SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For fiscal year ended September 30, 1997
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________________ to ____________________
Commission file number 0-25300
HARVEST HOME FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio 31-1402988
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3621 Harrison Avenue, Cheviot, Ohio 45211
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (513) 661-6612
Securities registered pursuant to 12(b) of the Exchange Act:
None
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
Common shares without par value
(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X YES NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year. $6.0 million
Based upon the bid price provided by the NASDAQ system, the aggregate
market value of voting stock held by non-affiliates of the issuer on December
26, 1997 was $14.50.
914,857 shares of issuer's common shares were issued and outstanding as of
December 26, 1997, this total is net of 77,018 shares of issuer's common
stock repurchased as treasury shares.
Page 1 of 57 sequentially numbered pages.
Index to Exhibits on page 56.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's annual report to security-holders furnished to the
Commission under Rule 14a-3 or 14c-3; Registrant's definitive proxy statement
filed in accordance with Rule 14a-101, Schedule 14a filed on November 28, 1997.
PART I
Item 1. Description of Business
Harvest Home Financial Corporation ("HHFC", or the "Corporation") was
incorporated in February 1994 under Ohio Law for the purpose of acquiring all of
the capital stock issued by Harvest Home Savings Bank in connection with its
conversion from a state chartered mutual savings bank to a state chartered stock
savings bank (the "Conversion"). The Conversion was consummated on October 7,
1994 and, as a result, the Corporation became a unitary savings and loan holding
company for its wholly owned subsidiary, Harvest Home Savings Bank ("Harvest
Home" or the "Bank"). The Corporation has no significant assets other than the
Bank's common stock acquired in the Conversion and that portion of the net
proceeds of the Conversion retained by the Corporation and has no significant
liabilities. Future references to the Corporation or Harvest Home are utilized
herein as the context requires.
General
As a community oriented financial institution, Harvest Home seeks to serve
the financial needs of the families and community businesses in its market
area. Harvest Home is principally engaged in the business of attracting
deposits from the general public (which are insured to applicable limits by the
Savings Association Insurance Fund) and using such deposits to originate
residential loans in its primary market area. To a lesser extent, Harvest
Home also originates construction loans and loans secured by multi-family
residential real estate, nonresidential real estate, and deposits. In addition,
Harvest Home invests in mortgage-backed securities, other investment grade
securities, and short-term liquid assets. Harvest Home also offers a Visa
credit card program through a commercial bank.
Harvest Home conducts business from its main office in Cheviot, Ohio and
from two full-service branch offices located in the Cincinnati area. Harvest
Home's primary market area consists of western Hamilton County, Ohio, although
its market also extends to the remainder of Hamilton County and to the townships
contiguous to Hamilton County in the counties of Butler, Clermont, and Warren.
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding HHFC at the
dates and for the periods indicated. The financial information should be read
in conjunction with the consolidated financial statements and notes thereto
included elsewhere herein.
<TABLE>
At September 30,
<CAPTION>
Selected Financial
condition
and other data: 1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $93,832 $78,718 $69,532 $72,765 $64,925
Cash and cash
Equivalent(1) 5,264 1,708 2,313 16,333 9,541
Investment
Securities at cost 0 0 18,032 9,992 6,125
Investment securities
available for sale
at market 8,039 12,105 0 0 0
Mortgage-backed
Securities at cost 0 20,429 9,009 8,243 9,545
Mortgage-backed Securities
available for Sale
at Market 32,466 20,429 0 0 0
Loans receivable
- - net 45,229 42,267 38,245 36,319 38,012
Deposits 58,786 57,958 56,425 67,810 60,470
Advances from the FHLB 24,000 10,000 0 0 0
Stockholders'
Equity(2) 10,344 9,725 12,706 4,581 4,166
Number of:
Real estate loans
outstanding 1,054 1,038 1,000 1,052 975
Deposit accounts 8,035 8,466 8,309 6,987 7,536
Full service
offices 3 3 3 3 3
Summary of Earnings: Year Ended September 30,
1997 1996 1995 1994 1993
(In thousands)
Interest income $5,983 $5,209 $4,872 $4,187 $4,584
Interest expense 3,689 2,969 2,569 2,387 2,676
Net interest income 2,294 2,240 2,303 1,800 1,908
Provision for
loan losses 9 1 12 9 59
Net interest income after
provision for loan losses 2,285 2,239 2,291 1,791 1,849
Other income 64 74 50 53 56
General, administrative
and other expense 1,409 2,136 1,372 1,216 1,158
Earnings before
income taxes 940 177 969 628 747
Federal income taxes 313 45 329 213 257
Net earnings $ 627 $ 132 $ 640 $ 415 $ 490
(1) Includes cash, federal funds sold and interest-bearing deposits in other
financial institutions.
(2) Consists of only retained earnings at September 30, 1993 through 1994,
inclusive.
</TABLE>
<TABLE>
<CAPTION>
At September 30,
Selected Financial
ratios: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest rate spread
(difference between
average yield on interest-
earning assets and
average cost of interest-
bearing liabilities) 2.17% 2.24% 2.48% 2.63% 2.81%
Net interest margin
(net interest income as
a percentage of average
interest earning assets) 2.76 3.07 3.27 2.82 3.07
Return on equity (net
earnings divided
by average equity) 6.09 1.05 5.09 9.49 12.50
Return on assets
(net earnings
divided by average
total assets) 0.73 0.18 0.89 0.64 0.76
Equity-to-assets ratio
(average equity divided
by average
total assets) 12.06 16.94 17.56 6.70 6.10
Loans loss reserve
as a percentage
of non-performing
loans 121.05% 67.68% 76.92% 268.57% N/M(1)
(1) Not meaningful.
</TABLE>
Lending Activities
General. Harvest Home's primary lending activity is the origination
of conventional mortgage loans for its own portfolio secured by one-to four-
family residential properties located in Harvest Home's primary market area. To
a lesser extent, loans for the construction of one- to four-family homes,
mortgage loans on multifamily properties containing five units or more and
nonresidential properties, and secured home equity loans are also offered by
Harvest Home. In addition to mortgage lending, Harvest Home makes a limited
amount of consumer loans secured by deposits.
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of Harvest Home's loan portfolio at
the dates indicated.
<TABLE>
At September 30
1997 1996 1995 1994 1993
<CAPTION>
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
Type of Loan:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
loans:
Construction loans $ 1,513 3.4% $ 3,290 7.8% $ 1,505 3.9% $ 1,660 4.6% $ 1,022 2.7%
1-4 family and multi-
family (1) 42,353 93.6 38,210 90.4 34,002 87.8* 32,898 90.6 34,308 90.2
Nonresidential real
estate and land 2,554 5.7 3,281 7.8 3,341 8.8 3,101 8.5 3,365 8.9
Deposit accounts 45 .1 42 .1 83 .2 90 0.2 127 0.3
46,465 102.8 44,823 106.1 38,931 101.8 7,749 103.9 38,822 102.1
Less:
Loans in process (1,019) (2.3) (2,320) 5.5 (428) (1.1) (1,148) (3.2) (465) (1.2)
Deferred loan
origination fees ( 102) ( .2) ( 125) .3 (148) ( .4) ( 184) (0.5) (253) (0.7)
Allowance for loan losses ( 115) ( .3) ( 111) .3 (110) ( .3) ( 98) (0.2) (92) (0.2)
Total Loans $45,229 100.0% $42,267 100.0% $38,245 100.0% $36,319 100.0% $38,012 100.0%
Type of Security:
Residential real
estate:
1-4 family $42,464 93.9% $39,978 94.6% $34,117 89.2% $32,818 90.4% $33,379 87.7%
Other dwelling 1,402 3.1 1,522 3.6 1,390 3.6 1,740 4.8 1,951 5.2
Nonresidential real estate 2,554 5.7 3,281 7.8 3,341 8.8 3,101 8.5 3,365 8.9
Deposit Accounts 45 .1 42 .1 83 .2 90 0.2 127 0.3
$46,465 102.8% $44,823 106.1 38,931 101.8 37,749 103.9 38,822 102.1
Less:
Loans in process (1,019) (2.3) (2,320) 5.5 (428) (1.1) (1,148) (3.2) (465) (1.2)
Deferred loan
origination fees (102) ( .2) ( 125) .3 (148) ( .4) (184) (0.5) (253) (0.7)
Allowance for loan losses ( 115) ( .3) ( 111) .3 (110) ( .3) ( 98) (0.2) ( 92) (0.2)
Total Loans $45,229 100.0% $42,267 100.0% $38,245 100.0% $36,319 100.0% $38,102 100.0%
(1) Includes home equity lines of credit underwritten on the same basis as
first mortgage loans.
(2)
</TABLE>
Loans. The following table sets forth certain information as of
September 30, 1997 regarding the dollar amount of loans maturing in Harvest
Home's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10- Due 20
Due during years years 20 years or more
The years after after after years
September 30, 9/30/97 9/30/97 9/30/97 after
1998 1999 2000 9/30/97 Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2)
One to four family
residential
Adjustable $1,146 $38 $ 30 $126 $703 $10,603 $7,858 $20,504
Fixed 19 18 70 1,185 4,567 12,763 2,102 20,724
Multi-family
residential(2):
Adjustable 60 60 0 22 312 948 0 1,402
Non-residential 31 0 14 185 615 1,709 0 2,554
Deposit Account loans 45 0 0 0 0 0 0 45
Total loans $1,301 $116 $114 $1,518 $6,197 $26,023 $9,960 $45,229
(1) Amounts shown are net of loans in process of $1,019,000, deferred loan
origination fees of $102,000 and allowance for loan losses of $115,000.
(2) Includes construction loans and land loans.
</TABLE>
The following table sets forth the dollar amount of all loans due
after one year from September 30, 1997, which have predetermined interest rates
and floating or adjustable interest rates:
<TABLE>
<CAPTION>
Predetermined Floating or
Rates adjustable rate Total
(In thousands)
<S> <C> <C> <C>
Mortgage Loans:
One- to four-
family residential $20,705 $19,358 $40,063
Multi-family
residential 0 1,342 1,342
Nonresidential 0 2,523 2,523
Total loans: $20,705 $23,223 $43,928
</TABLE>
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of Harvest Home has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Harvest Home's primary market area. In addition,
Harvest Home makes second mortgage loans, as well as home equity lines of credit
underwritten on the same basis as first mortgage loans. Harvest Home also has a
small percentage of loans secured by property located outside its primary market
area including a small percentage secured by real estate located in nearby south
eastern Indiana and northern Kentucky. Each of such
loans is secured by a mortgage on the underlying real estate and improvements
thereon, if any.
Regulations limit the amount which Harvest Home may lend in relationship to
the appraised value of the real estate and improvements at the time of loan
origination. Within the parameters of such regulations, Harvest Home makes
fixed rate loans on single family, owner occupied residences up to 80% of the
value of the real estate and improvements (the "Loan-to-Value Ratio" or "LTV")
for terms not to exceed 15 years and adjustable-rate mortgage loans ("ARMs") up
to 89% LTV. Harvest Home does not require private mortgage insurance for such
loans. Harvest Home recently began offering ARMs for terms not to
exceed 25 years in amounts up to 95% LTV and requires private mortgage
insurance for such loans. Harvest Home also offers loans to low and moderate
income borrowers for first time purchase of single family owner occupied
residences. These loans can be obtained for up to 95% of the property's
purchase price at a discounted fixed interest rate for a period of up to 25
years, and require private mortgage insurance.
ARMs are offered by Harvest Home for terms of up to 30 years. The interest
rate adjustment period on the ARMs is three years which is tied to changes in
the weekly average yield on U.S. Treasury securities, adjusted to a constant
maturity of one year as made available by the Board of Governors of the Federal
Reserve System (the "Index"). The interest rate for the next three-year period
is increased or decreased by the amount of the change in the Index between the
date the interest rate was set and the date of the three-year adjustment rounded
to the nearest one-quarter percent. The maximum allowable adjustment at each
adjustment date is usually 2% with a maximum adjustment of 5% over the term of
the loan. ARMs generally have an increased risk of delinquency in periods of
rising interest rates due to the increasing monthly payments required of
borrowers. Harvest Home has in the past issued three-year ARMs tied to
different indexes. One such index is tied to a one-year (our most current
index) constant maturity U.S. Treasury Index. Another index is tied to the
interest rates being charged by Harvest Home for similar type loans at the time
of the interest rate change. Borrowers are qualified at the contract rate at
the time of origination of the loan.
Harvest Home's one- to four-family residential real estate loan portfolio
was approximately $42.5 million at September 30, 1997, and represented 94% of
total loans at such date. At such date, loans secured by one- to four-family
residential real estate with outstanding balances of $645,000, or 1.5%, of the
total one- to four-family residential real estate loan balance, were delinquent.
See "Delinquent Loans, Non-Performing Assets and Classified Assets."
Multifamily Residential Real Estate Loans. In addition to loans on one-
to four-family properties, Harvest Home makes loans secured by multi-family
properties containing over four units. Multi-family loans generally have terms
of up to 20 years and a maximum LTV of 80%. Such loans are currently made with
adjustable interest rates.
Multi-family lending is generally considered to involve a higher degree of
risk because the loan amounts are larger and the borrower typically depends upon
income generated by the project to cover operating expenses and debt service.
The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Harvest Home attempts to reduce the risk associated with multi-family lending
by evaluating the credit-worthiness of the borrower and the projected income
from the project, and by obtaining personal guarantees on loans made to
corporations and partnerships, and, where deemed necessary, Harvest Home obtains
additional collateral. Harvest Home currently requires that borrowers agree to
submit financial statements annually to enable Harvest Home to monitor the loan,
although no such requirement existed until 1993.
At September 30, 1997, Harvest Home had $1.4 million of multi-family
residential real estate loans, representing 3% of total loans at that date.
At such date no such loans were delinquent.
Construction Loans. Harvest Home makes construction loans for residential and
non-residential real estate. Such loans are structured to become permanent
loans upon completion of construction. Residential construction loans are
offered at fixed rates for terms up to 15 years, and at adjustable rates up to
30 years. Non-residential construction loans are offered at adjustable rates
for terms up to 20 years. The majority of the construction loans originated by
Harvest Home are made to owner-occupants for construction of single family
homes. The remainder are made for non-owner occupied properties to builders for
small projects, some of which have not been pre-sold, and to other small
commercial developers.
Construction loans for non-owner occupied properties generally involve
greater underwriting and default risks than do loans secured by mortgages on
existing properties due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on real
estate developments, developers, managers and builders. In addition,
construction loans in general are more difficult to evaluate and monitor. Loan
funds are advanced upon the security of the project under construction, which is
more difficult to value before the completion of construction. Moreover,
because of the uncertainties inherent in estimating construction costs, it is
relatively difficult to evaluate accurately the LTVs and the total loan funds
required to complete a project. In the event a default on a construction loan
occurs and foreclosure follows, Harvest Home would have to take control of the
project and attempt either to arrange for completion of construction or dispose
of the unfinished project. Harvest Home's construction loans generally are
secured by property located in Harvest Home's primary market area. Construction
loans secured by property outside the primary lending area are secured by
property in Eastern Hamilton County and surrounding counties, all within the
State of Ohio; such loans are made on the same terms and conditions as those
within the primary lending area and pose no more risk than those within the
primary lending area.
At September 30, 1997, Harvest Home had $1.5 million of construction loans,
or 3% of its loan portfolio, none of which were delinquent.
Nonresidential Real Estate Loans and Land Loans. Harvest Home also makes
loans secured by nonresidential real estate consisting primarily of retail
stores, warehouses, and office buildings. Such nonresidential loans are made
only with adjustable rates of interest. Such loans have terms of up to 20 years
and a maximum LTV of 75%. The largest loan of this type at September 30, 1996
had a principal balance of $449,354 and was secured by a retail shopping center
and the residence of the borrower, both located in Harvest Home's primary market
area.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Harvest Home has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property, and appraisals supporting the
property's valuation. Harvest Home currently requires borrowers to agree to
submit financial statements annually to allow Harvest Home to monitor the loan,
although no such requirement existed until 1993.
At September 30, 1997, Harvest Home had a total of $2.6 million invested
in nonresidential real estate loans. Such loans comprised approximately 6% of
Harvest Home's total loans at such date. At such date, $31,000 or 1% of
nonresidential real estate loans were non-performing.
Deposit Account Loans. Harvest Home makes consumer loans, exclusively to
depositors on the security of their deposit accounts. Such loans are made at
adjustable rates of interest, and the principal amount of the loan cannot exceed
the face value of the pledged deposit. Interest is due quarterly, and principal
is due on demand.
At September 30, 1997, Harvest Home had approximately $45,000 or .1% of
total loans, invested in deposit loans.
Home Equity Lines of Credit and Second Mortgages. Harvest Home offers home
equity lines of credit. These are typically secured by second mortgages, but
with some being secured by first mortgages. The line of credit agreements
currently being offered by Harvest Home provide that borrowers can obtain
advances up to their credit limit for a period of fifteen years, and after that
time, the borrowers must repay the outstanding balance over a period of the next
ten years. Harvest Home has offered in the past home equity lines of credit
which are open ended and have no required repayment period or fixed termination
date. These lines of credit may, however, be terminated at any time by either
party.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Harvest Home's lending
staff, and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
Harvest Home obtains a credit report, verification of employment, and other
documentation concerning the credit-worthiness of the borrower. An appraisal
of the fair market value of the real estate which will be given as security for
the loan is prepared by an independent fee appraiser approved by the Board of
Directors. For residential properties, an environmental study is conducted only
if the appraiser or a director has reason to believe that an environmental
problem may exist. For most non-residential properties, an environmental report
is required. For most multi-family and nonresidential mortgage loans, a
personal guarantee is required. Upon the completion of the appraisal and the
receipt of information on the borrower, the application for a loan is submitted
to the Executive Committee and/or the Board of Directors for approval or
rejection. Loan applications which do not exceed $100,000 generally can be
approved by the Harvest Home's designated loan officer as long as the loan
conforms to all underwriting requirements.
If a mortgage loan application is approved, an attorney's opinion of title
is obtained on the real estate which will secure the mortgage loan. Harvest
Home does not obtain title insurance. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Harvest Home as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications, and estimates of construction costs. Harvest Home
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Harvest Home's loans contain provisions that the entire balance of the loan
is due upon sale of the property securing the loan.
Loan Originations, Purchases, and Sales. During the past several years,
Harvest Home has been actively originating new fixed-rate and adjustable-rate
loans. All loans originated during that period have been held in portfolio.
Harvest Home has not sold a loan since 1984. Harvest Home does not process
loans on forms accepted on the secondary market. Management believes other
significant secondary market guidelines are followed. While there are no
current plans to do so, Harvest Home may sell loans in the future if management
deems it in the best interest of Harvest Home. Prior to 1981, Harvest Home
originated mortgage loans only at fixed rates. Beginning in 1981, Harvest Home
originated only adjustable-rate loans. In the late '80s, Harvest Home again
began originating a limited amount of fixed-rate mortgage loans, up to maximum
terms of 15 years, which are held in its portfolio in addition to ARMs.
Harvest Home generally does not participate in loans originated by other
institutions. Harvest Home had in its portfolio participations originated and
serviced for others totalling approximately $250,000 at September 30, 1997.
