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, 1999
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.
The issuer's revenues for the fiscal year ended September 30, 1999, were $6.6
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
10, 1999 was $12.8 million.
875,289 shares of issuer's common shares were issued and outstanding as
of December 10, 1999, this total is net of 116,586 shares of issuer's common
stock repurchased as treasury shares.
Page 1 of 43 sequentially numbered
pages.
Index to Exhibits on page 44.
1
<PAGE>
PART I
Item 1. Description of Business
Harvest Home Financial Corporation ("HHFC", or the "Corporation") was
incorporated in February 1994 under Ohio Law for the purpose of acquiring all of
the capital stock issued by Harvest Home Savings Bank in connection with its
conversion from a state chartered mutual savings bank to a state chartered stock
savings bank (the "Conversion"). The Conversion was consummated on October 7,
1994 and, as a result, the Corporation became a unitary savings and loan holding
company for its wholly owned subsidiary, Harvest Home Savings Bank ("Harvest
Home" or the "Bank"). The Corporation has no significant assets other than the
Bank's common stock acquired in the Conversion and has no significant
liabilities. Future references to the Corporation or Harvest Home are utilized
herein as the context requires.
General
As a community oriented financial institution, Harvest Home seeks to
serve the financial needs of the families and community businesses in its market
area. Harvest Home is principally engaged in the business of attracting deposits
from the general public (which are insured to applicable limits by the Savings
Association Insurance Fund) and using such deposits to originate residential
loans in its primary market area. To a lesser extent, Harvest Home also
originates construction loans and loans secured by multi-family residential real
estate, nonresidential real estate, and deposits. In addition, Harvest Home
invests in mortgage-backed securities, other investment grade securities, and
short-term liquid assets. Harvest Home also offers a Visa credit card program
through a commercial bank.
Harvest Home conducts business from its main office in Cheviot, Ohio and
from two full-service branch offices located in the Cincinnati area. Harvest
Home's primary market area consists of western Hamilton County, Ohio, although
its market also extends to the remainder of Hamilton County and to the townships
contiguous to Hamilton County in the counties of Butler, Clermont, and Warren.
2
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding HHFC at the
dates and for the periods indicated. The financial information should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
Selected Financial
condition At September 30,
and other data: 1999 1998 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $98,935 $96,894 $93,832 $78,718 $69,532
Cash and cash
equivalents(1) 2,849 2,887 5,264 1,708 2,313
Investment securities
held to maturity - at cost - - - - 18,032
Investment securities
available for sale -
at market 5,951 4,032 8,039 12,105 -
Mortgage-backed
securities held to
maturity - at cost - - - - 9,009
Mortgage-backed securities
available for sale -
at market 33,711 37,864 32,466 20,429 -
Loans receivable - net 52,790 48,497 45,229 42,267 38,245
Deposits 66,220 60,225 58,786 57,958 56,425
Advances from the FHLB 22,600 25,850 24,000 10,000 -
Stockholders' equity 9,653 9,977 10,344 9,725 12,706
Number of:
Real estate loans
outstanding 925 919 1,054 1,038 1,000
Deposit accounts 7,055 6,879 6,946 7,078 7,164
Full service
offices 3 3 3 3 3
</TABLE>
(1) Includes cash, federal funds sold and interest-bearing deposits in other
financial institutions.
