== ====== ===== ====== =====
Total deposits $60,225 100.0% $58,786 100.0% $57,958 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
(1) Harvest Home's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September 30,
1998, 1997, and 1996, the weighted average rates on NOW accounts were
1.84%, 2.69%, and 2.66%, respectively. At September 30, 1998, 1997, and
1996, 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,
1998, 1997, and 1996, the weighted average rates on passbook accounts were
2.53%, 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, 1998, 1997, and 1996, 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.
19
<PAGE>
The following table shows interest rate and original contractual maturity
information for Harvest Home's certificates of deposit as of September 30, 1998:
<TABLE>
<CAPTION>
Over 1 Over 2
Up to one year to 2 years to 3 Over 3
Year Years Years Years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00-5.99% $25,108 $4,530 $4,539 $4,098 $38,275
6.00 - 7.99% 0 230 715 3,943 4,888
------ ----- ----- ----- -----
Total certificates
of deposit $25,108 $4,760 $5,254 $8,041 $43,163
======= ====== ====== ====== =======
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
Maturity At September 30, 1998
(In thousands)
<S> <C>
Three months or less $ 331
Over 3 months to 6 months 0
Over 6 months to 12 months 1,121
Over 12 months 1,461
-----
Total $2,913
======
</TABLE>
The following table sets forth Harvest Home's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $58,786 $57,958 $56,425
Deposits 65,375 58,930 64,222
Withdrawals (66,862) (60,904) (65,494)
Interest credited 2,926 2,802 2,805
----- ----- -----
Ending balance $60,225 $58,786 $57,958
======= ======= =======
Net increase $1,439 $ 828 $ 1,533
Percent increase 2.45% 1.43% 2.72%
</TABLE>
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.
20
<PAGE>
The following table sets forth certain information as to Harvest Home's
FHLB advances at the date indicated:
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $25,850 $24,000 $10,000
Weighted average
interest rate
of FHLB Advances 5.26% 5.82% 5.55%
</TABLE>
The following table sets forth the maximum balance and average balance of
FHLB advances during the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances $25,850 $24,000 $10,000
Average Balance:
FHLB advances 21,738 15,615 2,885
Weighted average
interest rate of
FHLB advances 5.62% 5.78% 5.37%
</TABLE>
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 10.6% at September 30, 1998. 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.
21
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1998, 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, IPS - Sendero Corporation, 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) $ 4,298 $13,415 $ 3,773 $ 0 $ 0 $ 0 $21,486
Fixed Rate(2) 5,202 3,469 8,405 4,001 2,037 0 23,114
Non-Residential
Adjustable
Rate(1) 806 1,020 1,198 0 0 0 3,024
Other Loans
Home Equity 1,275 0 0 0 0 0 1,275
Consumer 25 0 0 0 0 0 25
Investments
Core
Investments(3) 4,983 2,011 0 0 0 0 6,994
CMO/REMICs 31,624 2,386 3,161 591 0 0 37,762
------ ------ ------ ----- ----- ---- ------
TOTAL RATE
SENSITIVE
ASSETS $48,213 $22,301 $16,537 $4,592 $2,037 $ 0 $93,680
Interest-
bearing
liabilities
Deposits
Certificate
of Deposits(4) $ 6,506 $23,548 $11,346 $1,763 $ 0 $ 0 $43,163
Money Market
Deposits(5) 577 500 1,212 795 780 243 4,107
NOW Accts 465 403 1,129 641 628 195 3,461
Passbook
Accts 1,261 1,092 3,170 1,737 1,704 530 9,494
FHLB Advance 8,850 17,000 0 0 0 0 25,850
------ ------ ------ ----- ----- ---- ------
TOTAL RATE
SENSITIVE
LIABILITIES $17,659 $42,543 $16,857 $4,936 $3,112 $968 $86,075
------- ------- ------- ------ ------ ---- -------
Interest
Sensitivity
Gap 30,554 (20,242) (320) (344) (1,075) (968) 7,605
====== ======== ===== ===== ======= ===== =====
Cumulative
Interest Rate
Sensitivity
Gap $30,554 $10,312 $9,992 $9,648 $8,573 $7,605 $15,210
======= ======= ====== ====== ====== ====== =======
Cumulative
Interest Rate
Sensitive Gap
as a Percent
of Total
Assets 31.53% 10.64% 10.31% 9.96% 8.85% 7.85% 15.70%
====== ====== ====== ===== ===== ===== ======
</TABLE>
- --------------------------------------------------
(1) Includes all adjustable rate mortgage loans and mortgage-backed securities
based on contractual term to repricing.
(footnotes continued on next page)
22
<PAGE>
(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.
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.
23
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Weighted average yield on loan portfolio 7.70% 7.87% 7.81%
Weighted average yield on mortgage-
backed securities 6.24 6.38 6.13
Weighted average yield on investment
securities 6.81 6.86 6.73
Weighted average yield on other
interest-earning assets 6.17 5.57 5.25
Weighted average yield on all
interest-earning assets 7.02 7.19 7.13
Weighted average interest rate
paid on deposits 4.87 4.81 4.87
Weighted average interest rate
paid on borrowings 5.26 5.82 5.55
Weighted average rate on all
interest-bearing liabilities 5.07 5.02 4.89
Interest rate spread
(spread between weighted average
interest rate on all
interest-bearing assets and all
interest-bearing liabilities) 1.95 2.17 2.24
Net yield (net interest income
as a percentage of average
interest-earning assets 2.45% 2.76% 3.07%
</TABLE>
24
<PAGE>
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.
25
<PAGE>
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.
26
<PAGE>
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, 1998:
<TABLE>
<CAPTION>
At September 30, 1998
<S> <C>
Total Capital to Risk-Weighted Assets $9,419
Tier I Capital to Risk-Weighted Assets $9,292
Tier I Leverage Ratio $9,292
</TABLE>
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.
27
<PAGE>
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.
28
<PAGE>
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 $1.6 million at September 30, 1998.
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, 1998, 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.
29
<PAGE>
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, 1998, Harvest Home was in compliance with its reserve
requirements.
30
<PAGE>
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, 1998, 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.
31
<PAGE>
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, 1998. 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,
1998, 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.
32
<PAGE>
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 $3.8 million of accumulated earnings
and profits for tax purposes as of September 30, 1998, 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 1994. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the 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.
33
<PAGE>
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> <C> <C> <C> <C>
Main office:
3621 Harrison Ave.
Cheviot, OH 45211 Owned Various 6,000 $418
from
1926 to
present
Branch offices:
7030 Hamilton Ave.
Cinti., OH 45231 Owned 1975 1,200 $277
3663 Ebenezer Road
Cinti., OH 45248 Owned 1985 1,000 $287
</TABLE>
(1) At September 30, 1998, Harvest Home's office premises and equipment had a
total net book value of $1.1 million. 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.
34
<PAGE>
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 23,
1998, the stock was trading at $14.63 per share.
As of December 23, 1998, 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 1998. Such values do not include retail markups,
markdowns or commissions. Information relating to prices has been obtained by
the Corporation from NASDAQ for fiscal 1998.
<TABLE>
<CAPTION>
Cash
Fiscal year ending September 30, 1998 High Low Dividends
<S> <C> <C> <C>
Quarter ending December 31, 1997 $15.75 $12.00 $.11
Quarter ending March 31, 1998 $15.75 $13.75 $.11
Quarter ending June 30, 1998 $16.75 $14.75 $.11
Quarter ending September 30, 1998 $15.31 $11.75 $.11
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required herein is incorporated by reference from Harvest
Home Financial's 1998 Annual Report to Shareholders ("Annual Report"), the
Managements Discussion and Analysis of which is included in Exhibit 13 as
attached hereto.