Harvest Home will consider participation in loans in the future if management
deems it to be in the interest of Harvest Home.
The following table presents Harvest Home's mortgage loan originations and
mortgage-backed securities purchases, and sales activity for the periods
indicated:
<TABLE>
Year Ended September 30,
<CAPTION>
1997 1996 1995 1994
Loans Originated: (In thousands)
<S> <C> <C> <C> <C>
Construction $ 1,625 $ 3,488 $ 962 $1,269
1 to 4 Family 6,261 7,082 5,466 5,480
Home equity line
of credit 532 570 385 242
5 or more units 0 220 0 0
Nonresidential
real estate 485 844 0 188
Deposit Accounts 0 56 85 60
Total loans
Originated $ 8,913 $12,260 $6,898 $7,239
Loans and
mortgage-backed
securities
purchased:
Loans $ 0 $ 0 $ 0 $ 0
Insured,
guaranted or
collaterized
mortgage-backed
securities 18,205 12,972 2,013 1,000
Total loans and
mortgage-backed
securities
purchased $18,205 $12,972 $2,013 $1,000
Loans and mortgage-
backed securities
sold:
Residential real
estate loans $ 0 $ 0 $ 0 $ 0
Mortgage-backed
Securities 141 267 0 0
Total loans and
mortgage-backed
securities sold $ 141 $ 267 $ 0 $ 0
</TABLE>
Regulations generally limit the aggregate amount that a savings bank can lend
to one borrower to an amount equal to 15% of the savings bank's unimpaired
capital and unimpaired surplus (collectively, "Unimpaired Capital"). A savings
bank may loan to one borrower an additional amount not to exceed 10% of the
association's Unimpaired Capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." In applying these limits, the regulations
require that loans to certain related or affiliated borrowers be aggregated.
Based on such limits, Harvest Home could have made loans in an aggregate
principal amount of $1.3 million to one borrower at September 30, 1997.
At that date, Harvest Home had no loans in excess of such limits.
Loan Origination and Other Fees. Harvest Home realizes loan origination fee
and other fee income from its lending activities, and also realizes income from
late payment charges, and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income, varying
with the volume of lending, loan repayments, and general economic conditions.
All nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized in accordance with SFAS No. 91 as an
adjustment to yield over the life of the related loan.
Delinquent Loans, Non-Performing Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Harvest Home attempts to
cause the deficiency to be cured by contacting the borrower. In most cases,
deficiencies have been cured promptly.
Loans originated by Harvest Home before 1981 required payment of interest in
advance. Although the mortgage documents require payments on the first of each
month, borrowers were told that payments would not be treated as delinquent if
made by the last working day of that month.
Loans originated commencing in 1981 require interest in arrears, and payments
are due on the first day of the following month.
The following collection procedures are generally used:
A. When a loan payment is in arrears beyond the late payment date, a
notice of late payment is generated by the on-line computer system and
mailed to the borrower. A copy of the notice is filed in the loan file.
B. When a loan payment exceeds the due date by thirty days, the loan is
scheduled for individual attention. Additional late notices are sent to
the borrower followed by a telephone call, if necessary.
C. When a loan payment exceeds the due date by sixty days and personal
contact has not cured the delinquency, a ten-day collection letter is
sent to the borrower by the Savings Bank's attorney. When a delinquent
loan account is referred to the attorney for collection, the borrower is
restricted from making any payment other than the total amount due as of
the date of payment.
D. If the procedures outlined in C above have not cured the delinquency,
legal action is filed against the borrower.
Real estate acquired by Harvest Home as a result of foreclosure proceedings is
classified as real estate owned ("REO") until it is sold. When property is so
acquired, it is recorded by Harvest Home at the lower of the book value of the
related loan or the estimated fair value of the real estate, less selling
expenses at the date of acquisition, and any write-down resulting therefrom is
charged to the allowance for loan losses. Interest accrual, if any, ceases no
later than the date of acquisition of the real estate, and all costs incurred
from such date in maintaining the property are expensed. Costs relating to the
development and improvement of the property are capitalized to the extent of
fair value. Harvest Home has had only two parcels of REO during the last three
years.
Harvest Home places loans on non-accrual status when the collectibility of the
loan is in doubt or when a loan is more than ninety days delinquent in interest
payments.
The following table reflects the amount of loans in a delinquent status as of
the dates indicated:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996 September 30, 1995
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 13 $461 1.02% 11 $267 .63% 19 $574 1.50%
60 - 89 days 5 376 .83% 3 132 .31% 1 9 .02%
90 days and over 2 95 .21% 4 164 .39% 6 143 .38%
Total delinquent
loans 20 $932 2.06% 18 $563 1.33% 26 $726 1.90%
(1) At September 30, 1997, delinquencies include 17 one-to-four family
residential loans with principal balances totaling $645,000, 1 multi-residential
loan with a principal balance of $208,000 and 2 non-residential loans with
principal balances totaling $79,000.
</TABLE>
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>
At September 30,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Accruing loans
delinquent 90
days or more $ 0 $ 0 $ 0
Loans accounted for
on a nonaccrual basis:
Real Estate:
Residential 64 132 109
Nonresidential 31 32 34
Deposit Account 0 0 0
Total nonaccrual loans 95 164 143
Other non-performing
assets 0 0 0
Total non-performing
assets $ 95 $164 $143
Total non-performing
assets as a percentage
of total assets .10% .21% .20%
Specific loan loss
allowance $ 0 $ 0 $ 0
General loan loss
allowance (unallocated
as to any specific
loan type) 115 111 110
Total loan loss allowance $115 $111 $110
Loan loss allowance
as a percent of
non-performing loans 121.1% 67.7% 76.9%
Loan loss allowance as
a percent of non-
performing assets 121.1% 67.7% 76.9%
</TABLE>
Harvest Home had 2 nonperforming loans at September 30, 1997 and 4 non-
performing loans at September 30, 1996. During the periods shown, Harvest Home
had no restructured loans within the meaning of SFAS No. 15.
Harvest Home's classification policy provides for the classification of loans
and other assets such as debt and equity securities considered to be of lesser
quality as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that Harvest Home will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are designated "special mention" by management.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
Generally, Harvest Home classifies as "substandard" all loans that are more
than 90 days delinquent unless management believes the delinquency status is
short-term due to unusual circumstances. Loans delinquent fewer than 90 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate.
The aggregate amounts of Harvest Home's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Substandard $219 $252 $432
Doubtful 0 0 0
Loss $ 0 $ 0 $ 0
Total classified
assets $219 $252 $432
</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, 1997, 1996, and 1995, Harvest
Home's allowance for loan losses totaled $115,000, $111,000, and $110,000,
respectively, none of which was allocated to a particular type of loan at any
such dates. Due to the absence of any material loss on any loan in recent
years, the Board of Directors of Harvest Home does not believe such a specific
allocation is necessary.
The following table sets forth an analysis of Harvest Home's allowance for
losses on loans for the periods indicated. Harvest Home had no recoveries
during such periods.
<TABLE>
<CAPTION>
For the year ended September 30,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at
beginning of year $111 $110 $ 98
Loans charged-off (5) 0 0
Recoveries 0 0 0
Provision for losses
on loans (charged to
operations) 9 1 12
Balance at end of period $115 $111 $110
Ratio of allowance for
losses on loans to
non-accrual loans 121.1% 67.7% 76.9%
Ratio of allowance
for losses on loans
to total loans 0.25% 0.25% 0.28%
</TABLE>
Harvest Home increased its allowance for loan losses from $98,000 at
September 30, 1994, to $115,000 at September 30, 1997, due to (1) Harvest Home's
feeling that its new primary regulator would require an increase although there
is no such current agreement or requirement to increase the allowance, and (2)
an increase in the loan portfolio. There were no disagreements with Harvest
Home's primary regulator as to the amount of the allowance following the 1994
fiscal year provision. Because the loan loss allowance is based on estimates,
it is monitored regularly on an ongoing basis and adjusted as necessary to
provide an adequate allowance.
Mortgage-backed and Related Securities
Harvest Home faces significant competition for loans in its primary market
area. This competitive factor, coupled with the declining interest rate
environment over the past several years has limited the opportunities for
originating adjustable rate mortgage loans. As a result, Harvest Home has
purchased adjustable rate mortgage-backed securities, as well as mortgage
related securities such as CMO/REMICs as interest-rate sensitive portfolio
investments.
Harvest Home's adjustable rate mortgage-backed securities are guaranteed
as to principal and interest by GNMA, FNMA and FHLMC. At September 30, 1997,
$24.1 million, or 74.2% of Harvest Home's mortgage-backed securities were
adjustable rate.
CMO/REMICs are securities derived by reallocating cash flows from mortgage
backed securities or pools of mortgage loans in order to create multiple
classes, or tranches of securities with coupon rates that differ from the
underlying collateral as a whole. Harvest Home invests in these securities as
an interest rate sensitive investment portfolio alternative to mortgage loans.
As of September 30, 1997, Harvest Home's CMO/REMICS had estimated average lives
of approximately 20.9 years and totaled $26.2 million, or 80.7%, of the
mortgage-backed securities portfolio. All of the CMO/REMICs owned by Harvest
Home are insured or guaranteed directly, or indirectly, though mortgage-backed
securities underlying the obligations by FNMA, FHLMC, or GNMA. CMOs and REMICs
can be classified by federal regulators under certain economic scenarios as
"high risk" derivatives and are therefore potentially subject to forced
divestiture. However, due to the nature of Harvest Home's investments, i.e.,
relatively short-term to maturity, the probability of such occurrence is viewed
by management as remote.
At September 30, 1997, HHFC's investment and market value information of
mortgage-backed securities designated as available for sale was comprised of the
following:
<TABLE>
<CAPTION>
Gross Gross Gross Market
Amortized Unrealized Unrealized Value
Cost Gains Losses
(In thousands)
<S> <C> <C> <C> <C>
FHLMC participation
certificiates $ 2,236 $19 $ 37 $2,218
FHLMC CMOs 6,471 10 4 6,477
GNMA participation
certificates 0 0 0 0
FNMA participation
certificates 4,058 30 53 4,035
FNMA CMOs 19,709 65 38 19,736
$32,474 $124 $132 $32,466
</TABLE>
Investment Activities
Federal and state regulations require Harvest Home to maintain a prudent
amount of liquid assets to protect the safety and soundness of Harvest Home.
Therefore, the Board of Directors of Harvest Home has established an investment
policy to maintain safety and soundness and to provide control and guidelines
for investments purchased by the institution. In accordance with the investment
policy, Harvest Home invests in U.S. Treasury obligations, U.S. Federal agency
and federally sponsored agency obligations, federal funds sold and certificates
of deposits at insured banks. See "REGULATION".
The following table sets forth the composition of HHFC's interest-bearing
deposits and investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
Amortized % of Market % of Amortized % of Market % of Amortized % of Market % of
Cost Total Value Total Cost Total Value Total Cost Total Value Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Securities:
U.S. Gov't
& Agency
Obligations $ 7,972 57.4% $ 8,039 57.6% $11,992 87.1% $12,105 87.2% $18,032 90.4% $18,328 90.2%
Other
investments:
Interest
bearing
deposits
in other
financial
institution 2,106 15.1% 2,106 15.1% 788 5.7% 788 5.7% 345 1.7% 345 1.7%
Federal funds
Sold 2,600 18.7% 2,600 18.6% 400 2.9% 400 2.9% 1,100 5.5% 1,100 5.4%
Federal Home
Loan Bank
Stock 1,219 8.8% 1,219 8.7% 588 4.3% 588 4.3% 548 2.7% 548 2.8%
Total Investment
Securities,
Interest-
bearing
Deposits and
Other $13,897 100.0% $13,964 100.0% $13,768 100.0% $20,025 100.0% $20,321 100.0%
</TABLE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for Harvest Home's investment securities at
September 30, 1997. All of such securities mature in three years or less.
At September 30, 1997
One year or Less One to Five Years
Amortized Average Amortized Average
Cost Yield Cost Yield
(In thousands)
U.S. Government
and agency
securities $3,971 7.41% $4,001 6.31%
At September 30, 1997
Total Investment Securities
Average Life Amortized Fair Weighted
In Years Cost Value Average Yield
(in thousands)
U.S. Government
and agency
securities 1.5 $ 7,972 $ 8,039 6.77%
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Harvest
Home's funds for use in lending and other investment activities. In addition to
deposits, Harvest Home derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, income on earning assets,
and service charges. Loan payments are a relatively stable source of funds,
while deposit inflows and outflows fluctuate more in response to general
interest rates and money market conditions.
Deposits. Deposits are attracted principally from within Harvest Home's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, Super
NOW accounts, money market deposit accounts, regular passbook savings accounts,
Christmas savings accounts, term certificate accounts, and individual retirement
accounts ("IRAs"). Interest rates paid, maturity terms, service fees, and
withdrawal penalties for the various types of accounts are established
periodically by management of Harvest Home based on Harvest Home's liquidity
requirements, growth goals, and interest rates paid by competitors. Harvest
Home has never used brokers to attract deposits.
At September 30, 1997, Harvest Home's certificates of deposit totaled
$42.3 million, or 72.0% of total deposits. Of such amount, approximately $32.5
million in certificates of deposit will mature within one year. Based on past
experience and Harvest Home's prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with Harvest Home
at maturity. If there is a significant deviation from historical experience,
Harvest Home can utilize borrowings from the FHLB of Cincinnati as an
alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the various
types of savings programs offered by Harvest Home at the dates indicated:
<TABLE>
<CAPTION>
At September 30
1997 1996 1995
Percent Percent Percent
of total of total of total
Amount deposit Amount deposit Amount deposit
<S> <C> <C> <C> <C> <C> <C>
Transaction
accounts:
NOW accounts(1) $2,699 4.6% $2,647 4.6% $2,482 4.4%
Super NOW
accounts(1) 300 .5% 192 .3% 263 .5%
Passbook
savings(2) 9,143 15.6% 9,530 16.4% 9,720 17.2%
Money market
Deposit
account(3) 4,332 7.4% 4,721 8.2% 4,874 8.6%
Total
Transaction
accounts 16,474 28.1% 17,090 29.5% 17,339 30.7%
Certificates
Of Deposit(4):
4.00-5.99% 38,031 64.7% 35,004 60.4% 21,407 37.9%
6.00-7.99% 4,281 7.8% 5,864 10.1% 17,314 30.7%
8.00-9.99% 0 0 0 0 365 0.7%
Total
Certificates
of deposit 42,312 71.9% 40,868 70.5% 39,086 69.3%
Total deposits $58,786 100.0% $57,958 100.0% $56,425 100.0%
(1) Harvest Home's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September 30,
1997, 1996, and 1995, the weighted average rates on NOW accounts were
2.69%, 2.66%, and 2.61%, respectively. At September 30, 1997, 1996, and
1995, the weighted average rates of Super NOW accounts were 2.75%, 2.75%
and 2.75%, respectively.
(2) Harvest Home's weighted average interest rate paid on passbook accounts
fluctuates with the general movement of interest rates. At September 30,
1997, 1996, and 1995, the weighted average rates on passbook accounts
were 2.79%, 2.79%, and 2.79%, respectively.
(3) Harvest Home's weighted average interest rate paid on money market
deposit accounts fluctuates with the general movement of interest rates.
At September 30, 1997, 1996, and 1995, the weighted average rates on
money market accounts were 3.00%, 3.00%, and, 3.00%, respectively.
(4) IRAs are generally offered under certificate of deposit programs.
</TABLE>
The following table shows interest rate and original contractual maturity
information for Harvest Home's certificates of deposit as of September 30, 1997:
<TABLE>
<CAPTION>
Over 1 Over 2
Up to one year to 2 years to 3 Over 3
Rate Year Years Years Years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00-5.99% $25,540 $4,634 $4,040 $3,817 $38,031
6.00 - 7.99 0 0 257 4,024 4,281
Total certificates
of deposit $25,540 $4,634 $4,297 $7,841 $42,312
The following table presents the amount of Harvest Home's certificates
of deposit of $100,000, or more by the time remaining until maturity as of
September 30, 1997:
Maturity At September 30, 1997
(In thousands)
Three months or less $ 0
Over 3 months to 6 months 210
Over 6 months to 12 months 1,181
Over 12 months 762
Total $2,153
The following table sets forth Harvest Home's deposit account balance
activity for the periods indicated:
Year ended September 30
1997 1996 1995
(Dollars in thousands)
Beginning balance $57,958 $56,425 $67,810
Deposits 58,930 64,222 59,222
Withdrawals (60,904) (65,494) (73,208)
Interest credited 2,802 2,805 2,601
Ending balance $58,786 $57,958 $56,425
Net increase
(decrease) $ 828 $ 1,533 ($11,385)
Percent increase
(decrease) 1.43% 2.72% (16.8%)
Borrowings. The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See "REGULATION - Federal Home Loan Banks." As a member in good standing of the
FHLB of Cincinnati, Harvest Home is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of creditworthiness have been
met. Under current regulations, a bank must meet certain qualifications to
be eligible for FHLB advances.
Harvest Home's other sources of funds include advances from the FHLB. As
a member of the FHLB, Harvest Home is required to own capital stock in the FHLB
and is authorized to apply for advances from the FHLB. Each FHLB credit program
has its own interest rate, which may be fixed or variable and range of
maturity. The FHLB may prescribe the acceptable uses for these advances as well
as limitations on the size of the advances and repayment provisions.
The following table sets forth certain information as to Harvest Home's FHLB
advances at the date indicated:
At September 30
1997 1996 1995
(Dollars in thousands)
FHLB advances $24,000 $10,000 $ 0
Weighted average
interest rate
of FHLB Advances 5.82% 5.55% 0%
The following table sets forth the maximum balance and average balance of
FHLB advances during the periods indicated:
Year ended September 30,
1997 1996 1995
(Dollars in thousands)
Maximum Balance:
FHLB advances $24,000 $10,000 0
Average Balance:
FHLB advances 15,615 10,000 0
Weighted average
interest rate of
FHLB advances 5.82% 5.37% 0
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of income.
The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. In
managing its interest rate risk, Harvest Home begins with an objective to
increase the interest rate sensitivity of its assets by originating loans with
interest rates subject to period adjustment and market conditions and/or shorter
maturities. Harvest Home has historically had to rely upon retail deposit
accounts as a source of funds and intends to continue to do so. Management
believes that reliance on retail deposit accounts as a source of funds compared
to brokered deposits and long-term borrowings reduces the effects of interest
rate fluctuations because these deposits generally represent a more stable
source of funds.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis presents the projected maturities and
periods to repricing of a savings bank's rate sensitive assets and liabilities.
Harvest Home's cumulative one-year gap, which represents the difference between
the amount of interest sensitive assets maturing or repricing in one year and
the amount of interest sensitive liabilities maturing or repricing in the same
period was a 5.5% at September 30, 1997. A positive cumulative gap indicates
that interest sensitive assets exceed interest sensitive liabilities at a
specific date. In a rising interest rate environment, institutions with
positive maturity gaps generally experience a more rapid increase in interest
income earned on assets than the interest expense paid on liabilities.