3
<PAGE>
<TABLE>
<CAPTION>
Summary of Earnings:
Year Ended September 30,
1999 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $6,482 $6,367 $5,983 $5,209 $4,872
Interest expense 4,211 4,143 3,689 2,969 2,569
----- ----- ----- ----- -----
Net interest income 2,271 2,224 2,294 2,240 2,303
Provision for losses on loans 12 12 9 1 12
----- ----- ----- ----- -----
Net interest income after
provision for losses on loans 2,259 2,212 2,285 2,239 2,291
Other income 92 109 64 74 50
General, administrative
and other expense 1,572 1,516 1,409 2,136 1,372
----- ----- ----- ----- -----
Earnings before income taxes 779 805 940 177 969
Federal income taxes 265 264 313 45 329
----- ----- ----- ----- -----
Net earnings $ 514 $ 541 $ 627 $ 132 $ 640
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Selected Financial At September 30,
ratios: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities) 1.96% 1.95% 2.17% 2.24% 2.48%
Net interest margin (net interest income
As a percentage of average
interest earning assets) 2.35 2.45 2.76 3.07 3.27
Return on equity (net earnings divided
by average equity) 5.14 5.28 6.09 1.05 5.09
Return on assets (net earnings
divided by average total assets) 0.51 0.58 0.73 0.18 0.89
Equity-to-assets ratio
(average equity divided
by average total assets) 10.01 11.05 12.06 16.94 17.56
Loans loss reserve as a percentage
of non-performing loans 556.00% 259.18% 121.05% 67.68% 76.92%
</TABLE>
4
<PAGE>
Lending Activities
General. Harvest Home's primary lending activity is the origination of
conventional mortgage loans for its own portfolio secured by one-to four- family
residential properties located in Harvest Home's primary market area. To a
lesser extent, loans for the construction of one- to four-family homes, mortgage
loans on multifamily properties containing five units or more and nonresidential
properties, and secured home equity loans are also offered by Harvest Home. In
addition to mortgage lending, Harvest Home makes a limited amount of consumer
loans secured by deposits.
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of Harvest Home's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Residential real estate loans:
Construction loans $ 5,964 11.3% $ 4,663 9.6% $ 1,513 3.4%
1-4 family and multi-family (1) 46,741 88.5 43,856 89.8 42,353 93.6
Nonresidential real estate and land 3,085 5.8 3,024 6.2 2,554 5.7
Deposit accounts 20 .1 25 .1 45 .1
------ ----- ------ ----- ------ -----
55,810 105.7 51,568 105.7 46,465 102.8
Less:
Loans in process (2,823) (5.3) (2,556) (5.2) (1,019) (2.3)
Deferred loan origination fees (58) (0.1) (88) (0.2) (102) (0.2)
Allowance for loan losses (139) (0.3) (127) (0.3) (115) (0.3)
------ ----- ------ ----- ------ -----
Total Loans $52,790 100.0% $48,797 100.0% $45,229 100.0%
====== ===== ====== ===== ====== =====
Type of Security:
Residential real estate:
1-4 family $50,527 95.7% $47,152 96.6% $42,464 93.9%
Other dwelling 2,178 4.1 1,367 2.8 1,402 3.1
Nonresidential real estate 3,085 5.8 3,024 6.2 2,554 5.7
Deposit accounts 20 .1 25 .1 45 .1
------ ----- ------ ----- ------ -----
55,810 105.7 51,568 105.7 46,465 102.8
Less:
Loans in process (2,823) (5.3) (2,556) (5.2) (1,019) (2.3)
Deferred loan origination fees (58) (0.1) (88) (0.2) (102) (0.2)
Allowance for loan losses (139) (0.3) (127) (0.3) (115) (0.3)
------ ----- ------ ----- ------ -----
Total Loans $52,790 100.0% $48,797 100.0% $45,229 100.0%
====== ===== ====== ===== ====== =====
At September 30,
1996 1995
Percent Percent
of total of total
Amount loans Amount loans
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan:
Residential real estate loans:
Construction loans $ 3,290 7.8% $ 1,505 3.9%
1-4 family and multi-family (1) 38,210 90.4 34,002 88.9
Nonresidential real estate and land 3,281 7.8 3,341 8.8
Deposit accounts 42 .1 83 .2
------ ----- ------ -----
44,823 106.1 38,931 101.8
Less:
Loans in process (2,320) (5.5) (428) (1.1)
Deferred loan origination fees (125) (0.3) (148) (0.4)
Allowance for loan losses (111) (0.3) (110) (0.3)
------ ----- ------ -----
Total Loans $42,267 100.0% $38,245 100.0%
====== ===== ====== =====
Type of Security:
Residential real estate:
1-4 family $39,978 94.6% $34,117 89.2%
Other dwelling 1,522 3.6 1,390 3.6
Nonresidential real estate 3,281 7.8 3,341 8.8
Deposit accounts 42 .1 83 .2
------ ----- ------ -----
44,823 106.1 38,931 101.8
Less:
Loans in process (2,320) (5.5) (428) (1.1)
Deferred loan origination fees (125) (0.3) (148) (0.4)
Allowance for loan losses (111) (0.3) (110) (0.3)
------ ----- ------ -----
Total Loans $42,267 100.0% $38,245 100.0%
====== ===== ====== =====
</TABLE>
(1) Includes home equity lines of credit underwritten on the same basis as
first mortgage loans.