Item 7. Consolidated Financial Statements
The financial statements required herein are incorporated by reference from
the Annual Report, the financial statements of which are included in Exhibit 13
attached hereto.
35
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes or disagreements with regard to accountants.
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.
36
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
<TABLE>
<CAPTION>
POSITION WITH DATE OF TERMS
NAME AGE HARVEST HOME SERVICE EXPIRE
<S> <C> <C> <C> <C>
John E. Rathkamp 55 President, 1971 1999
Secretary, Director,
Managing Officer
Dennis J. Slattery 46 Executive Vice 1978 0
President
Richard F. Hauck 69 Vice President, 1985 2000
Director
Walter A. Schuch 81 Chairman of Board, 1955 2001
Director
Thomas L. Eckert 75 Director 1973 2000
Marvin J. Ruehlman 77 Director 1955 2001
Herbert E. Menkhaus 70 Director 1985 1999
George C. Eyrich 79 Director 1954 1999
</TABLE>
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.
37
<PAGE>
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 currently serving as a Director.
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 ended September 30, 1998.
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, 1998.
<TABLE>
<CAPTION>
Name and Principal Position Fiscal
Year-End Annual Compensation
All
Salary Bonus Other
<S> <C> <C> <C> <C>
John E. Rathkamp, President,
Secretary, Managing Officer 1996 $96,412 $2,380 $35,416
1997 $100,350 $3,295 $77,952
1998 $104,550 $3,875 $42,508
</TABLE>
38
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name and Address of Beneficial Ownership Shares Outstanding
<S> <C> <C>
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%
</TABLE>
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.
39
<PAGE>
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 28, 1998 Date December 28, 1998
By/s/Walter A. Schuch By/s/Thomas L. Eckert
Walter A. Schuch Thomas L. Eckert
Director Director
Date December 28, 1998 Date December 28, 1998
By/s/Marvin J. Ruehlman By/s/Herbert E. Menkhaus
Marvin J. Ruehlman Herbert E. Menkhaus
Director Director
Date December 28, 1998 Date December 28, 1998
By/s/George C. Eyrich
George C. Eyrich
Director
Date December 28, 1998
40
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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 1998
Incorporated by reference filed by HHFC on August 14, 1998;
June 13, 1998; February 14, 1998
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,
13 Portions of the 1998 Annual Report to Shareholders'
16 Letter of the Predecessor Accountant Incorporated by reference
to the S-1, Exhibit 10
22 Subsidiary of Harvest Home Financial Corporation
27.1 1998 Financial Data Schedule
27.2 Restated 1997 Financial Data Schedule
41
Harvest Home Financial Corporation
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, 1998, are greater than interest-bearing liabilities repricing within the
same period by approximately $9.8 million, resulting in a positive cumulative
one-year gap of 10.1% of total assets. The Corporation's interest-earning assets
repricing within three years of September 30, 1998, were $9.4 million greater
than interest bearing liabilities repricing during the same period, resulting in
a positive cumulative gap for such period of 9.7% of total assets.
In the event that interest rates rise during the forthcoming year, Harvest
Home's positive cumulative one-year gap may have a positive effect on earnings
because interest-earning assets may reprice at a faster pace than
interest-bearing liabilities. However, 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.
1
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 1998 and 1997, 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 positive 10.1% of total assets at
September 30, 1998. 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. Harvest Home's one to three year gap was essentially
matched, while all other maturities greater than three years reflected a
negative gap of 2.8% of total assets. The foregoing totals have been based on
certain prepayment and repricing data that may not reflect actual performance in
a rapidly rising or declining interest rate environment.
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, the effect of the year 2000 on information technology
systems and the effect of recent accounting pronouncements.
2
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1997 to
September 30, 1998
The Corporation's assets totaled $96.9 million at September 30, 1998, an
increase of $3.1 million, or 3.3%, over September 30, 1997 levels. The increase
in total assets was funded primarily by a $1.9 million increase in Federal Home
Loan Bank advances and a $1.4 million increase in deposits.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions totaled $2.9 million at September 30, 1998, a decrease of $2.4
million, or 45.2%, from 1997 levels. Federal funds sold decreased by $2.4
million, while interest-bearing deposits and cash remained relatively constant
during 1998. Investment securities totaled $4.0 million at September 30, 1998, a
decline of $4.0 million, or 49.8%, from the balance at September 30, 1997. This
decline resulted primarily from the maturity of $4.0 million of investment
securities during the 1998 period. The proceeds from such maturities and excess
liquidity were primarily redeployed to fund the purchase of fixed-rate
mortgage-backed securities and new loan originations.
Mortgage-backed securities increased by $5.4 million, or 16.6%, to a total of
$37.9 million at September 30, 1998, compared to September 30, 1997, as
purchases of $27.0 million exceeded principal repayments and sales of $19.9
million and $1.9 million, respectively. During fiscal 1998, management purchased
$22.2 million of long-term, adjustable-rate U.S. Government agency
collateralized mortgage obligations with a weighted-average yield of 6.41%. Such
purchases were funded with proceeds from Federal Home Loan Bank advances.
Additionally, the Savings Bank acquired $4.8 million of intermediate-term
Federal Home Loan Mortgage Corporation participation certificates at a fixed
rate of 6.0%, primarily using proceeds from the maturity of investment
securities.
Loans receivable increased by $3.6 million, or 7.9%, to a total of $48.8 million
at September 30, 1998, compared to September 30, 1997 levels. Loan disbursements
totaled $13.9 million during fiscal 1998, as compared to $8.9 million during
fiscal 1997, and were partially offset by principal repayments totaling $10.4
million. Growth in the loan portfolio consisted primarily of one- to four-family
residential and construction loans, which increased by $3.2 million, or 7.6%,
year to year.
At September 30, 1998, Harvest Home's allowance for loan losses totaled
$127,000, representing .3% of total loans and 259.2% of nonperforming loans. At
September 30, 1997, the allowance for loan losses totaled $115,000, or .2% of
total loans, and 121.1% of nonperforming loans. Nonperforming loans amounted to
$49,000, or .1%, and $95,000, or .1%, of total assets at September 30, 1998 and
1997, respectively. Although management believes that its allowance for loan
losses at September 30, 1998, 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 $60.2 million at September 30, 1998, an increase of $1.4
million, or 2.4%, over the $58.8 million total at September 30, 1997. The
increase resulted primarily from management's continuing efforts to maintain a
moderate rate of growth through marketing and pricing strategies.
3
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1997 to
September 30, 1998 (continued)
Federal Home Loan Bank advances totaled $25.9 million at September 30, 1998, an
increase of $1.9 million, or 7.7%, over September 30, 1997, as management
elected to fund the purchase of mortgage-backed securities with a combination of
fixed- and variable-rate, long-term advances. At September 30, 1998, the
advances carried a 5.26% weighted-average interest rate and are scheduled to
mature through fiscal 2008.