Conversely, in an environment of falling interest rates, interest income
earned on assets will generally decrease more rapidly than the interest expense
paid on liabilities. A negative gap will have the opposite effect.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
expected to reprice or mature in each of the future years shown. The analysis
of this interest-rate sensitivity, which is prepared quarterly by a financial
advisory firm, Performance Analysis, Inc., for Harvest Home, incorporates the
assumptions set forth in the footnotes of the following table.
</TABLE>
<TABLE>
<CAPTION>
Six
Within Months
Six to One 1-3 3-5 5-10 Over 10
Months Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Loans &
Mortgage-Backed
Securities
Adjustable
Rate(1) $8,953 $5,466 $7,763 $ 0 $ 0 $ 0 $24,182
Fixed Rate(2) 1,916 2,664 5,605 4,722 6,208 2,422 23,222
Non-Residential
Adjustable
Rate(1) 420 904 1,230 0 0 0 2,554
Other Loans
Home Equity 1,130 0 0 0 0 0 1,130
Consumer 45 0 0 0 0 0 45
Investments
Core
Investments(3) 7,967 2,063 4,001 0 0 0 14,031
CMO/REMICs 22,703 1,627 1,850 0 0 0 26,180
TOTAL RATE
SENSITIVE
ASSETS $43,134 $12,724 $22,449 $4,722 $6,208 $2,422 $91,659
Interest-
bearing
liabilities
Deposits
Certificate
of Deposits(4) $ 6,142 $26,472 $6,984 $2,714 $ 0 $ 0 $42,312
Money Market
Deposits(5) 649 518 1,581 624 509 451 4,332
NOW Accts 489 350 724 471 696 269 2,999
Passbook
Accts 1,364 1,057 2,760 1,368 1,949 645 9,143
FHLB Advance 24,000 0 0 0 0 0 24,000
TOTAL RATE
SENSITIVE
LIABILITIES $32,644 $28,397 $12,049 $5,177 $3,154 $1,365 $83,164
Interest
Sensitivity
Gap 10,490 ($15,673) $10,400 ($ 455) $3,054 $1,057 $ 8,873
Cumulative
Interest Rate
Sensitivity
Gap $10,490 ($5,183) $5,217 $4,762 $7,816 $8,813 $ 8,873
Cumulative
Interest Rate
Sensitive Gap
as a Percent
of Total
Assets 11.18% (5.52%) 5.56% 5.08% 8.33% 9.46% 9.46%
__________________________________________________
(1) Includes all adjustable rate mortgage loans and mortgage-backed
securities based on contractual term to repricing.
(2) Includes all fixed-rate mortgage loans and mortgage-backed securities
which are assumed to reprice in accordance with prepayment assumptions supplied
by Harvest Home's asset/liability management software provider. Such prepayment
assumptions have been derived from prepayment assumption
models previously utilized by the OTS through December of 1992.
(3) Includes all investment securities, interest-bearing deposits and federal
funds sold.
(4) Certificates of deposit are shown repricing based on contractual terms to
maturity.
(5) Based on an approximation of OTS assumptions supplied by Harvest Home
asset/liability management provider, money market deposits, NOW accounts and
passbook accounts are assumed to decay over a five-year period.
</TABLE>
These assumptions change over time based upon changes in the economy.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable. However, the interest rate
sensitivity of Harvest Home's assets and liabilities illustrated in the table
above would vary substantially if different assumptions were used or if actual
experience differed from that indicated by such assumptions.
Competition
Harvest Home competes for deposits with other savings banks and associations,
commercial banks and credit unions, and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Harvest Home competes with other savings banks and
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, and other lenders. Harvest Home competes for loan
originations primarily through the interest rates and loan fees it charges, and
through the efficiency and quality of services it provides to borrowers.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors which are not readily predictable.
Due to Harvest Home's size relative to the many other financial institutions
in its market area, management believes that Harvest Home has a small share of
the deposit and loan markets.
The size of financial institutions competing with Harvest Home is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Harvest Home.
The following table sets forth, for the years and at the date indicated, the
weighted average yields earned on Harvest Home's interest-earning assets, the
weighted average interest rates paid on interest-bearing liabilities, the
interest rate spread and the net interest margin on interest-earning assets.
Such yields and costs are derived by dividing income or expense by the average
balances of assets or liabilities, respectively, for each period presented.
Year ended September 30,
1997 1996 1995
Weighted average yield on loan portfolio 7.87% 7.81% 8.00%
Weighted average yield on mortgage
backed securities 6.38 6.13 5.74
Weighted average yield on investment
securities 6.86 6.73 6.39
Weighted average yield on other
interest-earning assets 5.57 5.25 3.86
Weighted average yield on all
interest-earning assets 7.19 7.13 6.92
Weighted average interest rate
paid on deposits 4.81 4.87 4.44
Interest rate spread
(spread between weighted average
interest rate on all
interest-bearing assets and all
interest-bearing liabilities) 2.17 2.24 2.48
Net yield (net interest income
as a percentage of average
interest-earning assets 2.76 3.07 3.27
REGULATION
General
Harvest Home is an Ohio chartered savings bank, a member of the FHLB System,
and its deposits are insured by the FDIC through the SAIF. Harvest Home is
subject to examination and regulation by the FDIC and the Superintendent
("Superintendent") of the Ohio Department of Commerce, Division of Savings and
Loans/Savings Banks ("Division") and to regulations governing such matters as
capital standards, mergers, establishment of branch offices, subsidiary
investments and activities, and general investment authority. Such examination
and regulation is intended primarily for the protection of depositors and the
SAIF.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which was enacted on August 9, 1989, effected a major restructuring
of the federal regulatory scheme applicable to savings institutions. Among
other things, FIRREA abolished the Federal Home Loan Bank Board and Federal
Savings and Loan Insurance Corporation ("FSLIC"), many of the previous
regulatory functions of which are now under the control of the Office of Thrift
Supervision ("OTS") and the FDIC. Regulatory functions relating to deposit
insurance and to conservatorship and receiverships of federally insured
savings institutions, including savings banks, are now exercised by the FDIC.
FIRREA contains provisions affecting numerous aspects of the operations and
regulation of federally insured savings banks, and empowered the FDIC to
promulgate regulations implementing the provisions of FIRREA, including
regulations defining certain terms used in the statute as well as regulations
exercising or defining the limits of regulatory discretion conferred by the
statute.
As a creditor and a financial institution, Harvest Home is subject to the
Community Reinvestment Act ("CRA") and to various regulations promulgated by the
Board of Governors of the Federal Reserve System (the "FRB") including, without
limitation, regulations relating to equal credit opportunity, reserves,
electronic fund transfers, truth in lending, availability of funds, and truth in
savings. As creditors of loans secured by real property and as owners of real
property, financial institutions, including Harvest Home, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property. Harvest Home is also subject to the
usury laws of Ohio and other states in which it makes loans. In Ohio, there is
a maximum interest rate applicable to mortgage loans secured by the borrower's
residence which is no greater than eight percent in excess of the discount rate
on ninety-day commercial paper in effect at the federal reserve bank in the
fourth federal reserve district. There are also limitations on interest rates
for other loans, such as consumer loans, and limitations on the amounts of fees
which may be charged in connection with such loans.
The FDIC has extensive enforcement authority over Ohio chartered savings
banks, including Harvest Home. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders, and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a state savings
bank on the basis of an institution's financial condition include: (i)
insolvency, in that the assets of the savings bank are less than its liabilities
to depositors and others; (ii) substantial dissipation of assets or earnings
through violations of law or unsafe or unsound practices; (iii) existence of an
unsafe or unsound condition to transact business; (iv) likelihood that the
savings bank will be unable to meet the demands of its depositors or to pay its
obligations in the normal course of business; and (v) insufficient capital, or
the incurring or likely incurring of losses that will deplete substantially all
the institution's capital with no reasonable prospect of replenishment of
capital without federal assistance.
Division Regulation
The Ohio Superintendent is responsible for the regulation and supervision
of Ohio savings banks in accordance with the laws of the State of Ohio. Ohio
law prescribes the permissible investments and activities of Ohio savings banks,
including the types of lending that such banks may engage in and the investments
in real estate, subsidiaries and corporate or government securities that such
banks may make. The ability of Ohio savings banks to engage in these state
authorized investments generally is subject to oversight and approval by the
FDIC.
The Ohio Superintendent must approve any mergers involving, or acquisitions
of control of, Ohio savings banks. The Ohio Superintendent may initiate certain
supervisory measures or formal enforcement actions against Ohio savings banks.
Ultimately, if the grounds provided by law exist, the Superintendent may place
an Ohio savings bank in conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of Harvest Home
approximately once a year. Such examinations are usually conducted jointly with
the FDIC. The Ohio Superintendent imposes assessments on Ohio savings banks
based on the savings bank's asset size to cover the cost of supervision and
examination.
In addition to being governed by the laws of Ohio specifically governing
savings banks Harvest Home is also governed by Ohio corporate law, to the extent
such law does not conflict with the laws specifically governing savings banks.
Since the enactment of FIRREA, all state-chartered institutions have
generally been limited to activities and investments of the type and in the
amount authorized for federally chartered institutions, notwithstanding state
law. The FDIC is authorized to permit such associations to engage in state
authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments and investment in junk bonds) for institutions
that meet fully phased-in capital requirements if it is determined that such
activities or investments do not to pose a significant risk to the SAIF. All
non-subsidiary equity investments and junk bonds must be divested by July 1,
1994, pursuant to an FDIC-approved divestiture plan. The FDIC restrictions on
state-chartered institutions have not been material to the operations of Harvest
Home.
Transactions with Affiliates with the laws specifically governing savings banks.
Since the enactment of FIRREA, all state-chartered institutions have generally
been limited to activities and investments of the type and in the amount
authorized for federally chartered institutions, notwithstanding state law. The
FDIC is authorized to permit such associations to engage in state authorized
activities or investments that do not meet this standard (other than
non-subsidiary equity investments and investment in junk bonds) for institutions
that meet fully phased-in capital requirements if it is determined that such
activities or investments do not to pose a significant risk to the SAIF. All
non-subsidiary equity investments and junk bonds must be divested by July 1,
1994, pursuant to an FDIC-approved divestiture plan. The FDIC restrictions on
state-chartered institutions have not been material to the operations of Harvest
Home.
Transactions with Affiliatestantially the same, or at least favorable, to the
savings institution or the subsidiary as those provided to a nonaffiliate. The
term "covered transaction" includes the making of loans or other extensions of
credit to an affiliate, the purchase of assets from an affiliate, the purchase
of, or an investment in, the securities of an affiliate, the acceptance of
securities of an affiliate as collateral for a loan or extension of credit to
any person, or issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. In addition to the restrictions imposed by Section
23A and 23B, no savings institution may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities that are
permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes, or similar obligations of any affiliate,
except for affiliates that are subsidiaries of the savings institution.
Further, current federal law has extended to savings institutions the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers, and principal stockholders. Under
Section 22(b), loans to directors, executive officers and stockholders who own
more than 10% of a savings institution (18% in the case of institutions located
in an area with less than 30,000 in population), and certain affiliated entities
of any of the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the savings institution's loan-to
borrower limit as established by federal law (as discussed below). Section
22(h) also prohibits loans above amounts prescribed by the appropriate federal
banking agency to directors, executive officers, and shareholders who own more
than 10% of a savings institution, and their respective affiliates, unless such
loan is approved in advance by a majority of the board of directors of the
savings institution. Any "interested" director may not participate in the
voting. The FRB has prescribed the loan amount (which includes all other
outstanding loans to such person) as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, pursuant to Section 22(h), the FRB requires
that loans to directors, executive officers, and principal shareholders be made
on terms substantially the same as offered in comparable transactions to other
persons.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital ratio
guidelines to which Harvest Home is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations. Risk
based capital ratios are determined by allocating assets and specified off
balance sheet commitments to four risk weighted categories, with higher levels
of capital being required for the categories perceived as representing greater
risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, certain non-cumulative perpetual
preferred stock (excluding auction rate issues) and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card
relationships, subject to certain limitations). Supplementary ("Tier II")
capital includes, among other items, cumulative perpetual and long-term limited-
life preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan and lease losses,
subject to certain limitations, less required deductions. Savings banks are
required to maintain a total risk-based capital ratio of 8%, of which 4% must be
Tier I capital. The FDIC may, however, set higher capital requirements when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the
minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
The following is a summary of Harvest Home's regulatory capital at September
30, 1997:
At September 30, 1997
Total Capital to Risk-Weighted Assets 25.1%
Tier I Capital to Risk-Weighted Assets 24.8%
Tier I Leverage Ratio 9.3%
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires each federal banking agency, including the FDIC, to revise
its risk-based capital standards within 18 months of enactment of the statute to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risk of nontraditional activities, as well
as reflect the actual performance and expected risk of loss on multi-family
mortgages. In September 1993, the FRB, the FDIC and the Office of the
Comptroller of the Currency issued a joint proposed rulemaking implementing
these revisions with respect to interest rate risk. Under the proposed rules,
an institution's assets, liabilities, and off-balance sheet positions would be
weighted by risk factors that approximate the instruments' price sensitivity to
a 200 basis point change in interest rates. Institutions with interest rate
risk exposure in excess of a threshold level could be required to hold
additional capital proportional to that risk, based either on an automatic
formula to be integrated with the risk-based capital requirements or on more
subjective recommendations of a bank's examiner. In August 1992, the
regulatory agencies requested comments on how the risk-based capital guidelines
of each agency may be revised to take account of concentration of credit risk
and the risk of nontraditional activities. The agencies indicated in September
1993 that separate rulemaking proposals on those areas would be forthcoming.
Management cannot assess at this point the impact the proposal would have on the
capital requirements of Harvest Home.
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
Management is unable to predict whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
Dividend Limitations. Under FRB supervisory policy, a bank holding company
generally should not maintain its existing rate of cash dividends on common
shares unless (i) the organization's net income available to common shareholders
over the past year has been sufficient to fully fund the dividends, and (ii) the
prospective rate of earnings retention appears consistent with the institution's
capital needs asset quality, and overall financial condition. The FDIC has
authority under the Financial Institutions Supervisory Act to prohibit a savings
bank from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice in light of the financial condition of
the savings bank. Under Ohio law HHFC and Harvest Home are prohibited from
paying a dividend which would result in insolvency. Ohio law requires Harvest
Home to obtain Division approval before payment of dividends in excess of net
profits for the current and two prior fiscal years, with certain adjustments.
The Plan provides for establishment of a liquidation account, and Harvest Home
will not be able to pay dividends which would impair regulatory capital in
liquidation accounts.
Liquidity. FDIC policy requires that savings banks maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state, or federal agency
obligations) in an amount which it deems adequate to protect the safety and
soundness of the savings bank. FDIC currently has no specific level which is
required.
Deposit Insurance. The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of federally insured banks and
thrifts and safeguards the safety and soundness of the banking and thrift
industries. FIRREA established two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations,
to be maintained and administered by the FDIC. Upon the enactment of FIRREA,
Harvest Home became a member of the SAIF and its deposit accounts became insured
by the FDIC, up to the prescribed limits.
Depository institutions are generally prohibited from converting from one
insurance fund to the other until the SAIF is recapitalized such that it reaches
a 1.25% reserve ratio, except with the prior approval of the FDIC in certain
limited cases, provided applicable exit and entrance fees are paid. The
insurance fund conversion provisions do not prohibit a SAIF member from
converting to a bank charter or merging with a bank during the moratorium, as
long as the resulting bank continues to pay the applicable insurance assessments
to the SAIF during that period and certain other conditions are met. Harvest
Home converted from a savings association charter to a savings bank charter
effective October 1, 1993. However, it does not presently intend to convert to
the BIF.
The FDIC is authorized to establish separate annual rates for deposit
insurance for members of the BIF and the SAIF. The FDIC may increase assessment
rates for either fund if necessary to restore the fund's ratio of reserves to
insured deposits to its target level within a reasonable time. Such rates must
be announced by September 30 of the succeeding calendar year. Pursuant to the
FedICIA, the FDIC has established a risk-based assessment system for both SAIF
and BIF members. Such risk is determined based on the institution's capital and
the FDIC's level of supervisory concern about the institution.
SAIF members are expected to be required to pay higher deposit insurance
premiums in the future to fund the SAIF, although it cannot be determined how
long such increased premiums would continue. By contrast, financial
institutions which are members of the BIF, are likely to experience lower
deposit insurance premiums in the future. Any such difference could place
savings banks at a competitive disadvantage.
Federal Home Loan Banks
The FHLBs, under the regulatory oversight of the Federal Housing Financing
Board, provide credit to their members in the form of advances. Harvest Home is
a member of the FHLB of Cincinnati, and must maintain an investment in the
capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1%
of the aggregate outstanding principal amount of Harvest Home's residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 5% of its advances from the FHLB. Harvest Home is
in compliance with this requirement, with an investment in FHLB of Cincinnati
stock having a book value of $588,000 at September 30, 1996.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati
is required by law to obtain and maintain a security interest in collateral in
one or more of the following categories: fully disbursed whole first mortgage
loans on improved residential property or securities representing a whole
interest in such loans; securities issued, insured, or guaranteed by the United
States government or an agency thereof; deposits in any FHLB; or other real
estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The FHLBs have established an "Affordable Housing Program" to
subsidize the interest rate of advances to member associations engaged in
lending for long-term, low-and moderate-income, owner-occupied and affordable
rental housing subsidized rates. The FHLB of Cincinnati reviews and accepts
proposals for subsidies under that program twice a year. Harvest Home has not
participated in such program.
FedICIA
FedICIA requires, among other things, federal bank regulatory authorities
to take "prompt corrective action" with respect to banks that do not meet
minimum capital requirements. For these purposes, FedICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At September
30, 1996, Harvest Home was categorized as "well capitalized."
The FDIC has adopted regulations to implement the prompt corrective action
provisions of FedICIA, effective December 19, 1992. Among other things, the
regulations define the relevant capital measures for the five capital
categories. An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio
of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. An institution is deemed to be "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based capital ratio of 4% or greater, and generally a leverage ratio of
4% or greater. An institution is deemed to be "undercapitalized" if it has a
total risk-based capital ratio of less than 8%, a Tier I risk-based capital
ratio of less than 4%, or generally a leverage ratio of less than 4%. An
institution is deemed to be "significantly undercapitalized" if it has a
total risk-based capital ratio of less than 6%, a Tier I risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%. An institution is
deemed to be "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%.
"Undercapitalized" banks are subject to growth limitations and are required to
submit a capital restoration plan. A bank's compliance with such plan is
required to be guaranteed by any company that controls the undercapitalized
institutions as described above. See "Banking Holding Company Act." If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of requirements and restrictions,
including an order by the FDIC to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cease receipt of
deposits from correspondent banks, and restrictions on compensation of executive
officers. "Critically undercapitalized" institutions may not, beginning 60 days
after becoming "critically undercapitalized," make any payment of principal or
interest on certain subordinated debt or extend credit for a highly leveraged
transaction or enter into any transaction outside the ordinary course of
business. In addition, "critically undercapitalized" institutions are subject
to appointment of a receiver or conservator.
FedICIA further directs that each federal banking agency prescribe standards
for depository institutions and depository institution holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value
to book value for publicly traded shares and such other standards as the
agency deems appropriate. The federal banking agencies have issued proposed
rulemakings, soliciting comments on the implementation of these FedICIA
provisions. HHFC cannot predict in what form such rules will eventually be
adopted or what effect such rules will have on HHFC or Harvest Home.
Bank Holding Company Act
HHFC is registered as a bank holding company and is subject to the regulations
of the Board of Governors of the Federal Reserve System the ("FRB") under the
Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies
are required to file periodic reports with, and are subject to periodic
examination by, the FRB. The FRB has issued regulations under the BHCA
requiring a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. It is the policy of the FRB
that, pursuant to this requirement, a bank holding company should stand ready to
use its resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity. Additionally, under the
FedICIA, a bank holding company is required to guarantee the compliance of any
insured depository institution subsidiary that may become "undercapitalized" (as
defined in the statute) within the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency up to the lesser
of (i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would have been necessary) to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under the BHCA, the FRB has the authority to
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
FRB's determination that such activity or control constitutes a serious risk to
the financial soundness and stability of any bank subsidiary of the bank holding
company.
HHFC is prohibited by the BHCA from acquiring direct or indirect control of
more than 5% of the outstanding shares of any class of voting stock or
substantially all of the assets of any bank or merging or consolidating with
another bank holding company without prior approval of the FRB. The BHCA also
prohibits HHFC from acquiring control of any bank operating outside the State of
Ohio unless such action is specifically authorized by the statutes of the state
where the bank to be acquired is located. Additionally, HHFC is prohibited by
BHCA from engaging in or from acquiring ownership or control of more than 5% of
the outstanding shares of any class of voting stock of any company engaged in a
nonbanking business unless such business is determined by the FRB to be so
closely related to banking as to be a proper incident thereto. The BHCA does
not place territorial restrictions on the activities of such nonbanking-related
activities.
FRB Regulations
Reserve Requirements. FRB regulations require savings and loan associations
to maintain reserves against their transaction accounts (primarily NOW accounts)
and non-personal time deposits. Such regulations generally require that
reserves of 3% be maintained against deposits in transaction accounts up to a
specified amount, presently $49 million (subject to an exemption of up to $4.3
million), and that reserves of 10% be maintained against the portion of total
transaction accounts in excess of $49.3 million. These percentages are subject
to adjustment by the FRB. At June 30, 1997, Harvest Home was in compliance
with its reserve requirements.
Truth in Savings. FedICIA included the Truth in Savings Act, which requires
the FRB to establish regulations providing for clear and uniform disclosure of
the rates, fees and terms of deposit accounts. The FRB has adopted regulations
requiring specific disclosure before an account is opened, in regularly provided
statements and in advertisements, announcements and solicitations initiated by
a depository institution. The regulations also impose substantive limits on the
methods used to determine the balance of an amount in which interest is
calculated. The regulations became effective in June 1993. The regulations
prescribe detailed disclosure of deposit account yield information, minimum
balance requirements and fees. The regulations also establish certain
recordkeeping requirements.
Capital Adequacy Guidelines for Bank Holding Companies
The FRB is the federal regulatory and examining authority for bank holding
companies. The FRB has adopted capital adequacy guidelines for bank holding
companies.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines which require a minimum ratio of total capital to risk
weighted assets (including certain off-balance sheet activities such as standby
letters of credit) of 8%. At least half of the total required capital must be
"Tier I capital," consisting principally of common stockholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder
("Tier II capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance. In addition to the risk-based capital
guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which
the bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of 3% in the case of bank holding companies
which have the highest regulatory examination ratings and are not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.
At September 30, 1997, HHFC was in compliance with this requirement.
Dividend Limitations Applicable to Bank Holding Companies
Under FRB supervisory policy, a bank holding company generally should not
maintain its existing rate of cash dividends on common stock unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fully fund dividends and (ii) the prospective rate of
earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition.
Taxation
Federal Taxation
HHFC and Harvest Home will file federal income tax returns on a separate
company basis, for the fiscal year ended September 30, 1997. HHFC is subject to
the federal tax laws and regulations which apply to corporations generally. With
certain exceptions, Harvest Home is also subject to the federal tax laws and
regulations which apply to corporations generally. One such exception permits
thrift institutions such as Harvest Home, which meet certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Code, to establish a reserve for bad debts and to make annual additions thereto
which may, within specified limits, be taken as a deduction in computing taxable
income. For purposes of the bad debt reserve deduction, loans are categorized
as "qualifying real property loans," which generally include loans secured by
improved real estate, and "nonqualifying loans," which include all other types
of loans. The amount of the bad debt reserve deduction for "nonqualifying
loans" is computed under the experience method. A thrift institution may elect
annually to compute its allowable addition to its bad debt reserves for
qualifying loans under either the experience method or the percentage of taxable
income method. For the past several years, Harvest Home used the percentage of
taxable income method because such method provided a higher bad debt deduction
than the experience method.
Under the experience method, the bad debt deduction for an addition to the
reserve for "qualifying real property loans" or nonqualifying loans" is an
amount determined under a formula based upon a moving average of the bad debts
actually sustained by a thrift institution over a period of years, or an amount
necessary to maintain a minimum reserve level amount for a statutory base year.
The percentage of taxable income used to compute the bad debt deduction is 8%.
The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for nonqualifying loans under the experience method.
The availability of the percentage of taxable income method permits qualifying
thrift institutions to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally. The effective maximum federal
income tax rate applicable to a qualifying thrift institution with taxable
income under $10 million (exclusive of any minimum tax or environmental tax),
assuming the maximum percentage bad debt deduction, is approximately 31.3%.
If less than 60% of the total dollar amount of an institution's assets (on
a tax basis) consist of specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash, and certain
governmental obligations), such institution may not deduct any addition to a bad
debt reserve and generally must include reserves in excess of that allowable
under the experience method in income over a four-year period. At September 30,
1997, at least 70% of Harvest Home's total assets were specified assets. No
representation can be made as to whether Harvest Home will meet the 60% test for
subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year. Additionally, the total bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method, or (ii)
the amount which, when added to the bad debt deduction for "nonqualifying
loans," equals the amount by which 12% of the amount comprising savings
accounts at year-end exceeds the sum of surplus, undivided profits and reserves
at the beginning of the year. At September 30, 1996, and for all prior years,
the 6% and 12% limitations did not restrict the percentage bad debt deduction
available to Harvest Home.
In addition to the regular income tax, HHFC and Harvest Home are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include (i) 100% of the
excess of a thrift institution's bad debt deduction over the amount that would
have been allowable based on actual experience, and (ii) interest on certain tax
exempt bonds issued after August 7, 1986. In addition, 75% of the amount by
which a corporation's "adjusted current earnings" exceed its alternative minimum
taxable income computed without regard to this adjustment and prior to reduction
by net operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. In addition,
for taxable years after 1986 and before 1996, HHFC and Harvest Home are also
subject to an environmental tax equal to 0.12% of the excess of alternative
minimum taxable income for the taxable year (determined without regard to net
operating losses and deduction for the environmental tax) over $2.0 million.
To the extent earnings appropriated to a thrift institution's bad debt
reserves for qualifying real property loans and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method, and to the extent of the institution's supplemental reserves
for losses on loans (the "Excess"), such Excess may not, without adverse tax
consequences, be utilized for payment of cash dividends or other distributions
to a shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first,
out of the institution's post-1951 accumulated earnings and profits; second, out
of the Excess; and third, out of such other accounts as may be proper. To the
extent a distribution by Harvest Home to HHFC is deemed paid out of its Excess
under these rules, the Excess would be reduced and Harvest Home's gross income
for tax purposes would be increased by the amount which, when reduced by the
income tax, if any, attributable to the inclusion of such amount in its gross
income, equals the amount deemed paid out of the Excess. As of September 30,
1997, Harvest Home's Excess for tax purposes totaled approximately $1.7
million. Harvest Home believes it had approximately $3.3 million of
accumulated earnings and profits for tax purposes as of September 30, 1997,
which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. See "DIVIDEND
POLICY."
The tax returns of Harvest Home have been audited or closed without audit
through fiscal year 1993. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the consolidated financial condition of HHFC.
Ohio Taxation
HHFC is subject to the Ohio corporation franchise tax, which, as applied to
HHFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth.
In computing its tax under the net worth method, HHFC may exclude 100% of
its investment in the capital stock of Harvest Home after the Conversion, as
reflected on the balance sheet of HHFC, in computing its taxable net worth as
long as it owns at least 25% of the issued and outstanding capital stock of
Harvest Home. The calculation of the exclusion from net worth is based on the
ratio of the excludable investment (net of any appreciation or goodwill included
in such investment) to total assets multiplied by the net value of the stock.
As a holding company, HHFC may be entitled to various other deductions in
computing taxable net worth that are not generally available to operating
companies.
A special litter tax is also applicable to all corporations, including HHFC,
subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Harvest Home is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Harvest Home's
book net worth determined in accordance with GAAP. As a "financial
institution," Harvest Home is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
Item 2. Properties
The following table sets forth certain information at September 30, 1996,
regarding the properties on which the main office and each branch office of
Harvest Home is located:
Approx.
Owned Date square Net
Location or leased acquired footage book value(1)
(In thousands)
Main office:
3621 Harrison Ave.
Cheviot, OH 45211 Owned Various 6,000 $430
from
1926 to
present
Branch offices:
7030 Hamilton Ave.
Cinti., OH 45231 Owned 1975 1,200 $122
3663 Ebenezer Road
Cinti., OH 45248 Owned 1985 1,000 $296
(1) At September 30, 1997, Harvest Home's office premises and equipment had
a total net book value of $981,000. For additional information regarding
Harvest Home's office premises and equipment, see Notes A-6 and E of
Notes to Consolidated Financial Statements.
Harvest Home has contracted for the data processing and reporting services
of NCR Corporation. The cost of these data processing services is approximately
$7,000 per month.
Item 3. Legal Proceedings
Neither HHFC nor Harvest Home is presently involved in any legal proceedings
of a material nature. From time to time, Harvest Home is a party to legal
proceedings incidental to its Business to enforce its security interest in
collateral pledged to secure loans made by Harvest Home.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The no par Common Stock was issued for the first time pursuant to
subscription orders on October 7, 1994. 991,875 shares were issued. The shares
are traded on the NASDAQ market. The stock opened at $10.00 per share. As of
December 26, 1997, the stock was trading at $14.50 per share.
As of December 26, 1997, there are approximately 350 holders of record of
the no par Common Stock of HHFC.
Presented below are the high and low bid prices for the Corporation's common
stock, as well as the amount of cash dividends paid on the common stock, for
each quarter of fiscal 1996. Such values do not include retail markups,
markdowns or commissions. Information relating to prices has been obtained
by the Corporation from NASDAQ for fiscal 1997.
Cash
Dividends
Fiscal year ending September 30, 1997 High Low
Quarter ending December 31, 1996 $9.875 $9.25
Quarter ending March 31, 1997 $13.00 $10.25
Quarter ending June 30, 1997 $11.25 $10.50
Quarter ending September 30, 1997 $12.125 $11.75
_________________________________
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Since its formation, the Corporation's activities have been primarily limited to
holding the stock of Harvest Home. As a result, the discussion that follows
focuses largely on the operations of Harvest Home.
Harvest Home's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income on loans
and investments and interest expense on deposits and borrowings. Like most
thrift institutions, the interest income and interest expense of Harvest Home
changes as interest rates fluctuate and assets and liabilities reprice.
Interest rates may fluctuate because of general economic conditions, the
policies of various regulatory authorities and other factors beyond Harvest
Home's control. Assets and liabilities will reprice in accordance with the
contractual terms of the asset or liability instrument and in accordance with
customer reaction to general economic trends.
Harvest Home's interest-earning assets repricing within one year after September
30, 1997, are less than interest-bearing liabilities repricing within the same
period by approximately $5.1 million, resulting in a negative cumulative oneyear
gap of 5.5% of total assets. The Corporation's interest-earning assets
repricing within three years of September 30, 1997, were $5.4 million greater
than interest bearing liabilities repricing during the same period, resulting in
a positive cumulative gap for such period of 5.9% of total assets.
In the event that interest rates rise during the forthcoming year, Harvest
Home's negative cumulative one-year gap may negatively affect earnings because
interest-bearing liabilities may reprice at a faster pace than interest-earning
assets. Further, rising interest rates could also affect Harvest Home's
earnings in a negative manner as a result of diminished loan demand and the
increased risk of delinquencies resulting from increased payment amounts on
adjustable-rate loans.
Harvest Home's earnings are also vulnerable to changes in interest rates due to
the amount of adjustable-rate mortgage loans ("ARMs") originated with low
margins and adjustment caps. In the 1980s, Harvest Home originated ARMs which
provide for interest rate adjustments every three years. Moreover, many of
these loans have adjustment caps of 2% in any three year period. Therefore, if
interest rates rise rapidly, Harvest Home may be unable to increase the interest
rates on such loans as rapidly as the cost of liabilities increase.
Notwithstanding the foregoing risks, the Bank is operating within management's
predetermined level of interest rate risk and management believes that Harvest
Home's interest rate risk posture and the strategies discussed below will result
in the Bank maintaining acceptable operating results in the current interest
rate environment.
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of income. The
interest rate spread, and therefore net interest income, can vary considerably
over time because asset and liability repricing do not coincide. Moreover, the
long-term or cumulative effect of interest rate changes can be substantial.
Interest rate risk is defined as the sensitivity of an institution's earnings
and net asset values to changes in interest rates. In managing its interest
rate risk, Harvest Home begins with an objective to increase the interest rate
sensitivity of its assets by originating loans with interest rates subject to
period adjustment and market conditions and/or shorter maturities. Harvest Home
has historically had to rely primarily upon retail deposit accounts as a source
of funds and intends to continue to do so. Management believes that reliance on
retail deposit accounts as a source of funds compared to brokered deposits and
long-term borrowings may reduce the effects of interest rate fluctuations
because these deposits generally represent a more stable source of funds.
However, in fiscal 1997 and 1996, Harvest Home has utilized FHLB advances as a
source of financing to fund purchases of certain mortgage-backed securities when
favorable spreads became available.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis presents the projected maturities and
periods to repricing of a savings bank's rate sensitive assets and liabilities.
As stated previously, Harvest Home's cumulative one-year gap, which represents
the difference between the amount of interest sensitive assets maturing or
repricing in one year and the amount of interest sensitive liabilities maturing
or repricing in the same period was a negative 5.5% of total assets at September
30, 1997. A positive cumulative gap indicates that interest sensitive assets
exceed interest sensitive liabilities at a specific date. In a rising interest
rate environment, institutions with positive repricing or maturity gaps
generally experience a more rapid increase in interest income earned on assets
than the interest expense paid on liabilities. Conversely, in an environment of
falling interest rates, interest income earned on assets will generally decrease
more rapidly than the interest expense paid on liabilities. A negative gap will
have the opposite effect.
Forward-Looking Statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Corporation's operations and the Corporation's
actual results could differ significantly from those discussed in the forward
looking statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Corporation's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for losses on loans and the effect of certain accounting pronouncements.
Discussion of Changes in Financial Condition from September 30, 1996 to
September 30, 1997
The Corporation's assets totaled $93.8 million at September 30, 1997, an
increase of $15.1 million, or 19.2%, from September 30, 1996. The increase in
total assets was funded primarily by a $14.0 million increase in Federal Home
Loan Bank advances, an $828,000, or 1.4%, increase in deposits and a $619,000
increase in stockholders' equity.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions totaled $5.3 million at September 30, 1997, an increase of $3.6
million, or 208.2%, from 1996 levels. Federal funds sold increased by $2.2
million, while interest-bearing deposits and cash increased by $1.4 million, or
103.7%. Investment securities totaled $8.0 million at September 30, 1997, a
decline of $4.1 million, or 33.6%, from the balance at September 30, 1996. This
decline resulted primarily from the maturity of $2.0 million and the sale of
$2.0 million of investment securities during the 1997 period. The proceeds were
primarily redeployed to fund new loan originations.
Mortgage-backed securities increased by $12.0 million, or 58.9%, to a total of
$32.5 million at September 30, 1997, compared to September 30, 1996, as
purchases of $18.2 million exceeded principal repayments and sales of $2.6
million and $138,000, respectively. During fiscal 1997, management purchased
$18.2 million of long-term, adjustable-rate U.S. Government agency
collateralized mortgage obligations with a weighted-average yield of 6.77%. Such
purchases were funded with proceeds from Federal Home Loan Bank advances.
Loans receivable increased by $3.0 million, or 7.0%, to a total of $45.2 million
at September 30, 1997, compared to September 30, 1996 levels. Loan
disbursements totaled $8.9 million during fiscal 1997, as compared to $12.3
million during fiscal 1996, and were partially offset by principal repayments
totaling $6.0 million. Growth in the loan portfolio consisted primarily of one
to four-family loans, which increased by $4.3 million, or 12.2%, year to year.
At September 30, 1997, Harvest Home's allowance for loan losses totaled
$115,000, representing .2% of total loans and 121.1% of nonperforming loans. At
September 30, 1996, the allowance for loan losses totaled $111,000, or .2% of
total loans, and 67.7% of nonperforming loans. Nonperforming loans amounted to
$95,000, or .1%, and $164,000, or .2%, of total assets at September 30, 1997 and
1996, respectively. Although management believes that its allowance for loan
losses at September 30, 1997, was adequate based on the available facts and
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which could adversely affect Harvest Home's
results of operations.
Deposits totaled $58.8 million at September 30, 1997, an increase of $828,000,
or 1.4%, over the $58.0 million total at September 30, 1996. The increase
resulted primarily from management's continuing efforts to maintain a moderate
rate of growth through marketing and pricing strategies.
Federal Home Loan Bank advances totaled $24.0 million at September 30, 1997, an
increase of $14.0 million, or 140.0%, over September 30, 1996, as management
elected to fund the purchase of mortgage-backed securities with variable rate,
long-term advances. These advances and the related mortgage-backed securities
reprice monthly based upon the LIBOR index. At September 30, 1997, the advances
carried a 5.82% weighted-average interest rate and are scheduled to mature
through fiscal 2007.
Shareholders' equity totaled $10.3 million at September 30, 1997, an increase of
$619,000, or 6.4%, over September 30, 1996 levels. The increase resulted
primarily from net earnings of $627,000 and a $49,000 increase in unrealized
gains on securities designated as available for sale, which were partially
offset by dividends of $371,000 and the purchase of treasury shares totaling
$223,000.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1997 and 1996
General
Net earnings for the year ended September 30, 1997, totaled $627,000, an
increase of $495,000, or 375.0%, over the $132,000 in net earnings reported for
the fiscal year ended September 30, 1996. The increase in net earnings resulted
primarily from a $727,000 decline in general, administrative and other expense,
including a one-time charge to recapitalize the Savings Association Insurance
Fund ("SAIF") totaling $368,000 which was recorded in fiscal 1996, coupled with
a $54,000 increase in net interest income, which were partially offset by a
$268,000 increase in the provision for federal income taxes.