Stockholders' equity totaled $10.0 million at September 30, 1998, a decrease of
$367,000, or 3.5%, from September 30, 1997 levels. The decrease resulted
primarily from cash dividends paid totaling $393,000, coupled with the purchase
of treasury shares totaling $756,000, which were partially offset by net
earnings of $541,000, a $47,000 increase in unrealized gains on securities
designated as available for sale and amortization of stock benefit plan expense
totaling $194,000.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1998 and 1997
General
Net earnings for the year ended September 30, 1998, totaled $541,000, a decrease
of $86,000, or 13.7%, from the $627,000 in net earnings reported for the fiscal
year ended September 30, 1997. The decrease in net earnings resulted primarily
from a $70,000 decline in net interest income, coupled with a $107,000 increase
in general administrative and other expense, which were partially offset by a
$45,000 increase in other income and a $49,000 decrease in the provision for
federal income taxes.
Net Interest Income
Total interest income amounted to $6.4 million for the fiscal year ended
September 30, 1998, an increase of $384,000, or 6.4%, over fiscal 1997. Interest
income on loans totaled $3.6 million in fiscal 1998, an increase of $114,000, or
3.3%. This increase was due primarily to a $2.5 million increase in the
weighted-average balance outstanding, which was offset by a 17 basis point
decrease in weighted-average yield, to 7.70% in 1998. Interest income on
mortgage-backed securities increased by $431,000, or 26.1%, as a result of a
$7.4 million increase in the weighted-average balance outstanding, which was
partially offset by a 14 basis point decrease in weighted-average yield, to
6.24% in fiscal 1998. Interest income on investment securities and
interest-bearing deposits decreased by $161,000, or 18.5%, due primarily to a
$2.5 million decrease in the weighted-average balance outstanding.
4
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1998 and 1997 (continued)
Net Interest Income (continued)
Interest expense totaled $4.1 million for the fiscal year ended September 30,
1998, an increase of $454,000, or 12.3%, over the $3.7 million total recorded in
fiscal 1997. Interest expense on deposits increased by $136,000, or 4.9%, due
primarily to a 6 basis point increase in the weighted-average cost of funds, to
4.87% during fiscal 1998. Interest expense on borrowings totaled $1.2 million
during fiscal 1998, an increase of $318,000 over fiscal 1997, due to the
previously discussed $6.1 million increase in the weighted-average balance of
advances outstanding from the Federal Home Loan Bank.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $70,000, or 3.1%, from $2.3 million for the
fiscal year ended September 30, 1997, to $2.2 million for fiscal 1998. The
interest rate spread declined by 22 basis points during fiscal 1998 to 1.95%,
while the net interest margin declined by 31 basis points year-to-year,
amounting to 2.45% in fiscal 1998.
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 $12,000 provision for losses on loans during the fiscal year ended September
30, 1998, as compared to $9,000 for fiscal 1997. 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 $45,000, or 70.0%, from $64,000 for the fiscal year
ended September 30, 1997 to $109,000 for fiscal 1998. The increase was due
primarily to a $36,000 increase in gain on sale of investment and
mortgage-backed securities during the year.
General, Administrative and Other Expense
General, administrative and other expense increased by $107,000, or 7.6%, to a
total of $1.5 million for the year ended September 30, 1998, as compared to $1.4
million for fiscal 1997. The increase resulted primarily from an increase of
$48,000, or 6.0%, in employee compensation and benefits, a $25,000, or 9.7%,
increase in occupancy and equipment expense and a $23,000, or 11.5% increase in
other operating expenses. The increase in employee compensation and benefits
resulted from normal merit increases and additional staffing levels, while the
increases in occupancy and equipment resulted from the addition of new computer
technology and other related corporate expenses, respectively.
5
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1998 and 1997 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $264,000 for the fiscal year
ended September 30, 1998, a decrease of $49,000 from the $313,000 total in
fiscal 1997. The decrease resulted primarily from a $135,000, or 14.4%, decrease
in pre-tax earnings. The effective tax rates for the years ended September 30,
1998 and 1997 were 32.8% and 33.3%, respectively.
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.
6
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1997 and 1996 (continued)
Net Interest Income (continued)
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.
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.
7
<PAGE>
Harvest Home Financial Corporation
AVERAGE YIELD ANALYSIS
The following table presents for the periods indicated, the total amount of
interest income from average interest-earning assets and the resulting yields,
and the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. Balances are based on average
monthly balances which, in the opinion of management, do not differ materially
from daily balances.
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $46,391 $3,571 7.70% $43,929 $3,457 7.87%
Mortgage-backed securities 33,391 2,085 6.24 25,938 1,654 6.38
Investment securities 5,900 402 6.81 9,846 675 6.86
Interest-bearing deposits and other 5,008 309 6.17 3,538 197 5.57
------- ------ -------- ------- ------ --------
Total interest-earning assets 90,690 6,367 7.02 83,251 5,983 7.19
Non-interest-earning assets 2,031 2,153
------- -------
Total assets $92,721 $85,404
====== ======
Interest-bearing liabilities:
Deposits
NOW accounts $ 3,533 77 2.18 $ 3,477 110 3.16
Passbook 9,264 250 2.70 9,057 252 2.78
Money market demand deposits 4,354 130 2.99 4,436 144 3.25
Certificates 42,814 2,465 5.76 40,909 2,280 5.57
Borrowings 21,738 1,221 5.62 15,615 903 5.78
------ ----- -------- ------ ------ --------
Total interest-bearing liabilities 81,703 4,143 5.07 73,494 3,689 5.02
----- -------- ----- --------
Non-interest-bearing liabilities 770 1,608
-------- -------
Total liabilities 82,473 75,102
Stockholders' equity 10,248 10,302
------ ------
Total liabilities and stockholders' equity $92,721 $85,404
====== ======
Net interest income; interest rate spread (1) $2,224 1.95% $2,294 2.17%
===== ======== ===== ========
Net yield (net interest income as a percent of average
interest-earning assets) 2.45% 2.76%
======== ========
Ratio of average interest-earning assets to average
interest-bearing liabilities 111.00% 113.28%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
1996
Average Interest
outstanding earned/ Yield/
balance paid rate
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $40,432 $3,159 7.81%
Mortgage-backed securities 12,505 767 6.13
Investment securities 15,250 1,026 6.73
Interest-bearing deposits and other 4,896 257 5.25
------- ------ --------
Total interest-earning assets 73,083 5,209 7.13
Non-interest-earning assets 1,215
-------
Total assets $74,298
======
Interest-bearing liabilities:
Deposits
NOW accounts $ 2,753 74 2.69
Passbook 9,671 270 2.79
Money market demand deposits 4,746 144 3.03
Certificates 40,639 2,326 5.72
Borrowings 2,885 155 5.37
------- ------ --------
Total interest-bearing liabilities 60,694 2,969 4.89
----- --------
Non-interest-bearing liabilities 1,017
-------
Total liabilities 61,711
Stockholders' equity 12,587
------
Total liabilities and stockholders' equity $74,298
======
Net interest income; interest rate spread (1) $2,240 2.24%
===== ========
Net yield (net interest income as a percent of averag
interest-earning assets) 3.07%
========
Ratio of average interest-earning assets to average
interest-bearing liabilities 120.41%
======
</TABLE>
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
8
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and expense during the fiscal
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended September 30,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $190 $(76) $114 $273 $25 $298
Mortgage-backed securities 469 (38) 431 855 32 887
Investment securities (269) (4) (273) (370) 19 (351)
Other interest-earning assets(1) 87 25 112 (74) 14 (60)
---- --- --- ---- ---- ----
Total interest income 477 (93) 384 684 90 774
Interest expense attributable to:
Deposits(2) 100 36 136 4 (32) (28)
Borrowings 345 (27) 318 735 13 748
--- --- --- --- ------ ---
Total interest expense 445 9 454 739 (19) 720
--- ---- --- --- ---- ---
Increase (decrease) in net interest income $ (70) $ 54
==== ====
</TABLE>
(1) Includes interest-bearing deposits in other financial institutions and
other interest-earning assets.
(2) Includes interest-bearing escrow deposits.
9
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Harvest Home's principal sources of funds are deposits, repayments on loans and
mortgage-backed securities, maturities of investment securities, and funds
provided by operations. While scheduled loan and mortgage-backed securities
amortization and maturing interest-bearing deposits and investment securities
are relatively predictable sources of funds, deposit flows and loan and
mortgage-backed securities prepayments are greatly influenced by economic
conditions, the general level of interest rates, and competition. The particular
sources of funds utilized by Harvest Home from time to time are selected based
on comparative costs and availability.
The FDIC requires savings banks to maintain a level of investments in specified
types of liquid assets sufficient to protect and ensure the safety and soundness
of the Savings Bank. The FDIC has no specific minimum guideline for liquidity.
The primary investing activities of Harvest Home include investing in loans,
mortgage-backed securities and investment securities. Such investments are
funded primarily from loans and mortgage-backed securities repayments, increases
in customer deposit liabilities and borrowings from the Federal Home Loan Bank.
During the fiscal year ended September 30, 1998, loan originations totaled $13.9
million and purchases of mortgage-backed securities totaled $27.0 million,
representing the deployment of funds from deposit growth, proceeds from Federal
Home Loan Bank advances and proceeds from maturity of investment securities.
Customer deposits increased during the fiscal year ended September 30, 1998, by
$1.4 million and increased during the fiscal year ended September 30, 1997 by
$828,000.
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 the 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 debts 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 (the sum of Tier 1 and Tier 2 capital) ratio
of 8%, of which 4% must be Tier I capital. The FDIC may, however, set higher
capital requirements when a bank's particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain a Tier
I leverage ratio, including tangible capital positions, well above the minimum
levels.
10
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
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 table sets forth the regulatory capital of Harvest Home at
September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Total Capital to Risk-Weighted Assets 23.7%
Tier I Capital to Risk-Weighted Assets 23.4%
Tier I Leverage Ratio 9.6%
</TABLE>
Effect of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments 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.
11
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
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, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS No. 125 during fiscal 1998 without material adverse
effect on the Corporation's consolidated financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
12
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on the Corporation's financial
statements.
Year 2000 Compliance Matters
As with most providers of financial services, Harvest Home's operations are
heavily dependent on information technology systems. Harvest Home is addressing
the potential problems associated with the possibility that the computers that
control or operate Harvest Home's information technology system and
infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data. Harvest
Home is working with the companies that supply or service its information
technology systems to identify and remedy any year 2000 related problems.
Harvest Home's primary data processing applications are handled by a third-party
service bureau, NCR. NCR has advised Harvest Home that it has migrated to a
fully Year 2000 compliant processing system that will be fully tested by January
1, 1999. Management has also reviewed Harvest Home's ancillary equipment and is
in the process of providing the appropriate remedial measures, including
requesting service providers to assure the Savings Bank that their systems and
products are fully year 2000 compliant. Harvest Home is in the process of
upgrading its existing teller operating system with a capital expense budget of
$150,000 - $175,000.
13
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
No assurance can be given, however, that significant expense will not be
incurred in future periods. In the unlikely event that the Savings Bank is
ultimately required to purchase replacement computer systems, programs and
equipment, or incur substantial expense to make the Savings Bank's current
systems, programs and equipment year 2000 compliant, the Savings Bank's net
earnings and financial condition could be adversely affected.
Management has developed a contingency plan which includes access to an
alternative processing site provided by NCR. Additionally, the Savings Bank can
process transactions manually for a period of several weeks, if necessary, upon
arrival of the year 2000.
In addition to possible expense related to its own systems, Harvest Home could
incur losses if loan payments are delayed due to year 2000 problems affecting
any major borrowers in Harvest Home's primary market area. Because Harvest
Home's loan portfolio is highly diversified with regard to individual borrowers
and types of businesses and Harvest Home's primary market area is not
significantly dependent upon one employer or industry, Harvest Home does not
expect any significant or prolonged difficulties that will affect net earnings
or cash flow.
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 were required for healthy commercial banks except
for a $2,000 minimum fee.
14
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Recapitalization of the Deposit Insurance Fund (continued)
Legislation was enacted to recapitalize the SAIF that provided 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 could be regulated as a bank holding company 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 a six year period, commencing in fiscal 1999.
15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Harvest Home Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Harvest Home Financial Corporation as of September 30, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years ended September 30, 1998, 1997 and 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Harvest Home
Financial Corporation as of September 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the years ended
September 30, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Cincinnati, Ohio
November 12, 1998
16
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 1,505 $ 558
Federal funds sold 200 2,600
Interest-bearing deposits in other financial institutions 1,182 2,106
------- -------
Cash and cash equivalents 2,887 5,264
Investment securities designated as available for sale - at market 4,032 8,039
Mortgage-backed securities designated as available for sale - at market 37,864 32,466
Loans receivable - net 48,797 45,229
Office premises and equipment - at depreciated cost 1,117 981
Federal Home Loan Bank stock - at cost 1,606 1,219
Accrued interest receivable on loans 257 245
Accrued interest receivable on mortgage-backed securities 173 139
Accrued interest receivable on investments and interest-
bearing deposits 47 126
Prepaid expenses and other assets 114 73
Prepaid federal income taxes - 51
------- ---------
Total assets $96,894 $93,832
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $60,225 $58,786
Advances from the Federal Home Loan Bank 25,850 24,000
Advances by borrowers for taxes and insurance 119 107
Accrued interest payable 126 89
Other liabilities 230 253
Accrued federal income taxes 65 -
Deferred federal income taxes 302 253
-------- --------
Total liabilities 86,917 83,488
Commitments - -
Stockholders' equity
Common stock - 2,000,000 shares of no par value authorized;
991,875 shares issued - -
Additional paid-in capital 6,903 6,884
Retained earnings - restricted 5,191 5,043
Shares acquired by Employee Stock Ownership Plan (301) (378)
Shares acquired by Recognition and Retention Plan (291) (389)
Unrealized gains on securities designated as available
for sale, net of related tax effects 87 40
Less 129,518 and 77,018 shares of treasury stock - at cost (1,612) (856)
------- --------
Total stockholders' equity 9,977 10,344
------- ------
Total liabilities and stockholders' equity $96,894 $93,832
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended September 30,
(In thousands, except share data)
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $3,571 $3,457 $3,159
Mortgage-backed securities 2,085 1,654 767
Investment securities 402 675 1,026
Interest-bearing deposits and other 309 197 257
------ ------ ------
Total interest income 6,367 5,983 5,209
Interest expense
Deposits 2,922 2,786 2,814
Borrowings 1,221 903 155
----- ------ ------
Total interest expense 4,143 3,689 2,969
----- ----- -----
Net interest income 2,224 2,294 2,240
Provision for losses on loans 12 9 1
------- -------- --------
Net interest income after provision