Net Interest Income
Total interest income amounted to $6.0 million for the fiscal year ended
September 30, 1997, an increase of $774,000, or 14.9%, over fiscal 1996.
Interest income on loans totaled $3.5 million in fiscal 1997, an increase of
$298,000, or 9.4%. This increase was due primarily to a $3.5 million increase
in the weighted-average balance outstanding, coupled with an 6 basis point
increase in weighted-average yield, to 7.87% in 1997. Interest income on
mortgage-backed securities increased by $887,000, or 115.6%, as a result of a
$13.4 million increase in the weighted-average balance outstanding, coupled with
an 25 basis point increase in weighted-average yield, to 6.38% in fiscal 1997.
Interest income on investment securities and interest-bearing deposits decreased
by $411,000, or 32.0%, due primarily to a $6.8 million decrease in the weighted
average balance outstanding, which was partially offset by a 15 basis point
increase in the weighted-average yield year-to-year.
Interest expense totaled $3.7 million for the fiscal year ended September 30,
1997, an increase of $720,000, or 24.3%, over the $3.0 million total recorded in
fiscal 1996. Interest expense on deposits decreased by $28,000, or 1.0%, due
primarily to a 6 basis point decrease in the weighted-average cost of funds, to
4.81% during fiscal 1997. Interest expense on borrowings totaled $903,000
during fiscal 1997, an increase of $748,000 over fiscal 1996, due to a $12.7
million increase in the weighted-average balance of advances outstanding from
the Federal Home Loan Bank, as previously discussed.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $54,000, or 2.4%, from $2.2 million for the
fiscal year ended September 30, 1996, to $2.3 million for fiscal 1997. The
interest rate spread declined by 7 basis points during fiscal 1997 to 2.17%,
while the net interest margin declined by 31 basis points year-to-year,
amounting to 2.76% in fiscal 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management
recorded a $9,000 provision for losses on loans during the fiscal year ended
September 30, 1997, as compared to $1,000 for fiscal 1996. There can be no
assurance that the allowance for loan losses of the Savings Bank will be
adequate to cover losses on nonperforming assets in the future.
Other Income
Other income declined by $10,000, or 13.5%, from $74,000 for the fiscal year
ended September 30, 1996 to $64,000 for fiscal 1997. The decline was due
primarily to a $12,000 decline in the recovery from the Ohio Deposit Guarantee
Fund which totaled $2,000 in fiscal 1997, as compared to $14,000 in fiscal 1996.
General, Administrative and Other Expense
General, administrative and other expense decreased by $727,000, or 34.0%, to a
total of $1.4 million for the year ended September 30, 1997, as compared to $2.1
million for fiscal 1996. The decrease resulted primarily from a $368,000 charge
recorded in fiscal 1996 to recapitalize the SAIF, a decrease of $229,000, or
22.2%, in employee compensation and benefits and a $28,000, or 12.3% decrease in
other operating expenses. The decrease in employee compensation and benefits
resulted primarily from management's decision to accelerate expenses related to
the ESOP during fiscal 1996, which resulted in a $200,000 charge during that
period. The decrease in other operating expenses resulted from a decrease in
professional and reporting expenses year-to-year.
Federal Income Taxes
The provision for federal income taxes totaled $313,000 for the fiscal year
ended September 30, 1997, an increase of $268,000 over the $45,000 total in
fiscal 1996. The increase resulted primarily from a $763,000, or 431.1%,
increase in pre-tax earnings. The effective tax rates for the years ended
September 30, 1997 and 1996 were 33.3% and 25.4%, respectively.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1996 and 1995
General
Net earnings for the year ended September 30, 1996, totaled $132,000, a decline
of $508,000, or 79.4%, from the $640,000 in net earnings reported for the fiscal
year ended September 30, 1995. The decline in net earnings resulted primarily
from a $368,000 charge recorded in the fourth quarter reflecting the assessment
to recapitalize the Savings Association Insurance Fund ("SAIF"), coupled with a
$396,000 increase in other general, administrative and other expense and a
$63,000 decrease in net interest income, which were partially offset by a
$284,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income amounted to $5.2 million for the fiscal year ended
September 30, 1996, an increase of $337,000, or 6.9%, over fiscal 1995.
Interest income on loans totaled $3.2 million in fiscal 1996, an increase of
$187,000, or 6.3%. This increase was due primarily to a $3.3 million increase
in the weighted-average balance outstanding, which was partially offset by a 19
basis point decrease in weighted-average yield to 7.81% in 1996. Interest
income on mortgage-backed securities increased by $202,000, or 35.8%, as a
result of a $2.7 million increase in the weighted-average balance outstanding,
coupled with a 39 basis point increase in weighted-average yield, to 6.13% in
fiscal 1996. Interest income on investment securities and interest-bearing
deposits decreased by $52,000, or 3.9%, due primarily to a $3.2 million decrease
in the weighted-average balance outstanding, which was partially offset by a 166
basis point increase in weighted-average yield year-to-year.
Interest expense totaled $3.0 million for the fiscal year ended September 30,
1996, an increase of $400,000, or 15.6%, over the $2.6 million total recorded in
fiscal 1995. Interest expense on deposits increased by $245,000, or 9.5%, due
primarily to a 43 basis point increase in the weighted-average cost of funds, to
4.87% during fiscal 1996. Interest expense on borrowings totaled $155,000
during fiscal 1996, due to an increase in advances from the Federal Home Loan
Bank, as previously discussed.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $63,000, or 2.7%, from $2.3 million for the
fiscal year ended September 30, 1995, to $2.2 million for fiscal 1996. The
interest rate spread declined by 24 basis points during fiscal 1996, to 2.24%,
while the net interest margin declined by 20 basis points year-to-year,
amounting to 3.07% in fiscal 1996.
Provision for Losses on Loans
provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management
recorded a $1,000 provision for losses on loans during the fiscal year ended
September 30, 1996. There can be no assurance that the allowance for loan
losses of the Savings Bank will be adequate to cover losses on nonperforming
assets in the future.
Other Income
Other income increased by $24,000, or 48.0%, from $50,000 for the fiscal year
ended September 30, 1995 to $74,000 for fiscal 1996. The increase was due
primarily to an increase in service fees and other charges during fiscal 1996,
coupled with a recovery from the Ohio Deposit Guarantee Fund totaling $14,000.
General, Administrative and Other Expense General, administrative and other
expense increased by $764,000, or 55.7%, to a total of $2.1 million for the year
ended September 30, 1996, as compared to $1.4 million for fiscal 1995. The
increase resulted primarily from a $368,000 charge recorded in the fourth
quarter reflecting the assessment to recapitalize the SAIF, an increase of
$340,000, or 49.1%, in employee compensation and benefits and a $44,000, or
55.0% increase in franchise taxes. The increase in employee compensation and
benefits resulted primarily from management's decision to accelerate
approximately $200,000 in expenses related to the Employee Stock Ownership Plan.
The increase in franchise taxes resulted from the increase in stockholders'
equity year-to-year.
Federal Income Taxes
The provision for federal income taxes totaled $45,000 for the fiscal year ended
September 30, 1996, a decrease of $284,000, or 86.3%, from the $329,000 total in
fiscal 1995. The decline resulted primarily from a $792,000, or 81.7%, decrease
in pre-tax earnings. The effective tax rates for the years ended September 30,
1996 and 1995 were 25.4% and 34.0%, respectively.
Other Matters
As with all providers of financial services, the Corporation's operations are
heavily dependent on information technology systems. The Corporation is
addressing the potential problems associated with the possibility that the
computers that control and operate the Corporation's information technology
system and infrastructure may not be programmed to read four-digit code dates
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.
The Corporation is working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
As of the date of this Form 10-KSB, the Corporation has not identified any
specific expenses that are reasonably likely to be incurred by the Corporation
in connection with this issue and does not expect to incur significant expense
to implement the necessary corrective measures. No assurance can be given,
however, that significant expense will not be incurred in future periods. In
the event that the Corporation is ultimately required to purchase replacement
computer systems, programs and equipment, or incur substantial expense to make
the Corporation's current systems, programs and equipment year 2000 compliant,
the Corporation's net earnings and financial could be adversely affected.
In addition to possible expenses related to its own systems, the Corporation
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in the Corporation's primary market area. Because
the Corporation's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses and the Corporation's primary market area is
not significantly dependent upon one employer or industry, the Corporation does
not expect any significant or prolonged difficulties that will affect net
earnings or cash flow.
Item 7. Consolidated Financial Statements
The 1997 Annual Report to Shareholders was filed with the SEC on November
28, 1997 and is attached to this Amended 10-KSB as Exhibit 13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes or disagreements with regard to
accountants.
Effect of Recent Accounting Pronouncements
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights. SFAS No. 122 requires that Harvest Home recognize as separate assets
rights to service mortgage loans for others, regardless of how those servicing
rights were acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights. SFAS No. 122 also requires that an
enterprise allocate the cost of purchasing or originating the mortgage loans
between the mortgage servicing rights and the loans when mortgage loans are
securitized, if it is practicable to estimate the fair value of mortgage
servicing rights. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment would be measured based on fair value. SFAS No. 122 is
effective for the Corporation's fiscal year beginning October 1, 1996, to
transactions in which an entity acquires mortgage servicing rights and to
impairment evaluations of all capitalized mortgage servicing rights and
capitalized excess servicing receivables whenever acquired. Retroactive
application is prohibited. On October 1, 1996, management adopted SFAS No. 122
without effect on Harvest Home's consolidated financial position or results of
operations.
In October 1995, the Financial Accounting Standards Board ( FASB ) issued
Statement of Financial Accounting Standards ( SFAS ) No. 123, Accounting for
Stock-Based Compensation, establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that the Corporation will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore SFAS No. 123 will have no effect on its consolidated financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities , that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include,
among others, transfers involving repurchase agreements, securitizations of
financial assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Corporation s consolidated financial position or results
of operations.
Additional recent accounting pronouncements are contained in HHFC's Annual
Report to Shareholders. Thus, these provisions are incorporated by reference in
the 1997 Annual Report to Shareholders filed on November 28, 1997.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto included herein
have been prepared in accordance with generally accepted accounting principles,
which require the Corporation to measure financial position and results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time because of inflation.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in
the inflation rate, they do not change at the same rate or in the same magnitude
as the inflation rate. Rather, interest rate volatility is based on changes in
the expected rate of inflation, as well as on changes in monetary and fiscal
policies.
Recapitalization of the Deposit Insurance Fund
The deposit accounts of the Savings Bank and of other savings associations
are insured by the FDIC in the Savings Association Insurance Fund ( SAIF ). The
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund were used to pay the cost of prior
thrift failures. The deposit accounts of commercial banks are insured by the
FDIC in the Bank Insurance Fund ( BIF ), except to the extent such banks have
acquired SAIF deposits. The reserves of the BIF met the level required by law
in May 1995. As a result of the respective reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996, no BIF assessments are required for healthy commercial banks except for
a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a
special assessment totaling $.657 per $100 of SAIF deposits held at March 31,
1995, in order to increase SAIF reserves to the level required by law.
The Savings Bank had $56.0 million in deposits at March 31, 1995, resulting
in an assessment of approximately $368,000, or $243,000 after tax, which was
charged to operations in 1996.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1999. The SAIF recapitalization legislation also
provides for an elimination of the thrift charter or of the separate federal
regulation of thrifts prior to the merger of the deposit insurance funds. As a
result, the Savings Bank would be regulated as a bank under Federal laws
which would subject it to the more restrictive activity limits imposed on
national banks. Under separate legislation related to the recapitalization
plan, the Savings Bank is required to recapture as taxable income approximately
$370,000 of its bad debt reserve, which represents the post-1987 additions to
the reserve, and will be unable to utilize the percentage of earnings method to
compute its reserve in the future. The Savings Bank has provided deferred taxes
for this amount and will be permitted to amortize the recapture of its bad debt
reserve over six years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
POSITION WITH DATE OF TERMS
NAME AGE HARVEST HOME SERVICE EXPIRE
John E. Rathkamp 54 President, 1971 1999
Secretary, Director,
Managing Officer
Dennis J. Slattery 45 Executive Vice 0 0
President
Richard F. Hauck 68 Vice President, 1985 2000
Director
Walter A. Schuch 80 Chairman of Board, 1955 1998
Director
Thomas L. Eckert 74 Director 1973 2000
Marvin J. Ruehlman 76 Director 1955 1998
Herbert E. Menkhaus 69 Director 1985 1999
George C. Eyrich 78 Director 1954 1999
The business experience of each director of HHFC is set forth below.
John E. Rathkamp joined Harvest Home in 1965 as Treasurer. He became
Secretary and Managing Officer in 1976. He has been a Director of Harvest Home
since 1971. In 1991 he was elected President of the Bank and currently is
serving as President, Secretary and Managing Officer of Harvest Home and
President of HHFC.
Thomas Eckert joined Victoria Savings & Loan Co. in 1954 as Treasurer and
served as Managing Officer from 1956 to 1973. In 1973 Victoria Savings & Loan
Co. merged with Harvest Home and Mr. Eckert became Vice President of Harvest
Home until his retirement in 1990. Mr. Eckert has been a member of the Board of
Directors of Harvest Home since 1973.
Walter A. Schuch joined Harvest Home as a Board member in 1955. He became
President in 1976 and Chairman of the Board in 1983. He retired as President in
1991 and is currently serving as Chairman of the Board.
George C. Eyrich joined Harvest Home as a Board member in 1954. Mr. Eyrich
is an attorney and the law firm has represented the Bank since its inception in
1919. He is currently of counsel with Kepley, Gilligan and Eyrich which acts as
general counsel of Harvest Home.
Herbert E. Menkhaus joined Baltimore Savings & Loan Co. as a Director in
1971. He served as Treasurer, President and Director of Baltimore Savings &
Loan until it merged with Harvest Home in 1985. Mr. Menkhaus has been a
Director of Harvest Home since 1985.
Marvin J. Ruehlman joined Harvest Home in 1955 and has served as a Board
member since then. He is currently on the Appraisal Committee and the Asset
Classification Committee. He retired from the construction business in 1990.
Richard F. Hauck joined Baltimore Savings & Loan Co. as a Director in 1971 and
became Secretary and Managing Officer in 1983. In 1985 Baltimore Savings & Loan
Co. merged with Harvest Home and Mr. Hauck became Vice President and Director of
Harvest Home. He is Vice President of HHFC.
Dennis J. Slattery joined Harvest Home in 1978 and became Treasurer in 1981.
In 1991, Mr. Slattery was elected Executive Vice President and served as
Treasurer and Executive Vice President in 1994. He is currently serving as
Executive Vice President.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and executive officers, and persons who own more than
ten percent (10%) of a registered class of the Corporation's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Corporation.
Officers, directors and greater than ten percent (10%) shareholders are required
by SEC regulation to furnish the Corporation with copies of all Section 16(a)
forms they file.
To the Corporation's knowledge, based solely on a review of the copies of
such reports furnished to the Corporation, all Section 16(a) filing requirements
for officers, directors and greater than ten percent (10%) beneficial owners
were complied with and the requisite Forms 5 were filed on November 14, 1997.
All Section 16(a) filing requirements applicable to its officers, directors and
greater than ten (10) percent beneficial owners were complied with the during
the fiscal year endered September 30, 1997.
Item 10. Executive Compensation
The following table presents certain information regarding the cash and non
cash compensation for each of the last three fiscal years awarded to or earned
by the Chief Executive Officer. No other executive officers received a salary
and bonus in excess of $100,000 during the fiscal year ended September 30,
1997.
Name and Principal Position Fiscal Annual Compensation
Year-End
Salary Bonus All
Other
John E. Rathkamp, President,
Secretary, Managing Officer 1995 $92,700 $4,300 $23,026
1996 $96,412 $2,380 $35,416
1997 $100,350 $3,295 $77,952
Item 11. Security Ownership of Certain Beneficial Owners and Management
Amount and Nature Percent of
Name and Address of Beneficial Ownership Shares Outstanding
John E. Rathkamp 14,959 1.7%
Dennis J. Slattery 7,475 .8%
Richard F. Hauck 11,983 1.3%
Walter A. Schuch 14,959 1.7%
Thomas L. Eckert 14,959 1.7%
Marvin J. Ruehlman 14,959 1.7%
Herb E. Menkhaus 14,959 1.7%
George C. Eyrich 14,959 1.7%
Total of all directors
and officers as a group 109,212 11.7%
Item 12. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K have been filed during the last
quarter of the fiscal year covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HARVEST HOME
/s/John E. Rathkamp
John E. Rathkamp
President and Director (Principal Executive
Officer)
By/s/Dennis J. Slattery
Executive Vice President
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By/s/Dennis J. Slattery By/s/Richard F. Hauck
Dennis J. Slattery Richard F. Hauck
Executive Vice President Vice President and Director
(Principal Accounting Officer)
Date December 29, 1997 Date December 29, 1997
By/s/Walter A. Schuch By/s/Thomas L. Eckert
Walter A. Schuch Thomas L. Eckert
Director Director
Date December 29, 1997 Date December 29, 1997
By/s/Marvin J. Ruehlman By/s/Herbert E. Menkhaus
Marvin J. Ruehlman Herbert E. Menkhaus
Director Director
Date December 29, 1997 Date December 29, 1997
By/s/George C. Eyrich
George C. Eyrich
Director
Date December 29, 1997
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
3.1 Articles of Incorporation of
Harvest Home Financial Corporation
Incorporated by reference to the Registration Statement on Form S-1
filed by HHFC on February 26, 1994 (the "S-1") with the Securities
and Exchange Commission (the "SEC"), Exhibit 3.1
3.2 Code of Regulations of Harvest
Home Financial Corporation Incorporated by reference to the S-1,
Exhibit 3.1
4 Forms 10-QSB for the first three
quarters of FY 1997
Incorporated by reference filed by HHFC on August 14, 1997; June 13,
1997; February 14, 1997
10.1 The Stock Ownership Plan
Incorporated by reference to S-1, Exhibit 10.4
10.2 The Stock Option and Incentive Plan
Incorporated by reference to the S-1, Exhibit 10.2 and as Exhibit A
to
the Definitive Proxy Statement
filed by HHFC on December 2, 1995.