for losses on loans 2,212 2,285 2,239
Other income
Gain on sale of investment and mortgage-backed securities 43 7 2
Other operating 66 57 72
------- ------- -------
Total other income 109 64 74
General, administrative and other expense
Employee compensation and benefits 851 803 1,032
Occupancy and equipment 282 257 254
Federal deposit insurance premiums 36 28 498
Franchise taxes 124 121 124
Other operating 223 200 228
------ ------ ------
Total general, administrative and
other expense 1,516 1,409 2,136
----- ----- -----
Earnings before income taxes 805 940 177
Federal income taxes
Current 241 130 150
Deferred 23 183 (105)
------- ------ ------
Total federal income taxes 264 313 45
------ ------ -------
NET EARNINGS $ 541 $ 627 $ 132
====== ====== ======
EARNINGS PER SHARE
Basic $.63 $.71 $.16
=== === ===
Diluted $.60 $.70 $.16
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1998, 1997 and 1996
(In thousands, except share data)
Unrealized
Shares gain (loss)
acquired on securities
Additional by stock designated as
Common paid-in Retained benefit available Treasury
stock capital earnings plans for sale stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $- $9,473 $5,021 $ (794) $- $ (994) $12,706
Net earnings for the year ended
September 30, 1996 - - 132 - - - 132
Cash distributions of $3.40 per share - (2,796) (366) - - - (3,162)
Purchase of treasury shares - at cost - - - - - (80) (80)
Amortization of expense related to stock
benefit plans - 18 - 120 - - 138
Purchase of shares for recognition and
retention plan - 45 - (486) - 441 -
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - - (9) - (9)
-- ----- ----- ------ ----- ------ ---------
Balance at September 30, 1996 - 6,740 4,787 (1,160) (9) (633) 9,725
Net earnings for the year ended
September 30, 1997 - - 627 - - - 627
Cash dividends of $.40 per share - - (371) - - - (371)
Purchase of treasury shares - at cost - - - - - (223) (223)
Amortization of expense related to stock
benefit plans - 144 - 393 - - 537
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - - 49 - 49
-- ----- ----- ----- ---- ------ ---------
Balance at September 30, 1997 - 6,884 5,043 (767) 40 (856) 10,344
Net earnings for the year ended
September 30, 1998 - - 541 - - - 541
Cash dividends of $.44 per share - - (393) - - - (393)
Purchase of treasury shares - at cost - - - - - (756) (756)
Amortization of expense related to stock
benefit plans - 19 - 175 - - 194
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - - 47 - 47
-- ----- ----- ----- ---- ------ ---------
Balance at September 30, 1998 $- $6,903 $5,191 $ (592) $ 87 $(1,612) $ 9,977
== ===== ===== ====== ==== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 541 $ 627 $ 132
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (34) (34) (43)
Depreciation and amortization 57 51 51
Amortization of premiums on mortgage-backed securities 5 6 14
Amortization of premiums (discounts) on investment securities - net (33) 17 42
Gain on sale of investment and mortgage-backed securities (43) (7) (2)
Amortization expense of stock benefit plans 194 537 138
Provision for losses on loans 12 9 1
Federal Home Loan Bank stock dividends (102) (59) (40)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (12) (36) (23)
Accrued interest receivable on mortgage-backed securities (34) (37) (47)
Accrued interest receivable on investments and interest-
bearing deposits 79 85 116
Prepaid expenses and other assets (41) 1 15
Accrued interest payable 37 12 53
Other liabilities (23) (563) 677
Federal income taxes
Current 116 22 (57)
Deferred 23 183 (105)
--------- -------- --------
Net cash provided by operating activities 742 814 922
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 19,867 2,644 1,144
Purchase of mortgage-backed securities (26,992) (18,205) (12,972)
Proceeds from sale of mortgage-backed securities
available for sale 1,878 141 267
Proceeds from maturity of mortgage-backed securities - 3,500 -
Proceeds from maturity of investment securities 4,000 2,003 6,000
Proceeds from sale of investment securities available
for sale - 2,003 -
Principal repayments on loans 10,376 5,976 8,280
Loan disbursements (13,922) (8,913) (12,260)
Purchase of Federal Home Loan Bank stock (285) (572) -
Purchase of office equipment (193) (80) (291)
-------- --------- --------
Net cash used in investing activities (5,271) (11,503) (9,832)
------- ------ -------
Net cash used in operating and investing
activities (balance carried forward) (4,529) (10,689) (8,910)
------- ------ -------
</TABLE>
20
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $ (4,529) $(10,689) $ (8,910)
Cash flows provided by (used in) financing activities:
Net increase in deposits 1,439 828 1,533
Proceeds from Federal Home Loan Bank advances 38,200 18,200 10,000
Repayment of Federal Home Loan Bank advances (36,350) (4,200) -
Advances by borrowers for taxes and insurance 12 11 14
Distributions and dividends on common stock (393) (371) (3,162)
Purchase of treasury stock (756) (223) (80)
-------- --------- ---------
Net cash provided by financing activities 2,152 14,245 8,305
------- ------- -------
Net increase (decrease) in cash and cash equivalents (2,377) 3,556 (605)
Cash and cash equivalents at beginning of year 5,264 1,708 2,313
------- -------- -------
Cash and cash equivalents at end of year $ 2,887 $ 5,264 $ 1,708
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 121 $ 96 $ 208
======== ========== ========
Interest paid on deposits and borrowings $ 4,106 $ 3,677 $ 2,916
======= ======== =======
Supplemental disclosure of noncash investing activities:
Transfer of investment and mortgage-backed securities
to an available for sale classification $ - $ - $25,732
======= ======== ======
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 47 $ 49 $ (9)
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harvest Home Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of Harvest Home Savings Bank, (the "Savings Bank"). The Savings Bank
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and primarily applying those
funds to the origination of loans for residential, consumer and
nonresidential purposes. The Savings Bank's profitability is significantly
dependent on net interest income, which is the difference between interest
income generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e. customer
deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest
rates paid or received by the Savings Bank can be significantly influenced
by a number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and the Savings Bank. All significant intercompany balances and
transactions have been eliminated.
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments in debt and equity securities be categorized
as held-to-maturity, trading, or available for sale. Securities classified
as held-to-maturity are carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities designated as available for sale are carried at
fair value with resulting unrealized gains or losses recorded to operations
or stockholders' equity, respectively.
22
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a Special Report on Implementation of SFAS No. 115 (the "Special
Report"), which provided for the reclassification of securities between the
held-to-maturity, available for sale and trading portfolios during a
forty-five day period, without calling into question management's prior
intent with respect to such securities. Management elected to restructure
the Corporation's securities portfolio pursuant to the Special Report, and
transferred all investment and mortgage-backed securities from the
held-to-maturity portfolio to an available for sale classification. At
September 30, 1998 and 1997, the Corporation's stockholders' equity
reflected net unrealized gains on securities designated as available for
sale totaling $87,000 and $40,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
3. Loans Receivable
Loans receivable are stated at the principal amount outstanding, adjusted
for deferred loan origination fees and the allowance for loan losses.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Interest on loans that are contractually past due is charged off, or
an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status.
If the ultimate collectibility of the loan is in doubt, in whole or in
part, all payments received on nonaccrual loans are applied to reduce
principal until such doubt is eliminated.
4. Loan Origination Fees
The Savings Bank accounts for loan origination fees in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Cost of Leases". Pursuant
to the provisions of SFAS No. 91, origination fees received from loans, net
of direct origination costs, are deferred and amortized to interest income
using the level-yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs of originating a loan, i.e.,
principally actual personnel costs. Fees received for loan commitments that
are expected to be drawn upon, based on the Savings Bank's experience with
similar commitments, are deferred and amortized over the life of the loan
using the level-yield method. Fees for other loan commitments are deferred
and amortized over the loan commitment period on a straight-line basis.
23
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the
level of delinquent and problem loans, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a loan charge-off equal to the
difference between the fair value of the property securing the loan and the
loan's carrying value. Major loans (including development projects) and
major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which requires
that impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or, as
an alternative, at the loan's observable market price or fair value of the
collateral. The Savings Bank's current procedures for evaluating impaired
loans result in carrying such loans at the lower of cost or fair value.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and its
evaluation of impairment thereof, such loans are collateral dependent, and
as a result, are carried as a practical expedient at the lower of cost or
fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
At September 30, 1998 and 1997, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
24
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
forty years for buildings, ten to forty years for building improvements, and
five to ten years for furniture and equipment. An accelerated method is used
for tax reporting purposes.
7. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the
amount determined at the recording date. In determining the lower of cost or
fair value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
8. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and
its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax
assets are recorded only to the extent that the amount of net deductible
temporary differences or carryforward attributes may be utilized against
current period earnings, carried back against prior years' earnings, offset
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, Federal Home Loan Bank stock
dividends, certain components of retirement expense, the general loan loss
allowance and percentage of earnings bad debt deductions. Additional
temporary differences result from depreciation computed using accelerated
methods for tax purposes.
25
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit Plans
The Savings Bank provides a supplemental retirement plan to certain key
officers. The Savings Bank's obligations under the supplemental plan have
been funded via the purchase of key man life insurance policies for which
the Savings Bank is the beneficiary. Expense under the supplemental plan
totaled approximately $1,000 during each of the fiscal years ended September
30, 1998, 1997 and 1996.
The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides
retirement benefits for substantially all full-time employees who have
completed one year of service. The Corporation accounts for the ESOP in
accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting
for Employee Stock Ownership Plans". SOP 93-6 requires that compensation
expense recorded by employers equal the fair value of ESOP shares allocated
to participants during a given fiscal year. Expense recognized related to
the ESOP totaled approximately $111,000, $48,000 and $342,000 for the years
ended September 30, 1998, 1997 and 1996, respectively.
The Corporation also has a Recognition and Retention Plan ("RRP"). During
fiscal 1996, the RRP purchased 39,675 shares of the Corporation's common
stock in the open market and 34,712 of such shares were granted to executive
officers and members of the Board of Directors of the Corporation. Common
stock granted under the RRP vests ratably over a five year period,
commencing in December 1995. A provision of $97,000, $97,000 and $73,000
related to the RRP was charged to expense for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
10. Earnings Per Share and Dividends Per Share
Basic earnings per share for the years ended September 30, 1998, 1997 and
1996 is computed based upon the weighted-average shares outstanding during
the period, less 28,252, 36,774 and 65,933 shares, respectively, in the ESOP
that are unallocated and not committed to be released. Weighted-average
common shares deemed outstanding totaled 859,891, 881,720 and 849,627 for
the years ended September 30, 1998, 1997 and 1996, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
894,437, 893,942 and 851,025 for the fiscal years ended September 30, 1998,
1997 and 1996, respectively.
26
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Earnings Per Share and Dividends Per Share (continued)
Effective during the fiscal year ended September 30, 1998, the Corporation
began presenting earnings per share pursuant to the provisions of SFAS No.
128, "Earnings Per Share." Accordingly, the fiscal 1997 and 1996 earnings
per share presentation has been revised to conform to the provisions of SFAS
No. 128.
During fiscal 1996, the Corporation declared capital distributions of $3.40
per common share. Of this amount, $3.00 per share was paid in September 1996
from funds retained by the Corporation in the conversion to stock form and
was deemed by management to constitute a return of excess capital.
Accordingly, the Corporation charged the return of capital distribution to
additional paid-in-capital. Additionally, management believes that
approximately $.33 and $.37 of the fiscal 1998 and 1997 distributions,
respectively, constituted a tax-free return of capital.
11. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September
30, 1998 and 1997:
Cash and cash equivalents: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
27
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts and consumer and
other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair value of NOW accounts, passbook accounts,
money market demand and escrow deposits is deemed to
approximate the amount payable on demand. Fair values for
fixed-rate certificates of deposit have been estimated using a
discounted cash flow calculation using the interest rates
currently offered for deposits of similar remaining
maturities.
Advances from the Federal Home Loan Bank: The fair value of
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At September 30, 1998 and 1997, the
difference between the fair value and notional amount of loan
commitments was not material.
28
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments at September 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,887 $ 2,887 $ 5,264 $ 5,264
Investment securities 4,032 4,032 8,039 8,039
Mortgage-backed securities 37,864 37,864 32,466 32,466
Loans receivable 48,797 50,590 45,229 46,244
Stock in Federal Home Loan Bank 1,606 1,606 1,219 1,219
------- ------- ------- -------
$95,186 $96,979 $92,217 $93,232
====== ====== ====== ======
Financial liabilities
Deposits $60,225 $61,304 $58,786 $58,938
Advances from Federal Home Loan Bank 25,850 25,775 24,000 23,837
Escrow deposits 119 119 107 107
-------- -------- -------- --------
$86,194 $87,198 $82,893 $82,882
====== ====== ====== ======
</TABLE>
12. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions with original maturities of less than ninety
days.
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
29
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at September 30, 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
obligations $4,005 $27 $- $4,032
===== == == =====
</TABLE>
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
obligations $7,972 $67 $- $8,039
===== == == =====
</TABLE>
The amortized cost and estimated fair values of U.S. Government agency
obligations by contractual term to maturity at September 30 are shown below:
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $4,005 $4,032 $3,971 $4,013
Due after one year through
five years - - 4,001 4,026
----- ----- ----- -----
$4,005 $4,032 $7,972 $8,039
===== ===== ===== =====
</TABLE>
30
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at September 30, 1998
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation:
Participation certificates $ 6,140 $ 3 $ 26 $ 6,117
Collateralized mortgage obligations 15,358 8 29 15,337
Federal National Mortgage Association:
Participation certificates 3,068 29 37 3,060
Collateralized mortgage obligations 13,193 172 15 13,350
------ --- ---- ------
Total mortgage-backed securities $37,759 $212 $107 $37,864
====== === === ======
</TABLE>
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation:
Participation certificates $ 2,236 $ 19 $ 37 $ 2,218
Collateralized mortgage obligations 6,471 10 4 6,477
Federal National Mortgage Association:
Participation certificates 4,058 30 53 4,035
Collateralized mortgage obligations 19,709 65 38 19,736
------ ---- ---- ------
Total mortgage-backed securities $32,474 $124 $132 $32,466
====== === === ======
</TABLE>
31
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities, by contractual terms to
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without
prepayment penalties.
<TABLE>
<CAPTION>
September 30,
1998 1997
(In thousands)
<S> <C> <C>
Due within three years $ 1,010 $ 1,145
Due in three to five years 5,713 2,169
Due in five to ten years - 1,253
Due in ten to twenty years 2,857 834
Due after twenty years 28,179 27,073
------ ------
$37,759 $32,474
====== ======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $41,214 $39,821
Home equity lines of credit 1,275 1,130
Multifamily 1,367 1,402
Construction 4,663 1,513
Nonresidential real estate and land 3,024 2,554
Deposit account 25 45
--------- ---------
51,568 46,465
Less:
Undisbursed portion of loans in process 2,556 1,019
Deferred loan origination fees 88 102
Allowance for loan losses 127 115
-------- --------
$48,797 $45,229
</TABLE>
32
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Savings Bank's lending efforts have historically
focused on one-to-four family residential and multifamily residential real
estate loans, which comprise approximately $46.0 million, or 94%, of the
total loan portfolio at September 30, 1998, and $42.8 million, or 95%, of
the total loan portfolio at September 30, 1997. Generally, such loans have
been underwritten on the basis of no more than an 80% loan-to-value ratio,
which has historically provided the Savings Bank with adequate collateral
coverage in the event of default. Nevertheless, the Savings Bank, as with
any lending institution, is subject to the risk that residential real estate
values could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the belief
that residential real estate values in the Savings Bank's primary lending
area are presently stable.