10.3 The Recognition and Retention Plan
Incorporated by reference to the S-1, Exhibit 10.3 and as Exhibit B
to the Definitive Proxy Statement filed by HHFC on December 2, 1995
10.4 Employment Agreements, Incorporated by reference to the S-1,
16 Letter of the Predecessor Accountant Incorporated by reference to
the S-1, Exhibit 10
22 Subsidiary of Harvest Home Financial Corporation
SUBSIDIARY OF HARVEST HOME FINANCIAL CORPORATION
Exhibit # 22
Name: Harvest Home Savings Bank d/b/a Harvest Home Savings Bank
State of Incorporation: Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 558
<INT-BEARING-DEPOSITS> 2,106
<FED-FUNDS-SOLD> 2,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,505
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 45,229
<ALLOWANCE> 115
<TOTAL-ASSETS> 93,832
<DEPOSITS> 58,786
<SHORT-TERM> 0
<LIABILITIES-OTHER> 702
<LONG-TERM> 24,000
0
0
<COMMON> 0
<OTHER-SE> 10,344
<TOTAL-LIABILITIES-AND-EQUITY> 93,832
<INTEREST-LOAN> 3,457
<INTEREST-INVEST> 2,329
<INTEREST-OTHER> 197
<INTEREST-TOTAL> 5,983
<INTEREST-DEPOSIT> 2,786
<INTEREST-EXPENSE> 3,689
<INTEREST-INCOME-NET> 2,294
<LOAN-LOSSES> 9
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 1,409
<INCOME-PRETAX> 940
<INCOME-PRE-EXTRAORDINARY> 940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
<YIELD-ACTUAL> 2.17
<LOANS-NON> 95
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 111
<CHARGE-OFFS> (5)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 115
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 115
</TABLE>
HARVEST HOME FINANCIAL'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDING SEPTEMBER 30, 1997
TABLE OF CONTENTS
President's Letter to Stockholders
The Business of Harvest Home Financial Corporation and
Subsidiary
Common Stock and Related Information
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of Results of Operations for Fiscal Years Ended
September 30, 1997 and 1996
Comparison of Results of Operations for Fiscal Years Ended
September 30, 1996 and 1995
Average Yield Analysis
Rate/Volume Table
Liquidity and Capital Resources
Effect of Recent Accounting Pronouncements
Recapitalization of Deposit Insurance Fund
Report of Independent Certified Public Accountants
Consolidated Financial Statements
Directors and Officers
Stockholder Services
Dear Stockholder:
We are very pleased to present Harvest Home Financial's Annual Report to
Stockholders for the fiscal year ending September 30, 1997.
I am happy to report that net earnings for fiscal 1997 totaled $627,000,
exceeding same period earnings for fiscal 1996 by $495,000, or 375%.
We had discussed with you last year our need to maintain a growth strategy
that would result in improved earnings and an increased return on equity.
Consistent with that objective, we were able to grow the Bank's assets
during fiscal 1997 by $15.1 million, or 19.2%. Total assets reached the
unprecedented level of $93.8 million. New loan originations remained
strong during the current fiscal year, resulting in portfolio growth of
$3.0 million, or 7.0%
The heart of our mission statement is that "we want to be recognized as a
stable/secure institution that provides a personal touch and treats our
customers as individuals while offering competitive rates along with
efficient modern services." In keeping with our mission statement, we
recently completed remodeling our Ebenezer Road office to upgrade customer
services. Currently, we are remodeling the North College Hill office to
improve services at that location. A drive up ATM is included in the North
College Hill upgrade.
In April 1997, we announced a share repurchase program which provided for
the repurchase of 46,742 shares over a six month period. In October 1997,
we extended our share repurchase program intending to repurchase an
additional 49,000 shares over a six month period commencing October 27,
1997. Since April we have successfully repurchased 43,500 shares. The
Board continues to believe that repurchasing shares benefits the
Corporation and its stockholders. Repurchased shares will become treasury
shares available for general corporate purposes.
Dividends were paid quarterly totaling $.41 for the calendar year 1997. As
a charter shareholder, the annual dividend represents a 5.6% return on your
original tax adjusted investment. Consistent with the Private Letter
Ruling received during fiscal year 1996, we can estimate 93% of your 1997
dividends will be considered tax free. You will be advised in January 1998
as to the exact percentage of the 1997 dividend distributions that are
considered tax free.
On a personal note, Vice President Richard F. Hauck will be retiring from
our management team January 1, 1998. Mr. Hauck became part of Harvest Home
Savings Bank in March 1985 through our merger with Baltimore Savings & Loan
Company. Mr. Hauck's experience in the savings and loan business extends
beyond twenty-five years. I know I speak for all of his co-workers in
recognizing his contribution to our company and wishing Dick and Janet, his
wife, many comfortable retirement years. Mr. Hauck will continue to serve
as a Board member.
In conclusion, your Board and management look forward to the future with
great optimism. Our mission remains consistent as a provider of financial
services to our community. Technology is fast changing the way we provide
services but our desire to treat each customer as an individual remains
steadfast.
As always, we appreciate your continued confidence and support.
Very truly yours,
John E. Rathkamp
President
BUSINESS OF HARVEST HOME FINANCIAL CORPORATION AND SUBSIDIARY
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 ("Harvest
Home", or the "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. The Corporation has no
significant assets other than the shares of the Bank's common stock
acquired in the Conversion and has no significant liabilities.
As a community oriented financial institution, Harvest Home seeks to serve
the financial needs of the families and community businesses in its primary
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 (the "SAIF"),
and using such deposits to originate residential loans. 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 U.S. Government and agency securities, and short-
term interest-bearing deposits. Harvest Home also offers a credit card
program through a correspondent relationship with 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 contiguous townships in the counties of Butler, Clermont, and
Warren.
COMMON STOCK AND RELATED INFORMATION
The Corporation's common stock has been listed on the NASDAQ System since
October 7, 1994 under the NASDAQ symbol HHFC.
Presented below are the market values for the Corporation's common stock,
as well as the amount of cash dividends paid on the common stock, for each
quarter of fiscal 1997 and 1996. Such values represent actual transactions
and do not include retail markups, markdowns or commissions. Information
relating to prices has been obtained by the Corporation from NASDAQ for
fiscal 1997, 1996 and 1995.
Market Cash
Fiscal year ending September 30, 1997 value dividends (1)
Quarter ending December 31, 1996 $ 9.75 $.10
Quarter ending March 31, 1997 $11.50 $.10
Quarter ending June 30, 1997 $10.88 $.10
Quarter ending September 30, 1997 $12.00 $.10
Market Cash
Fiscal year ending September 30, 1996 value dividends (2)
Quarter ending December 31, 1995 $11.88 $ .10
Quarter ending March 31, 1996 $12.00 $ .10
Quarter ending June 30, 1996 $12.50 $ .10
Quarter ending September 30, 1996 $ 9.63 $3.10
Market Cash
Fiscal year ending September 30, 1995 value dividends
Quarter ending December 31, 1994 $ 8.75 $.05
Quarter ending March 31, 1995 $10.00 $.07
Quarter ending June 30, 1995 $10.00 $.09
Quarter ending September 30, 1995 $11.25 $.10
As of November 19, 1997, the Corporation had outstanding 891,357 shares of
common stock, held by approximately 350 stockholders of record. This
number of stockholders does not reflect the number of persons or entities
who may hold stock in nominee or "street" name through brokerage firms or
others. In April 1997 and October 1997, the Corporation announced the
implementation of stock repurchase programs pursuant to which the
Corporation would repurchase up to 5% per program of its outstanding common
stock over respective periods of at least six months. The October 1997
period remains open. Since April 1997, the Corporation repurchased a total
of 43,500 shares of its common stock at an average price of $12.84 per
share.
(1) Approximately $.37 of fiscal 1997 dividends are deemed to constitute a
return of capital.
(2) Approximately $2.64 of fiscal 1996 dividends are deemed to constitute
a return of capital.
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial condition and other data:
At September 30,
<CAPTION>
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $93,832 $78,718 $69,532 $72,765 $64,925
Cash and cash equivalents (1) 5,264 1,708 2,313 16,333 9,541
Investment securities - at cost 0 0 18,032 9,992 6,125
Investment securities, available
for sale - at market 8,039 12,105 0 0 0
Mortgage-backed securities -
at cost 0 0 9,009 8,243 9,545
Mortgage-backed securities
available for sale -
at market 32,466 20,429 0 0 0
Loans receivable - net 45,229 42,267 38,245 36,319 38,012
Deposits 58,786 57,958 56,425 67,810 60,470
Advances from the FHLB 24,000 10,000 0 0 0
Stockholders' equity (2) 10,344 9,725 12,706 4,581 4,166
Number of:
Real estate loans outstanding 1,054 1,038 1,000 1,052 975
Deposit accounts 8,035 8,466 8,309 6,987 7,536
Full service offices 3 3 3 3 3
Summary of consolidated earnings and other data:
Year Ended September 30,
1997 1996 1995 1994 1993
(In thousands, except share data)
Interest income $5,983 $5,209 $4,872 $4,187 $4,584
Interest expense 3,689 2,969 2,569 2,387 2,676
Net interest income 2,294 2,240 2,303 1,800 1,908
Provision for loan losses 9 1 12 9 59
Net interest income after
provision for loan losses 2,285 2,239 2,291 1,791 1,849
Other income 64 74 50 53 56
General, administrative, and
other expense 1,409 2,136 1,372 1,216 1,158
Earnings before income taxes 940 177 969 628 747
Federal income taxes 313 45 329 213 257
Net earnings $ 627 $ 132 $ 640 $ 415 $ 490
Earnings per share $ .70 $ .16 $ .73 N/A N/A
Year ended September 30,
1997 1996 1995 1994 1993
Interest rate spread 2.17% 2.24% 2.48% 2.63% 2.81%
Net yield on average interest-
earning assets 2.76 3.07 3.27 2.82 3.07
Return on equity (net earnings
divided by average equity) 6.09 1.05 5.09 9.49 12.50
Return on assets (net earnings
divided by average total assets) 0.73 0.18 0.89 0.64 0.76
Equity-to-assets ratio (average
Equity divided by average total
assets) 12.06 16.94 17.56 6.70 6.10
Loan loss allowance as a
percentage of non-performing
loans 121.05% 67.68% 76.92% 268.57% N/M(3)
(1) Includes cash and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions.
(2) Consists only of retained earnings as of September 30, 1993 - 1994, inclusive.
(3) Not meaningful.
</TABLE>
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, 1997, are less than interest-bearing liabilities repricing
within the same period by approximately $5.1 million, resulting in a
negative cumulative one-year gap of 5.5% of total assets. The
Corporation's interest-earning assets repricing within three years of
September 30, 1997, were $5.4 million greater than interest bearing
liabilities repricing during the same period, resulting in a positive
cumulative gap for such period of 5.9% of total assets.
In the event that interest rates rise during the forthcoming year, Harvest
Home's negative cumulative one-year gap may negatively affect earnings
because interest-bearing liabilities may reprice at a faster pace than
interest-earning assets. Further, rising interest rates could also affect
Harvest Home's earnings in a negative manner as a result of diminished loan
demand and the increased risk of delinquencies resulting from increased
payment amounts on adjustable-rate loans.
Harvest Home's earnings are also vulnerable to changes in interest rates
due to the amount of adjustable-rate mortgage loans ("ARMs") originated
with low margins and adjustment caps. In the 1980s, Harvest Home
originated ARMs which provide for interest rate adjustments every three
years. Moreover, many of these loans have adjustment caps of 2% in any
three year period. Therefore, if interest rates rise rapidly, Harvest Home
may be unable to increase the interest rates on such loans as rapidly as
the cost of liabilities increase.
Notwithstanding the foregoing risks, the Bank is operating within
management's predetermined level of interest rate risk and management
believes that Harvest Home's interest rate risk posture and the strategies
discussed below will result in the Bank maintaining acceptable operating
results in the current interest rate environment.
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of income.
The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not
coincide. Moreover, the long-term or cumulative effect of interest rate
changes can be substantial. Interest rate risk is defined as the
sensitivity of an institution's earnings and net asset values to changes in
interest rates. In managing its interest rate risk, Harvest Home begins
with an objective to increase the interest rate sensitivity of its assets
by originating loans with interest rates subject to period adjustment and
market conditions and/or shorter maturities. Harvest Home has historically
had to rely primarily upon retail deposit accounts as a source of funds and
intends to continue to do so. Management believes that reliance on retail
deposit accounts as a source of funds compared to brokered deposits and
long-term borrowings may reduce the effects of interest rate fluctuations
because these deposits generally represent a more stable source of funds.
However, in fiscal 1997 and 1996, Harvest Home has utilized FHLB advances
as a source of financing to fund purchases of certain mortgage-backed
securities when favorable spreads became available.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis presents the projected maturities and
periods to repricing of a savings bank's rate sensitive assets and
liabilities. As stated previously, Harvest Home's cumulative one-year gap,
which represents the difference between the amount of interest sensitive
assets maturing or repricing in one year and the amount of interest
sensitive liabilities maturing or repricing in the same period was a
negative 5.5% of total assets at September 30, 1997. A positive cumulative
gap indicates that interest sensitive assets exceed interest sensitive
liabilities at a specific date. In a rising interest rate environment,
institutions with positive repricing or maturity gaps generally experience
a more rapid increase in interest income earned on assets than the interest
expense paid on liabilities. Conversely, in an environment of falling
interest rates, interest income earned on assets will generally decrease
more rapidly than the interest expense paid on liabilities. A negative gap
will have the opposite effect.
Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and
the Corporation's actual results could differ significantly from those
discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and the
Corporation's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the
allowance for losses on loans and the effect of certain accounting
pronouncements.
Discussion of Changes in Financial Condition from September 30, 1996 to
September 30, 1997
The Corporation's assets totaled $93.8 million at September 30, 1997, an
increase of $15.1 million, or 19.2%, from September 30, 1996. The increase
in total assets was funded primarily by a $14.0 million increase in Federal
Home Loan Bank advances, an $828,000, or 1.4%, increase in deposits and a
$619,000 increase in stockholders' equity.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions totaled $5.3 million at September 30, 1997, an increase of
$3.6 million, or 208.2%, from 1996 levels. Federal funds sold increased by
$2.2 million, while interest-bearing deposits and cash increased by $1.4
million, or 103.7%. Investment securities totaled $8.0 million at
September 30, 1997, a decline of $4.1 million, or 33.6%, from the balance
at September 30, 1996. This decline resulted primarily from the maturity
of $2.0 million and the sale of $2.0 million of investment securities
during the 1997 period. The proceeds were primarily redeployed to fund new
loan originations.
Mortgage-backed securities increased by $12.0 million, or 58.9%, to a total
of $32.5 million at September 30, 1997, compared to September 30, 1996, as
purchases of $18.2 million exceeded principal repayments and sales of $2.6
million and $138,000, respectively. During fiscal 1997, management
purchased $18.2 million of long-term, adjustable-rate U.S. Government
agency collateralized mortgage obligations with a weighted-average yield of
6.77%. Such purchases were funded with proceeds from Federal Home Loan
Bank advances.
Loans receivable increased by $3.0 million, or 7.0%, to a total of $45.2
million at September 30, 1997, compared to September 30, 1996 levels. Loan
disbursements totaled $8.9 million during fiscal 1997, as compared to $12.3
million during fiscal 1996, and were partially offset by principal
repayments totaling $6.0 million. Growth in the loan portfolio consisted
primarily of one- to four-family loans, which increased by $4.3 million, or
12.2%, year to year.
At September 30, 1997, Harvest Home's allowance for loan losses totaled
$115,000, representing .2% of total loans and 121.1% of nonperforming
loans. At September 30, 1996, the allowance for loan losses totaled
$111,000, or .2% of total loans, and 67.7% of nonperforming loans.
Nonperforming loans amounted to $95,000, or .1%, and $164,000, or .2%, of
total assets at September 30, 1997 and 1996, respectively. Although
management believes that its allowance for loan losses at September 30,
1997, was adequate based on the available facts and circumstances, there
can be no assurance that additions to such allowance will not be necessary
in future periods, which could adversely affect Harvest Home's results of
operations.
Deposits totaled $58.8 million at September 30, 1997, an increase of
$828,000, or 1.4%, over the $58.0 million total at September 30, 1996. The
increase resulted primarily from management's continuing efforts to
maintain a moderate rate of growth through marketing and pricing
strategies.
Federal Home Loan Bank advances totaled $24.0 million at September 30,
1997, an increase of $14.0 million, or 140.0%, over September 30, 1996, as
management elected to fund the purchase of mortgage-backed securities with
variable rate, long-term advances. These advances and the related mortgage-
backed securities reprice monthly based upon the LIBOR index. At
September 30, 1997, the advances carried a 5.82% weighted-average interest
rate and are scheduled to mature through fiscal 2007.
Discussion of Changes in Financial Condition from September 30, 1996 to
September 30, 1997 (continued)
Shareholders' equity totaled $10.3 million at September 30, 1997, an
increase of $619,000, or 6.4%, over September 30, 1996 levels. The
increase resulted primarily from net earnings of $627,000 and a $49,000
increase in unrealized gains on securities designated as available for
sale, which were partially offset by dividends of $371,000 and the purchase
of treasury shares totaling $223,000.
Comparison of Results of Operations for the Fiscal Years Ended September
30, 1997 and 1996
General
Net earnings for the year ended September 30, 1997, totaled $627,000, an
increase of $495,000, or 375.0%, over the $132,000 in net earnings reported
for the fiscal year ended September 30, 1996. The increase in net earnings
resulted primarily from a $727,000 decline in general, administrative and
other expense, including a one-time charge to recapitalize the Savings
Association Insurance Fund ("SAIF") totaling $368,000 which was recorded in
fiscal 1996, coupled with a $54,000 increase in net interest income, which
were partially offset by a $268,000 increase in the provision for federal
income taxes.
Net Interest Income
Total interest income amounted to $6.0 million for the fiscal year ended
September 30, 1997, an increase of $774,000, or 14.9%, over fiscal 1996.
Interest income on loans totaled $3.5 million in fiscal 1997, an increase
of $298,000, or 9.4%. This increase was due primarily to a $3.5 million
increase in the weighted-average balance outstanding, coupled with an 6
basis point increase in weighted-average yield, to 7.87% in 1997. Interest
income on mortgage-backed securities increased by $887,000, or 115.6%, as a
result of a $13.4 million increase in the weighted-average balance
outstanding, coupled with an 25 basis point increase in weighted-average
yield, to 6.38% in fiscal 1997. Interest income on investment securities
and interest-bearing deposits decreased by $411,000, or 32.0%, due
primarily to a $6.8 million decrease in the weighted-average balance
outstanding, which was partially offset by a 15 basis point increase in the
weighted-average yield year-to-year.
Interest expense totaled $3.7 million for the fiscal year ended September
30, 1997, an increase of $720,000, or 24.3%, over the $3.0 million total
recorded in fiscal 1996. Interest expense on deposits decreased by
$28,000, or 1.0%, due primarily to a 6 basis point decrease in the weighted-
average cost of funds, to 4.81% during fiscal 1997. Interest expense on
borrowings totaled $903,000 during fiscal 1997, an increase of $748,000
over fiscal 1996, due to a $12.7 million increase in the weighted-average
balance of advances outstanding from the Federal Home Loan Bank, as
previously discussed.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $54,000, or 2.4%, from $2.2
million for the fiscal year ended September 30, 1996, to $2.3 million for
fiscal 1997. The interest rate spread declined by 7 basis points during
fiscal 1997 to 2.17%, while the net interest margin declined by 31 basis
points year-to-year, amounting to 2.76% in fiscal 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by
the Savings Bank, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
Savings Bank's market area, and other factors related to the collectibility
of the Savings Bank's loan portfolio. As a result of such analysis,
management recorded a $9,000 provision for losses on loans during the
fiscal year ended September 30, 1997, as compared to $1,000 for fiscal
1996. There can be no assurance that the allowance for loan losses of the
Savings Bank will be adequate to cover losses on nonperforming assets in
the future.