The Savings Bank has sold participating interests in loans in the secondary
market, retaining servicing on the loans sold. Loans sold and serviced for
others totaled approximately $196,000, $250,000 and $350,000 at September
30, 1998, 1997 and 1996, respectively.
In the ordinary course of business, the Savings Bank has granted loans to
some of its directors, officers and their related business interests. All
loans to related parties have been made on substantially the same terms as
those prevailing at the time for unrelated third parties. The aggregate
dollar amount of loans to officers and directors was approximately $157,000,
$156,000 and $181,000 at September 30, 1998, 1997 and 1996, respectively.
During the fiscal year ended September 30, 1998, $18,000 of new loans were
disbursed to officers and directors, while principal repayments of $17,000
were received from officers and directors.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $115 $111 $110
Provision for losses on loans 12 9 1
Charge-off of loans - (5) -
-- ----- --
Balance at end of year $127 $115 $111
=== === ===
</TABLE>
33
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
At September 30, 1998, the Savings Bank's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
At September 30, 1998, 1997 and 1996, the Savings Bank's nonaccrual and
nonperforming loans totaled $49,000, $95,000 and $164,000, respectively.
Interest income which would have been recognized if such loans had performed
pursuant to contractual terms totaled approximately $2,000, $6,000 and
$7,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following at September
30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land and improvements $ 119 $ 119
Office buildings and improvements 1,397 1,230
Furniture, fixtures and equipment 474 492
Automobile 14 14
------- -------
2,004 1,855
Less accumulated depreciation 887 874
------ ------
$1,117 $ 981
===== ======
</TABLE>
34
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-average 1998 1997
interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts - 1.84% in 1998 and
2.69% in 1997 $ 3,208 5.3 $ 2,699 4.6%
Super NOW accounts - 2.75% in 1998
and 1997 253 .4 300 .5
Passbook accounts - 2.53% in 1998
and 2.79% in 1997 9,494 15.8 9,143 15.6
Money market demand deposit -
3.00% in 1998 and 1997 4,107 6.8 4,332 7.4
------- ------- ------- -------
Total demand, transaction and
passbook deposits 17,062 28.3 16,474 28.1
Certificates of deposit:
Original maturities of:
Less than 12 months
5.13% in 1998 and 5.09% in 1997 3,163 5.3 3,547 6.0
12 months
5.15% in 1998 and 5.87% in 1997 21,945 36.4 21,993 37.4
18 months
5.86% in 1998 and 5.82% in 1997 4,760 7.9 4,634 7.9
30 months
5.80% in 1998 and 5.79% in 1997 5,254 8.7 4,297 7.3
48 months
5.13% in 1998 and 5.03% in 1997 13 - 72 .1
More than 48 months
6.12% in 1998 and 1997 8,028 13.4 7,769 13.2
------- ------ ------- ------
Total certificates of deposit 43,163 71.7 42,312 71.9
------ ------ ------ ------
Total deposits $60,225 100.0% $58,786 100.0%
====== ===== ====== =====
</TABLE>
At September 30, 1998 and 1997, the Savings Bank had certificate of deposit
accounts with balances greater than $100,000 totaling $2.9 million and $2.5
million, respectively.
35
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
Interest expense on deposit accounts is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Money market demand deposit accounts $ 130 $ 144 $ 144
Passbook and escrow accounts 254 256 270
NOW and Super NOW accounts 73 107 74
Certificates of deposit 2,465 2,279 2,326
----- ----- -----
$2,922 $2,786 $2,814
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than six months $13,202 $13,423
Six months to one year 16,864 19,090
One to two years 6,976 3,536
Two to three years 4,358 3,548
Three to four years 341 2,338
Over four years 1,422 377
------- --------
$43,163 $42,312
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1998 by pledges of certain residential mortgage loans totaling $38.8 million
and the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
Interest Rate Maturing fiscal September 30,
year ending in 1998 1997
(In thousands)
<S> <C> <C> <C>
6.53% 1998 $ - $ 3,200
5.58% 2000 3,000 -
5.71% 2006 - 6,500
5.43% - 5.71% 2007 950 14,300
4.66% - 5.64% 2008 21,900 -
------ -------
$25,850 $24,000
====== ======
Weighted-average interest rate 5.26% 5.82%
==== ====
</TABLE>
36
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE H - COMMITMENTS
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Savings Bank's involvement in such financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Savings Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet instruments.
At September 30, 1998, the Savings Bank had commitments for unused lines of
credit under home equity loans of $2.7 million. Management believes that
such loan commitments are able to be funded through cash flow from
operations and existing excess liquidity. Fees received in connection with
these commitments have not been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Savings Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Savings Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral on loans may vary but the preponderance of loans
granted generally include a mortgage interest in real estate as security.
NOTE I - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate for the years ended September 30 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $274 $320 $60
Decrease in taxes resulting from:
Other (10) (7) (15)
---- ----- --
Federal income tax provision per consolidated
financial statements $264 $313 $45
=== === ==
</TABLE>
37
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at
September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate:
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 43 $ 39
Stock benefit plans 25 25
Other - 3
--- ------
Total deferred tax assets 68 67
Deferred tax liabilities:
Percentage of earnings bad debt deduction (125) (125)
Deferred loan origination costs (24) (17)
Federal Home Loan Bank stock dividends (176) (156)
Unrealized gain on securities designated as
available for sale (45) (19)
Other - (3)
--- ------
Total deferred tax liabilities (370) (320)
---- ----
Net deferred tax liability $(302) $(253)
==== ====
</TABLE>
The Savings Bank was allowed a special bad debt deduction based on a
percentage of earnings, generally limited to 8% of otherwise taxable income
and subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. This deduction totaled
approximately $1.7 million as of September 30, 1998. If the amounts that
qualify as deductions for federal income tax purposes are later used for
purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. The approximate amount of the
unrecognized deferred tax liability relating to the cumulative bad debt
deduction is $450,000. See Note L for additional information regarding
future percentage of earnings bad debt deductions.
38
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL
The Savings Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Savings Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet specific capital guidelines
that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
During the calendar year, the Savings Bank was notified by its primary
regulator that it was categorized as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as
"well-capitalized" the Savings Bank must maintain minimum capital ratios as
set forth in the table that follows.
The FDIC has adopted risk-based capital ratio guidelines to which the
Savings Bank 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-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") 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 2") 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 losses, subject to certain
limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital (the sum of Tier 1 and Tier 2 capital)
ratio of 8%, of which 4% must be Tier 1 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.
39
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings banks that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other savings banks are required to
maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
As of September 30, 1998 and 1997, management believes that the Savings Bank
met all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $9,419 23.7% =>$3,174 =>8.0% =>$3,967 =>10.0%
Tier I capital
(to risk-weighed assets) $9,292 23.4% =>$1,587 =>4.0% =>$2,380 => 6.0%
Tier I leverage $9,292 9.6% =>$3,860 =>4.0% =>$4,825 => 5.0%
</TABLE>
<TABLE>
<CAPTION>
1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $8,679 25.1% =>$2,762 =>8.0% =>$3,453 =>10.0%
Tier I capital
(to risk-weighed assets) $8,564 24.8% =>$1,381 =>4.0% =>$2,072 => 6.0%
Tier I leverage $8,564 9.3% =>$3,698 =>4.0% =>$4,622 => 5.0%
</TABLE>
The Savings Bank's management believes that, under the current regulatory
capital regulations, the Savings Bank will continue to meet its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Savings Bank, such as increased interest rates or a downturn
in the economy in the primary market areas, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
40
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - STOCK OPTION PLAN
The Board of Directors adopted a Stock Option Plan that provided for the
issuance of 129,333 shares (adjusted) of authorized, but unissued shares of
common stock at fair value at the date of grant. During fiscal 1996, the
Corporation granted options to purchase 74,297 shares to members of the
Board of Directors and executive officers at an initial fair value of $12.25
per share. The number of shares granted under option and the exercise price
were adjusted to 96,879 and $9.42 per share, respectively, in fiscal 1997 to
give effect to the return of capital distribution. As of September 30, 1998,
none of the stock options granted had been exercised.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share would have resulted in the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $541 $627 $132
=== === ===
Pro-forma $541 $627 $ 34
=== === ====
Earnings per share
Basic As reported $.63 $.71 $.16
=== === ===
Pro-forma $.63 $.71 $.04
=== === ===
Diluted As reported $.60 $.70 $.16
=== === ===
Pro-forma $.60 $.70 $.04
=== === ===
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1996: dividend yield
of 5.5%, expected volatility of 20.0%, a risk-free interest rate of 6.5% and
expected lives of ten years.
41
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of
September 30, 1998, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 96,879 $9.42 74,297 $12.25 - $ -
Adjustment for return of capital
distribution - $ - 22,582 $ 9.42 - $ -
Granted - $ - - $ - 74,297 $12.25
Exercised - $ - - $ - - $ -
Forfeited - $ - - $ - - $ -
------- --------- ------- --------- ------- ---------
Outstanding at end of year 96,879 $9.42 96,879 $ 9.42 74,297 $12.25
====== ==== ====== ====== ====== =====
Options exercisable at year-end 96,879 $9.42 96,879 $ 9.42 74,297 $12.25
====== ==== ====== ====== ====== =====
Weighted-average fair value of
options granted during the year N/A N/A $ 1.99
=== === ======
</TABLE>
The following information applies to options outstanding at September 30,
1998:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding 96,879
Range of exercise prices $9.42
Weighted-average exercise price $9.42
Weighted-average remaining contractual life 7.25 years
</TABLE>
NOTE L - LEGISLATIVE MATTERS
The deposit accounts of the Savings Bank and of other savings associations
are insured by the Federal Deposit Insurance Corporation ( "FDIC") through
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
through 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 and 1997, no BIF assessments were required
for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided 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 held $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 fiscal 1996.
42
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE L - LEGISLATIVE MATTERS (continued)
Under separate legislation related to the recapitalization plan, the Savings
Bank is required to recapture as taxable income approximately $370,000 of
its tax 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 bad debt deduction in the future. The Savings Bank has provided
deferred taxes for this amount and will be permitted to amortize the
recapture of the bad debt reserve in taxable income over six years
commencing in fiscal 1999.
NOTE M - CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of Harvest Home Financial Corporation as of September 30, 1998 and
1997, and the results of its operations and its cash flows for the three
years ended September 30, 1998, 1997 and 1996.
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
ASSETS 1998 1997
<S> <C> <C>
Cash and cash equivalents $ 130 $ 355
Mortgage-backed securities designated as available for
sale - at market 397 1,020
Loan receivable from ESOP 301 378
Investment in Harvest Home Savings Bank 9,370 8,585
Prepaid expenses and other 69 44
--------- ---------
Total assets $10,267 $10,382
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 290 $ 38
Stockholders' equity
Common stock and additional paid-in capital 6,903 6,884
Retained earnings 5,191 5,043
Shares acquired by stock benefit plans (592) (767)
Unrealized gain on securities designated as available
for sale, net of tax effects 87 40
Less treasury stock - at cost (1,612) (856)
------- --------
Total stockholders' equity 9,977 10,344
------- ------
Total liabilities and stockholders' equity $10,267 $10,382
====== ======
</TABLE>
43
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL
CORPORATION (continued)
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
For the year ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Revenue
Interest income $ 57 $108 $274
Other income 26 27 44
Equity in earnings of Harvest Home Savings Bank 542 602 156
--- --- ---
Total revenue 625 737 474
General and administrative expenses 98 100 354
---- --- ---
Earnings before income taxes (credits) 527 637 120
Federal income taxes (credits) (14) 10 (12)
---- ---- ----
NET EARNINGS $541 $627 $132
=== === ===
</TABLE>
44
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL CORPORATION
(continued)
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 541 $627 $ 132
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Accretion of discounts on mortgage-backed securities (4) (4) (7)
Undistributed earnings of consolidated subsidiary (542) (602) (156)
Amortization expense of employee benefit plans 8 144 -
Gain on sale of mortgage-backed securities (6) - -
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (25) 66 67
Other liabilities 257 (199) 126
------ --- ------
Net cash provided by operating activities 229 32 162
Cash flows provided by (used in) investing activities:
Proceeds from repayment of loan to ESOP 77 296 120
Proceeds from maturities of investment securities - - 2,000
Proceeds from sale of mortgage-backed securities 337 - -
Principal repayments on mortgage-backed securities 281 228 491
------ --- ------
Net cash provided by investing activities 695 524 2,611
Cash flows provided by (used in) financing activities:
Payment of dividends on common stock (393) (371) (3,162)
Purchase of treasury stock (756) (223) (80)
Proceeds from sale of treasury stock - - 486
----- -- ------
Net cash used in financing activities (1,149) (594) (2,756)
----- --- -----
Net increase (decrease) in cash and cash equivalents (225) (38) 17
Cash and cash equivalents at beginning of year 355 393 376
------ --- ------
Cash and cash equivalents at end of year $ 130 $355 $ 393
====== === ======
</TABLE>
45
EXHIBIT 22
SUBSIDIARY OF HARVEST HOME FINANCIAL CORPORATION
Name: Harvest Home Savings Bank d/b/a Harvest Home Savings Bank
State of Incorporation: Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,505
<INT-BEARING-DEPOSITS> 1,182
<FED-FUNDS-SOLD> 200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,896
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 48,797
<ALLOWANCE> 127
<TOTAL-ASSETS> 96,894
<DEPOSITS> 60,225
<SHORT-TERM> 0
<LIABILITIES-OTHER> 842
<LONG-TERM> 25,850
0
0
<COMMON> 0
<OTHER-SE> 9,977
<TOTAL-LIABILITIES-AND-EQUITY> 96,894
<INTEREST-LOAN> 3,571
<INTEREST-INVEST> 2,487
<INTEREST-OTHER> 309
<INTEREST-TOTAL> 6,367
<INTEREST-DEPOSIT> 2,922
<INTEREST-EXPENSE> 4,143
<INTEREST-INCOME-NET> 2,224
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 1,516
<INCOME-PRETAX> 805
<INCOME-PRE-EXTRAORDINARY> 541
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541
<EPS-PRIMARY> .63
<EPS-DILUTED> .60
<YIELD-ACTUAL> 2.45
<LOANS-NON> 49
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 115
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 127
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 127
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<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> 627
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-PRIMARY> .71
<EPS-DILUTED> .70
<YIELD-ACTUAL> 2.76
<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>