Other Income
Other income declined by $10,000, or 13.5%, from $74,000 for the fiscal
year ended September 30, 1996 to $64,000 for fiscal 1997. The decline was
due primarily to a $12,000 decline in the recovery from the Ohio Deposit
Guarantee Fund which totaled $2,000 in fiscal 1997, as compared to $14,000
in fiscal 1996.
General, Administrative and Other Expense
General, administrative and other expense decreased by $727,000, or 34.0%,
to a total of $1.4 million for the year ended September 30, 1997, as
compared to $2.1 million for fiscal 1996. The decrease resulted primarily
from a $368,000 charge recorded in fiscal 1996 to recapitalize the SAIF, a
decrease of $229,000, or 22.2%, in employee compensation and benefits and a
$28,000, or 12.3% decrease in other operating expenses. The decrease in
employee compensation and benefits resulted primarily from management's
decision to accelerate expenses related to the ESOP during fiscal 1996,
which resulted in a $200,000 charge during that period. The decrease in
other operating expenses resulted from a decrease in professional and
reporting expenses year-to-year.
Federal Income Taxes
The provision for federal income taxes totaled $313,000 for the fiscal year
ended September 30, 1997, an increase of $268,000 over the $45,000 total in
fiscal 1996. The increase resulted primarily from a $763,000, or 431.1%,
increase in pre-tax earnings. The effective tax rates for the years ended
September 30, 1997 and 1996 were 33.3% and 25.4%, respectively.
Comparison of Results of Operations for the Fiscal Years Ended September
30, 1996 and 1995
General
Net earnings for the year ended September 30, 1996, totaled $132,000, a
decline of $508,000, or 79.4%, from the $640,000 in net earnings reported
for the fiscal year ended September 30, 1995. The decline in net earnings
resulted primarily from a $368,000 charge recorded in the fourth quarter
reflecting the assessment to recapitalize the Savings Association Insurance
Fund ("SAIF"), coupled with a $396,000 increase in other general,
administrative and other expense and a $63,000 decrease in net interest
income, which were partially offset by a $284,000 decrease in the provision
for federal income taxes.
Net Interest Income
Total interest income amounted to $5.2 million for the fiscal year ended
September 30, 1996, an increase of $337,000, or 6.9%, over fiscal 1995.
Interest income on loans totaled $3.2 million in fiscal 1996, an increase
of $187,000, or 6.3%. This increase was due primarily to a $3.3 million
increase in the weighted-average balance outstanding, which was partially
offset by a 19 basis point decrease in weighted-average yield to 7.81% in
1996. Interest income on mortgage-backed securities increased by $202,000,
or 35.8%, as a result of a $2.7 million increase in the weighted-average
balance outstanding, coupled with a 39 basis point increase in weighted-
average yield, to 6.13% in fiscal 1996. Interest income on investment
securities and interest-bearing deposits decreased by $52,000, or 3.9%, due
primarily to a $3.2 million decrease in the weighted-average balance
outstanding, which was partially offset by a 166 basis point increase in
weighted-average yield year-to-year.
Interest expense totaled $3.0 million for the fiscal year ended September
30, 1996, an increase of $400,000, or 15.6%, over the $2.6 million total
recorded in fiscal 1995. Interest expense on deposits increased by
$245,000, or 9.5%, due primarily to a 43 basis point increase in the
weighted-average cost of funds, to 4.87% during fiscal 1996. Interest
expense on borrowings totaled $155,000 during fiscal 1996, due to an
increase in advances from the Federal Home Loan Bank, as previously
discussed.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $63,000, or 2.7%, from $2.3
million for the fiscal year ended September 30, 1995, to $2.2 million for
fiscal 1996. The interest rate spread declined by 24 basis points during
fiscal 1996, to 2.24%, while the net interest margin declined by 20 basis
points year-to-year, amounting to 3.07% in fiscal 1996.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by
the Savings Bank, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to the
Savings Bank's market area, and other factors related to the collectibility
of the Savings Bank's loan portfolio. As a result of such analysis,
management recorded a $1,000 provision for losses on loans during the
fiscal year ended September 30, 1996. There can be no assurance that the
allowance for loan losses of the Savings Bank will be adequate to cover
losses on nonperforming assets in the future.
Other Income
Other income increased by $24,000, or 48.0%, from $50,000 for the fiscal
year ended September 30, 1995 to $74,000 for fiscal 1996. The increase was
due primarily to an increase in service fees and other charges during
fiscal 1996, coupled with a recovery from the Ohio Deposit Guarantee Fund
totaling $14,000.
General, Administrative and Other Expense
General, administrative and other expense increased by $764,000, or 55.7%,
to a total of $2.1 million for the year ended September 30, 1996, as
compared to $1.4 million for fiscal 1995. The increase resulted primarily
from a $368,000 charge recorded in the fourth quarter reflecting the
assessment to recapitalize the SAIF, an increase of $340,000, or 49.1%, in
employee compensation and benefits and a $44,000, or 55.0% increase in
franchise taxes. The increase in employee compensation and benefits
resulted primarily from management's decision to accelerate approximately
$200,000 in expenses related to the Employee Stock Ownership Plan. The
increase in franchise taxes resulted from the increase in stockholders'
equity year-to-year.
Federal Income Taxes
The provision for federal income taxes totaled $45,000 for the fiscal year
ended September 30, 1996, a decrease of $284,000, or 86.3%, from the
$329,000 total in fiscal 1995. The decline resulted primarily from a
$792,000, or 81.7%, decrease in pre-tax earnings. The effective tax rates
for the years ended September 30, 1996 and 1995 were 25.4% and 34.0%,
respectively.
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,
1997 1996 1995
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $43,929 $3,457 7.87% $40,432 $3,159 7.81% $37,159 $2,972 8.00%
Mortgage-backed securities 25,938 1,654 6.38 12,505 767 6.13 9,835 565 5.74
Investment securities 9,846 675 6.86 15,250 1,026 6.73 17,095 1,092 6.39
Interest-bearing deposits and other 3,538 197 5.57 4,896 257 5.25 6,299 243 3.86
Total interest-earning assets 83,251 5,983 7.19 73,083 5,209 7.13 70,388 4,872 6.92
Non-interest-earning assets 2,153 1,215 1,229
Total assets $85,404 $74,298 $71,617
Interest-bearing liabilities:
Deposits
NOW accounts $ 3,477 110 3.16 $ 2,753 $ 74 2.69 $ 2,554 $ 67 2.62%
Passbook 9,057 252 2.78 9,671 272 2.79 11,745 346 2.95
Money market demand deposits 4,436 144 3.25 4,746 144 3.03 5,551 160 2.88
Certificates 40,909 2,280 5.57 40,639 2,326 5.72 37,978 1,996 5.26
Borrowings 15,615 903 5.78 2,885 155 5.37 0 0 0
Total interest-bearing liabilities 73,494 3,689 5.02 60,694 2,969 4.89 57,828 2,569 4.44
Non-interest-bearing liabilities 1,608 1,017 1,210
Total liabilities 75,102 61,711 59,038
Stockholders' equity 10,302 12,587 12,579
Total liabilities and
stockholders' equity $85,404 $74,298 $71,617
Net interest income; interest rate
spread (1) $2,294 2.17% $2,240 2.24% $2,303 2.48%
Net yield (net interest income as
a percent of average interest-
earning assets) 2.76% 3.07% 3.27%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 113.28% 120.41% 121.72%
(1) Represents the difference between the average yield on interest-earning assets and
the average cost of interest-bearing liabilities.
</TABLE>
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,
1997 vs. 1996 1996 vs. 1995
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 $273 $25 $298 $258 $ (71) $187
Mortgage-backed securities 855 32 887 162 40 202
Investment securities (370) 19 (351) (122) 56 ( 66)
Other interest-earning assets(1) (74) 14 (60) (62) 76 14
Total interest income 684 90 774 236 101 337
Interest expense attributable to:
Deposits(2) 4 (32) (28) (1) 246 245
Borrowings 735 13 748 155 0 155
Total interest expense 739 19) 720 154 246 400
Increase (decrease) in net interest income $ 54 $ (63)
(1) Includes interest-bearing deposits in other financial institutions and
other interest-earning assets.
(2) Includes interest-bearing escrow deposits.
</TABLE>
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,
1997, loan originations totaled $8.9 million and purchases of mortgage-
backed securities totaled $18.2 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, 1997, by $828,000 and
increased during the fiscal year ended September 30, 1996 by $1.5 million.
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.
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, 1997:
Total Capital to Risk-Weighted Assets 25.1%
Tier I Capital to Risk-Weighted Assets 24.8%
Tier I Leverage Ratio 9.3%
Effect of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", establishing financial accounting and
reporting standards for stock-based compensation plans. SFAS No. 123
encourages all entities to adopt a new method of accounting to measure
compensation cost of all stock compensation plans based on the estimated
fair value of the award at the date it is granted. Companies are, however,
allowed to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect
to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net earnings and, if
presented, earnings per share, as if SFAS No. 123 had been adopted. The
accounting requirements of SFAS No. 123 are effective for transactions
entered into during fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management
has determined that the Corporation will continue to account for stock-
based compensation pursuant to Accounting Principles Board Opinion No. 25,
and therefore the disclosure provisions of SFAS No. 123 will have no effect
on its consolidated financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities",
that provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishment of liabilities. SFAS No.
125 introduces an approach to accounting for transfers of financial assets
that provides a means of dealing with more complex transactions in which
the seller disposes of only a partial interest in the assets, retains
rights or obligations, makes use of special purpose entities in the
transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, referred to as the financial components
approach, provides that the carrying amount of the financial assets
transferred be allocated to components of the transaction based on their
relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has
occurred. If the transfer does not qualify as a sale, it is accounted for
as a secured borrowing. Transactions subject to the provisions of SFAS No.
125 include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring
arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized
assets are retained and classified as held-to-maturity). A servicing asset
or liability that is purchased or assumed is initially recognized at its
fair value. Servicing assets and liabilities are amortized in proportion
to and over the period of estimated net servicing income or net servicing
loss and are subject to subsequent assessments for impairment based on fair
value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1997, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe that adoption of SFAS No. 125 will
have a material adverse effect on the Corporation's consolidated financial
position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings
per share, respectively. Basic earnings per share is computed without
including potential common shares, i.e., no dilutive effect. Diluted
earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares, including options,
warrants, convertible securities and contingent stock agreements. SFAS No.
128 is effective for periods ending after December 15, 1997. Early
application is not permitted. Based upon the provisions of SFAS No. 128,
the Corporation's basic and diluted earnings per share for the year ended
September 30, 1997, would have been $.71 and $.69, respectively.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting
guidance relating to disclosure about a company's capital structure. SFAS
No. 129 is effective for financial statements for periods ending after
December 15, 1997. SFAS No. 129 is not expected to have a material impact
on the Corporation's financial statements.
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.
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 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
six years.
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, 1997
and 1996, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years ended
September 30, 1997, 1996 and 1995. 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
years ended September 30, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio Grant Thornton, LLP
November 19, 1997
Harvest Home Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
September 30,
(In thousands, except share data)
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 558 $ 520
Federal funds sold 2,600 400
Interest-bearing deposits in other
financial institutions 2,106 788
Cash and cash equivalents 5,264 1,708
Investment securities designated as
available for sale - at market 8,039 12,105
Mortgage-backed securities designated
as available for sale - at market 32,466 20,429
Loans receivable - net 45,229 42,267
Office premises and equipment - at
depreciated cost 981 952
Federal Home Loan Bank stock - at cost 1,219 588
Accrued interest receivable on loans 245 209
Accrued interest receivable on mortgage-
backed securities 139 102
Accrued interest receivable on investments
and interest - bearing deposits 126 211
Prepaid expenses and other assets 73 74
Prepaid federal income taxes 51 73
Total assets $93,832 $78,718
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $58,786 $57,958
Advances from the Federal Home Loan Bank 24,000 10,000
Advances by borrowers for taxes and insurance 107 96
Accrued interest payable 89 77
Other liabilities 253 816
Deferred federal income taxes 253 46
Total liabilities 83,488 68,993
Commitments 0 0
Stockholders' equity
Common stock - 2,000,000 shares of no par
value authorized;
991,875 shares issued 0 0
Additional paid-in capital 6,884 6,740
Retained earnings - restricted 5,043 4,787
Shares acquired by Employee Stock Ownership Plan (378) (674)
Shares acquired by Recognition and Retention Plan(389) (486)
Unrealized gains (losses) on securities
designated as available for sale, net of
related tax effects 40 (9)
Less 77,018 and 57,018 shares of treasury
stock - at cost (856) (633)
Total stockholders' equity 10,344 9,725
Total liabilities and stockholders' equity $93,832 $78,718
</TABLE>
The accompanying notes are an integral part of these statements.
Harvest Home Financial Corporation
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended September 30,
(In thousands, except share data)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans $3,457 $3,159 $2,972
Mortgage-backed securities 1,654 767 565
Investment securities 675 1,026 1,092
Interest-bearing deposits and other 197 257 243
Total interest income 5,983 5,209 4,872
Interest expense
Deposits 2,786 2,814 2,569
Borrowings 903 155 0
Total interest expense 3,689 2,969 2,569
Net interest income 2,294 2,240 2,303
Provision for losses on loans 9 1 12
Net interest income after
Provision for losses on loans 2,285 2,239 2,291
Other income
Gain on sale of investment and
mortgage-backed securities 7 2 0
Other operating income 57 72 50
Total other income 64 74 50
General, administrative and other expense
Employee compensation and benefits 803 1,032 692
Occupancy and equipment 257 254 239
Federal deposit insurance premiums 28 498 137
Franchise taxes 121 124 80
Other operating 200 228 224
Total general, administrative and
other expense 1,409 2,136 1,372
Earnings before income taxes 940 177 969
Federal income taxes
Current 130 150 295
Deferred 183 (105) 34
Total federal income taxes 313 45 329
NET EARNINGS $ 627 $ 132 $ 640
EARNINGS PER SHARE $.70 $.16 $.73
</TABLE>
The accompanying notes are an integral part of these statements.
Harvest Home Financial Corporation
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1997, 1996 and 1995
(In thousands, except share data)
<CAPTION>
Unrealized
Shares gain (loss)
acquired on securities
Additional by stock designated
Common paid-in Retained benefit as available Treasury
stock capital earnings plans for sale stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 $ 0 $ 0 $ 4,581 $ 0 $ 0 $ 0 $4,581
Net proceeds from issuance
of common stock 0 9,473 0 (794) 0 0 8,679
Net earnings for the year
ended September 30, 1995 0 0 640 0 0 0 640
Cash dividends of $.21 per
share 0 0 (200) 0 0 0 (200)
Purchase of treasury shares -
at cost 0 0 0 0 0 (994) (994)
Balance at September 30, 1995 9,473 5,021 (794) 0 (994) 12,700
Net earnings for the year
ended September 30, 1996 0 0 132 0 0 0 132
Cash dividends of $3.40
per share 0 (2,796) (366) 0 0 0 (3,162)
Purchase of treasury shares -
at cost 0 0 0 0 0 (80) (80)
Amortization of expense related
to stock benefit plans 0 18 0 120 0 0 138
Purchase of shares for
recognition and retention plan 0 45 0 (486) 0 441 0
Unrealized losses on securities
designated as available
for sale, net of related
tax effects 0 0 0 0 (9) 0 (9)
Balance at September 30, 1996 0 6,740 4,787 (1,160) (3) 9,725
Net earnings for the year
ended September 30, 1997 0 0 627 0 0 0 627
Cash dividends of $.40 per share 0 0 (371) 0 0 0 (371)
Purchase of treasury shares -
at cost 0 0 0 0 0 (223) (223)
Amortization of expense related
to stock benefit plans 0 144 0 393 0 537
Unrealized gains on securities
designated as available
for sale, net of related
tax effects 0 0 0 0 49 0 49
Balance at September 30, 1997 $ 0 $6,884 $5,043 $ (767) $ 40 $ (856) $10,344
</TABLE>
The accompanying notes are an integral part of these statements.
24
Harvest Home Financial Corporation
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended September 30,
(In thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 627 $ 132 $ 640
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Amortization of deferred loan
origination fees (34) (43) (42)
Depreciation and amortization 51 51 43
Amortization of premiums on mortgage-
backed securities 6 14 19
Amortization of premiums on investment
securities 17 42 36
Gain on sale of investment and mortgage-
backed securities (7) (2) 0
Amortization expense of stock benefit plans 537 138 0
Provision for losses on loans 9 1 12
Federal Home Loan Bank stock dividends (59) (40) (34)
Increase (decrease) in cash due to
changes in:
Accrued interest receivable on loans (36) (23) (2)
Accrued interest receivable on mortgage-
backed securities (37) (47) (11)
Accrued interest receivable on investments
and interest-bearing deposits 85 116 (156)
Prepaid expenses and other assets 1 15 94
Accrued interest payable 12 53 (12)
Other liabilities (563) 677 134
Federal income taxes
Current 22 (57) (46)
Deferred 183 (105) 34
Net cash provided by operating activities 814 922 709
Cash flows provided by (used in)
investing activities:
Principal repayments on mortgage-backed
securities 2,644 1,144 1,228
Purchase of mortgage-backed securities (18,205) (12,972) (2,013)
Proceeds from sale of mortgage-backed
Securities available for sale 141 267 0
Proceeds from maturity of mortgage-backed
securities 3,500 0 0
Proceeds from maturity of investment
securities 2,003 6,000 6,000
Proceeds from sale of investment
securities available for sale 2,003 0 0
Purchase of investment securities 0 0 (14,076)
Principal repayments on loans 5,976 8,280 5,002
Loan disbursements (8,913) (12,260) (6,898)
Purchase of Federal Home Loan Bank stock (572) 0 0
Purchase of office equipment (80) (291) (80)
Net cash used in investing activities (11,503) (9,832) (10,837)
Net cash used in operating and investing
activities (balance carried forward) (10,689) (8,910) (10,128)
</TABLE>
<TABLE>
Harvest Home Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended September 30,
(In thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(10,689) $ (8,910) $(10,128)
Cash flows provided by (used in)
financing activities:
Net increase (decrease) in deposit
accounts 828 1,533 (11,385)
Proceeds from Federal Home Loan Bank
Advances 18,200 10,000 0
Repayment of Federal Home Loan Bank
Advances (4,200) 0 0
Advances by borrowers for taxes and
insurance 11 14 8
Net proceeds from issuance of common stock 0 0 8,679
Dividends on common stock (371) (3,162) (200)
Purchase of treasury stock (223) (80) (994)
Net cash provided by (used in) financing
activities 14,245 8,305 (3,892)
Net increase (decrease) in cash and cash
equivalents 3,556 (605) (14,020)
Cash and cash equivalents at beginning
of year 1,708 2,313 16,333
Cash and cash equivalents at end of year $ 5,264 $ 1,708 $ 2,313
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Federal income taxes $ 96 $ 208 $ 260
Interest paid on deposits and borrowings $ 3,677 $ 2,916 $ 2,600
Supplemental disclosure of noncash
investing activities:
Transfer of investment and mortgage-
backed securities to an available
for sale classification $ 0 $25,732 $ 0
Unrealized gains (losses) on securities
designated as available for sale,
net of related tax effects $ 49 $ (9) $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During fiscal 1993, the Board of Directors of Harvest Home Savings Bank,
(the "Savings Bank") adopted an overall plan of conversion and
reorganization (the "Plan") whereby the Savings Bank would convert to the
stock form of ownership (the "Conversion"), followed by the issuance of
all of the Savings Bank's outstanding stock to a newly formed holding
company, Harvest Home Financial Corporation (the "Corporation"), and the
issuance of common shares of the Corporation to subscribing members of
the Savings Bank. The conversion to the stock form of ownership was
completed on October 7, 1994, culminating in the Corporation's issuance
of 991,875 common shares. Condensed financial statements of the
Corporation for the years ended September 30, 1997, 1996 and 1995 are
presented in Note N. Future references are made to either the
Corporation or the Savings Bank as applicable.
The Corporation is a savings and loan holding company whose activities
are primarily limited to holding the stock of 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 to be 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 shareholders' equity,
respectively.
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, 1997 and 1996, the Corporation's
shareholders' equity reflected a net unrealized gain and a net unrealized
loss of $40,000 and $9,000, respectively, on securities designated as
available for sale.
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.
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).
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which was amended by SFAS No. 118 as to certain
income recognition and financial statement disclosure provisions and was
effective for the Corporation in fiscal 1996. SFAS No. 114 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.
The Savings Bank adopted SFAS No. 114, as subsequently amended, on
October 1, 1995, without material effect on consolidated financial
condition or results of operations.
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, 1997 and 1996, the Savings Bank had no loans that would
be defined as impaired under SFAS No. 114.
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". SFAS No. 109
established financial accounting and reporting standards for the effects
of income taxes that result from the Corporation's activities within the
current and previous years. 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, 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.
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, 1997, 1996 and 1995.
The Savings Bank had provided retirement benefits through a defined
contribution pension plan to substantially all employees who had attained
the age of 21 and completed one year of service. Contributions to the
plan were made annually and amounted to 15% of base compensation. The
plan was terminated during fiscal 1995. The provision for pension
expense totaled $13,000 for the fiscal year ended September 30, 1995.
In conjunction with its common stock offering, the Corporation
implemented an Employee Stock Ownership Plan (ESOP). The ESOP 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 changed the measure of
compensation expense recorded by employers from the cost of allocated
ESOP shares to the fair value of ESOP shares allocated to participants
during a fiscal year. Expense recognized related to the ESOP totaled
approximately $48,000, $342,000 and $71,000 for the years ended September
30, 1997, 1996 and 1995, respectively.
The Corporation also has a Recognition and Retention Plan (RRP).
Subsequent to the offering the RRP purchased 39,675 shares of its common
stock in the open market. During fiscal 1996, 34,712 shares available
under the RRP were granted to executive officers and members of the Board
of Directors of the Corporation effective upon ratification of the RRP by
the Corporation's shareholders. Common stock granted under the RRP vests
ratably over a five year period, commencing in December 1995. A
provision of $97,000 and $73,000 related to the RRP was charged to
expense for the fiscal years ended September 30, 1997 and 1996,
respectively.
10. Earnings Per Share and Dividends Per Share
Earnings per share for the years ended September 30, 1997, 1996 and 1995
is based upon the weighted-average shares outstanding during the period,
less 36,774, 65,933 and 79,350 shares, respectively, in the ESOP that are
unallocated and not committed to be released. Weighted-average common
shares deemed outstanding totaled 894,201, 848,210 and 879,978 for the
years ended September 30, 1997, 1996 and 1995, respectively. There was
no material dilutive effect to the Corporation's stock option plan.
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
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. Management has obtained a Private Letter
Ruling from the Internal Revenue Service which states that the
Corporation's dividend payments in excess of accumulated earnings and
profits are considered a tax-free return of capital for federal income
tax purposes. As a result, management believes that approximately $.37
and $2.64 of the fiscal 1997 and 1996 distributions 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, 1997 and 1996:
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.
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.
11. Fair Value of Financial Instruments (continued)
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, 1997 and 1996, the difference between
the fair value and notional amount of loan commitments was not
material.
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>
1997 1996
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 5,264 $ 5,264 $ 1,708 $ 1,708
Investment securities 8,039 8,039 12,105 12,105
Mortgage-backed securities 32,466 32,466 20,429 20,429
Loans receivable 45,229 46,244 42,267 42,695
Stock in Federal Home
Loan Bank 1,219 1,219 588 588
$92,217 $93,232 $77,097 $77,525
Financial liabilities
Deposits $58,786 $58,938 $57,958 $58,099
Advances from Federal Home
Loan Bank 24,000 23,837 10,000 10,046
Escrow deposits 107 107 96 96
$82,893 $82,882 $68,054 $68,241
</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 1997
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost and approximate fair values of investment securities
at September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
<S> <C> <C> <C> <C>
Available for sale: (In thousands)
U.S. Government agency
obligations $ 7,972 $67 $ 0 $ 8,039
1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
obligations $11,992 $123 $ 10 $12,105
The amortized cost and approximate fair values of U.S. Government agency
obligations by contractual term to maturity at September 30 are shown
below:
<CAPTION>
1997 1996
Amortized Fair Amortized Fair
Cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $3,971 $4,013 $ 4,030 $ 4,065
Due after one year through
five years 4,001 4,026 7,962 8,040
$7,972 $8,039 $11,992 $12,105
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate fair values of mortgage-backed securities at September 30, 1997
and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
<S> <C> <C> <C> <C>
Available for sale: (In thousands)
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
1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Available for sale: (In thousands)
Federal Home Loan Mortgage Corporation:
Participation certificates $ 2,732 $ 8 $ 47 $ 2,693
Collateralized mortgage obligations 7,003 57 25 7,035
Government National Mortgage Association:
Participation certificates 99 11 0 110
Federal National Mortgage Association:
Participation certificates 4,682 17 109 4,590
Collateralized mortgage obligations 6,040 0 39 6,001
Total mortgage-backed securities $20,556 $ 93 $ 220 $ 20,429
</TABLE>
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.
September 30,
1997 1996
(In thousands)
Due within three years $ 1,145 $ 0
Due in three to five years 2,169 1,207
Due in five to ten years 1,253 3,778
Due in ten to twenty years 834 1,117
Due after twenty years 27,073 14,454
$32,474 $20,556
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $39,821 $35,491
Home equity lines of credit 1,130 1,197
Multifamily 1,402 1,522
Construction 1,513 3,290
Nonresidential real estate and land 2,554 3,281
Deposit account 45 42
46,465 44,823
Less:
Undisbursed portion of loans in process 1,019 2,320
Deferred loan origination fees 102 125
Allowance for loan losses 115 111
$45,229 $42,267
</TABLE>
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 $42.6 million, or 94%, of
the total loan portfolio at September 30, 1997, and $38.9 million, or
92%, of the total loan portfolio at September 30, 1996. 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 $250,000, $350,000 and $540,000
at September 30, 1997, 1996 and 1995, respectively. At September 30,
1997, all loans serviced for others had been sold with recourse.
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 $156,000, $181,000 and $203,000 at September 30, 1997, 1996
and 1995, respectively. During the fiscal year ended September 30, 1997,
no loans were disbursed to officers and directors, while principal
repayments of $25,000 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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $111 $110 $ 98
Provision for losses on loans 9 1 12
Charge-off of loans (5) 0 0
Balance at end of year $115 $111 $110
</TABLE>
At September 30, 1997, 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, 1997, 1996 and 1995, the Savings Bank's nonaccrual and
nonperforming loans totaled $95,000, $164,000 and $143,000, respectively.
Interest income which would have been recognized if such loans had
performed pursuant to contractual terms totaled approximately $6,000,
$7,000 and $5,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following at September
30:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land and improvements $ 119 $ 119
Office buildings and improvements 1,230 1,197
Furniture, fixtures and equipment 492 445
Automobile 14 14
1,855 1,775
Less accumulated depreciation 874 823
$ 981 $ 952
</TABLE>
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-average 1997 1996
interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts - 2.69% in 1997 and
2.66% in 1996 $ 2,699 4.6%$ 2,647 4.6%
Super NOW accounts - 2.75% in 1997
and 1996 300 .5 192 .3
Passbook accounts - 2.79% in 1997
and 1996 9,143 15.6 9,530 16.4
Money market demand deposit -
3.00% in 1997 and 1996 4,332 7.4 4,721 8.2
Total demand, transaction and
passbook deposits 16,474 28.1 17,090 29.5
Certificates of deposit:
Original maturities of:
Less than 12 months
5.09% in 1997 and 4.94% in 1996 3,547 6.0 5,799 10.0
12 months
5.87% in 1997 and 5.34% in 1996 21,993 37.4 15,495 26.7
15 months
5.65% in 1996 0 0 2,196 3.8
18 months
5.82% in 1997 and 5.86% in 1996 4,634 7.9 4,652 8.0
24 months
4.60% in 1996 0 0 52 .1
30 months
5.79% in 1997 and 5.74% in 1996 4,297 7.3 4,494 7.8
48 months
5.03% in 1997 and 5.06% in 1996 72 .1 188 .3
More than 48 months
6.12% in 1997 and 6.13% in 1996 7,769 13.2 7,992 13.8
Total certificates of deposit 42,312 71.9 40,868 70.5
Total deposits $58,786 100.0% $57,958 100.0%
</TABLE>
At September 30, 1997 and 1996, the Savings Bank had deposit accounts with
balances greater than $100,000 totaling $2.5 million and $2.0 million,
respectively.
Interest expense on deposit accounts is summarized as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Money market demand deposit accounts $ 144 $ 144 $ 160
Passbook accounts 252 266 343
Escrow accounts 4 4 3
NOW accounts 101 65 58
Super NOW accounts 6 9 9
Certificates of deposit 2,280 2,326 1,996
$2,786 $2,814 $2,569
</TABLE>
Maturities of outstanding certificates of deposit are summarized as
follows at September 30:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than six months $13,423 $14,110
Six months to one year 19,090 14,109
One to two years 3,536 5,074
Two to three years 3,548 2,092
Three to four years 2,338 3,111
Over four years 377 2,372
$42,312 $40,868
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1997 by pledges of certain residential mortgage loans totaling $36.0
million and the Savings Bank's investment in Federal Home Loan Bank
stock, are summarized as follows:
Interest Rate Maturing fiscal September 30,
year ending in 1997 1996
(In thousands)
6.53% 1998 $ 3,200 $ 0
5.55% 2006 0 10,000
5.71% 2006 6,500 0
5.71% 2007 14,300 0
$24,000 $10,000
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, 1997, the Savings Bank had commitments for unused lines
of credit under home equity loans of $1.7 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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at
statutory rate $320 $60 $329
Decrease in taxes resulting from:
Other (primarily surtax exemptions
in 1996) (7) (15) 0
Federal income tax provision per
Consolidated financial statements $313 $45 $329
</TABLE>
The composition of the Corporation's net deferred tax liability at
September 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance $ 39 $ 38
Deferred loan origination fees 0 19
Unrealized loss on securities designated as
available for sale 0 5
Stock benefit plans 25 31
SAIF recapitalization assessment 0 125
Other 3 0
Total deferred tax assets 67 218
Deferred tax liabilities:
Percentage of earnings bad debt
deduction (125) (125)
Deferred loan origination costs (17) 0
Federal Home Loan Bank stock dividends (156) (136)
Unrealized gain on securities designated
as available for sale ( 19) 0
Other (3) (3)
Total deferred tax liabilities (320) (264)
Net deferred tax liability $(253) $ (46)
</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, 1997. 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.
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.
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, 1997, management believes that the Savings Bank met
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
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.
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, 1997, none of the stock options granted had been
exercised.
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 been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net earnings As reported $627 $132
Pro-forma $627 $ 34
Earnings per share As reported $.70 $.16
Pro-forma $.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.
A summary of the status of the Corporation's fixed stock option plan as
of September 30, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 74,297 $12.25 0 $ 0
Adjustment for return of capital
distribution 22,582 $ 9.42 0 $ 0
Granted 0 $ 0 74,297 $12.25
Exercised 0 $ 0 0 $ 0
Forfeited 0 $ 0 0 $ 0
Outstanding at end of year 96,879 $ 9.42 74,297 $12.25
Options exercisable at year-end 96,879 $ 9.42 74,297 $12.25
Weighted-average fair value of
options granted during the year N/A $ 1.99
</TABLE>
The following information applies to options outstanding at September 30,
1997:
Number outstanding 96,879
Range of exercise prices $9.42
Weighted-average exercise price $9.42
Weighted-average remaining contractual life 8.25 years
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Savings Bank and of other savings
associations are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through the Savings Association Insurance Fund (the "SAIF").
Prior to September 1996, 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.
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.
NOTE M - CORPORATE REORGANIZATION AND CONVERSION TO STOCK
FORM
On May 17, 1993, the Savings Bank's Board of Directors adopted a plan of
conversion and reorganization (the "Plan") whereby the Savings Bank would
convert to the stock form of ownership, followed by the issuance of all
of the Savings Bank's outstanding common stock to a newly formed holding
company, Harvest Home Financial Corporation (the "Corporation").
On October 7, 1994, the Savings Bank completed its conversion to the
stock form of ownership, and issued all of the Savings Bank's outstanding
common shares to the Corporation.
In connection with the conversion, the Corporation sold 991,875 shares to
depositors of the Savings Bank at a price of $10.00 per share which,
after consideration of offering expenses totaling $460,000, and shares
purchased by employee benefit plans, resulted in net cash proceeds of
$8.7 million.
At the date of the conversion, the Savings Bank established a liquidation
account in an amount equal to retained earnings reflected in the
statement of financial condition used in the conversion offering
circular. The liquidation account will be maintained for the benefit of
eligible savings account holders who maintained deposit accounts in the
Savings Bank after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then
current adjusted balance of deposit accounts held, before any liquidation
distribution may be made with respect to the common shares. Except for
the repurchase of stock and payment of dividends by the Savings Bank, the
existence of the liquidation account will not restrict the use or further
application of such retained earnings.
The Savings Bank may not declare or pay a cash dividend on, or repurchase
any of its common shares if the effect thereof would cause the Savings
Bank's stockholders' equity to be reduced below either the amount
required for the liquidation account or the regulatory capital
requirements for insured institutions.
NOTE N - 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, 1997 and 1996, and
the results of its operations and its cash flows for the three years ended
September 30, 1997, 1996 and 1995.
<TABLE>
Harvest Home Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and cash equivalents $ 355 $ 393
Mortgage-backed securities designated as
available for sale - at market 1,020 1,238
Loan receivable from ESOP 378 674
Investment in Harvest Home Savings Bank 8,585 7,543
Prepaid expenses and other 44 110
Total assets $10,382 $ 9,958
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 38 $ 233
Stockholders' equity
Common stock and additional paid-in capital 11,099 10,367
Retained earnings 61 0
Unrealized gain (loss) on securities
designated as available for sale,
net of tax effects 40 (9)
Less treasury stock - at cost (856) (633)
Total stockholders' equity 10,344 9,725
Total liabilities and stockholders' equity $10,382 $ 9,958
</TABLE>
<TABLE>
Harvest Home Financial Corporation
STATEMENTS OF EARNINGS
For the year ended September 30,
(In thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenue
Interest income $108 $274 $277
Other income 27 44 48
Equity in earnings of Harvest Home
Savings Bank 602 156 496
Total revenue 737 474 821
General and administrative expenses 100 354 104
Earnings before income taxes (credits) 637 120 717
Federal income taxes (credits) 10 (12) 77
NET EARNINGS $627 $132 $640
</TABLE>
<TABLE>
Harvest Home Financial Corporation
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash provided by (used in) operating
activities:
Net earnings for the year $627 $ 132 $ 640
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities
Undistributed earnings of consolidated
subsidiary (602) (156) (101)
Increase (decrease) in cash due to
changes in:
Accretion of discounts on mortgage-
backed securities (4) (7) 0
Prepaid expenses and other assets 66 67 (177)
Amortization expense of employee
benefit plans 144 0 0
Other liabilities (199) 126 111
Net cash provided by operating
activities 32 162 473
Cash flows provided by (used in)
investing activities:
Proceeds from repayment of loan to ESOP 296 120 0
Proceeds from maturities of investment
securities 0 2,000 0
Purchase of investment securities 0 0 (2,000)
Purchase of mortgage-backed securities 0 0 (2,013)
Principal repayments on mortgage-backed
securities 228 491 314
Purchase of common shares of Harvest
Home Savings Bank 0 0 (3,883)
Issuance of loan to ESOP 0 0 (794)
Net cash provided by (used in)
investing activities 524 2,611 (8,376)
Cash flows provided by (used in)
financing activities:
Proceeds from issuance of common stock 0 0 9,473
Payment of dividends on common stock (371) (3,162) (200)
Purchase of treasury stock (223) (80) (994)
Proceeds from sale of treasury stock 0 486 0
Net cash provided by (used in)
financing activities (594) (2,756) 8,279
Net increase (decrease) in cash and
cash equivalents (38) 17 376
Cash and cash equivalents at beginning
of year 393 376 0
Cash and cash equivalents at end of year $355 $ 393 $ 376
</TABLE>
HARVEST HOME FINANCIAL CORPORATION
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS OFFICERS
Walter A. Schuch John E. Rathkamp
Chairman of the Board President, Chief Executive Officer
and Secretary
John E. Rathkamp
Director Dennis J. Slattery
Executive Vice President and Treasurer
Richard F. Hauck
Director Richard F. Hauck
Vice President
Marvin J. Ruehlman
Director
Thomas L. Eckert
Director
Herbert E. Menkhaus
Director
George C. Eyrich
Director
HARVEST HOME SAVINGS BANK
DIRECTORS AND OFFICERS
John E. Rathkamp
Director, President, Chief Executive Officer and Secretary
Dennis J. Slattery
Executive Vice President, Treasurer
Richard F. Hauck
Director and Vice President
Walter A. Schuch
Director
Thomas L. Eckert
Director
Marvin J. Ruehlman
Director
Herbert E. Menkhaus
Director
George C. Eyrich
Director
BANKING LOCATIONS
Main Office
3621 Harrison Avenue
Cincinnati, Ohio 45211
3663 Ebenezer Road 7030 Hamilton Avenue
Cincinnati, Ohio 45248 Cincinnati, Ohio 45231
STOCKHOLDER SERVICES
The Fifth Third Bank serves as transfer agent and dividend distributing
agent for HHFC's shares. Communications regarding change of address,
transfer of shares, lost certificates and dividends should be sent to:
Dana S. Hushak
Vice President
Fifth-Third Bank
Trust and Investment Services
Fifth-Third Center
Cincinnati, Ohio 45263
ANNUAL MEETING
The Annual Meeting of Stockholders of Harvest Home Financial Corporation
will be held on December 23, 1997, at 11:00 a.m., local time, at Dante's
Restaurant, Rybolt Road and I-74, Cincinnati, Ohio. Stockholders are
cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
A copy of HHFC's Annual Report on Form 10-KSB, as filed with the Securities
and Exchange Commission will be available at no charge to Stockholders upon
written request to:
Harvest Home Financial Corporation
Attention: Dennis J. Slattery
Executive Vice President
3621 Harrison Avenue
Cheviot, Ohio 45211