5
<PAGE>
Loan maturity. The following table sets forth certain information as of
September 30, 1999 regarding the dollar amount of loans maturing in Harvest
Home's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10-20 Due 20 or
Due during the years ended years years years more years
September 30, after after after after
2000 2001 2002 9/30/99 9/30/99 9/30/99 9/30/99 Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2)
One to four family residential:
Adjustable $1,480 $ 11 $ 8 $160 $ 624 $12,579 $6,270 $21,132
Fixed 19 486 247 441 5,154 17,282 2,746 26,375
Multi-family residential:
Adjustable - - 23 - 286 1,357 512 2,178
Non-residential 30 5 95 - 882 2,073 - 3,085
Deposit account loans 20 - - - - - - 20
----- --- --- --- ----- ------ ----- ------
Total loans $1,549 $502 $373 $601 $6,946 $33,291 $9,528 $52,790
===== === === === ===== ====== ===== ======
</TABLE>
(1) Amounts shown are net of loans in process of $2,823,000, deferred loan
origination fees of $58,000 and allowance for loan losses of $139,000.
(2) Includes construction loans and land loans.
6
<PAGE>
The following table sets forth the dollar amount of all loans due after
one year from September 30, 1999, 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 $26,356 $19,652 $46,008
Multi-family
residential - 2,178 2,178
Nonresidential - 3,055 3,055
------ ------ ------
Total loans: $26,356 $24,885 $51,241
====== ====== ======
</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
southeastern Indiana. 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 20 years and adjustable-rate mortgage loans ("ARMs") up to 95% LTV
not to exceed 30 years. Harvest Home does not require 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. No private
mortgage insurance is required for any of these loan products.
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
7
<PAGE>
adjustment date is usually 2% with a maximum adjustment of 5% over the term of
the loan. ARMs generally have an increased risk of delinquency in periods of
rising interest rates due to the increasing monthly payments required of
borrowers. Harvest Home has in the past issued three-year ARMs tied to different
indexes. One such index is tied to a one-year (our most current index) constant
maturity U.S. Treasury Index. Another index is tied to the interest rates being
charged by Harvest Home for similar type loans at the time of the interest rate
change. Borrowers are qualified at the contract rate at the time of origination
of the loan.
Harvest Home's one- to four-family residential real estate loan
portfolio, including construction loans, was approximately $50.5 million at
September 30, 1999, and represented 95.7% of total loans at such date. At such
date, loans secured by one- to four-family residential real estate with
outstanding balances of $25,000, or .1%, of the total one- to four-family
residential real estate loan balance, were non-performing. 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 may require 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, 1999, Harvest Home had $2.2 million of multi-family
residential real estate loans, representing 4.1% of total loans at that date. At
such date, no such loans were non-performing.
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 20 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. These loans are typically one year in duration and require only interest
payments until the loan becomes a permanent loan upon completion of
construction. 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
8
<PAGE>
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, 1999, Harvest Home had $6.0 million of construction loans,
or 11.3% 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, 1999
had a principal balance of $468,600 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 may require 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, 1999, Harvest Home had a total of $3.0 million invested in
nonresidential real estate loans. Such loans comprised approximately 5.8% of
Harvest Home's total loans at such date. At such date, none of the
nonresidential real estate loans were non-performing.
Deposit Account Loans. Harvest Home makes consumer loans, exclusively to
depositors on the security of their deposit accounts. Such loans are made at
adjustable rates of interest, and the principal amount of the loan cannot exceed
the face value of the pledged deposit. Interest is due quarterly, and principal
is due on demand.
At September 30, 1999, Harvest Home had approximately $20,000 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.
9
<PAGE>
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 management has reason to believe that an
environmental problem may exist. For most nonresidential properties, an
environmental report is required. For most multi-family and nonresidential
mortgage loans, a personal guarantee is required. Upon the completion of the
appraisal and the receipt of information on the borrower, the application for a
loan is submitted to the Executive Committee and/or the Board of Directors for
approval or rejection. Loan applications which do not exceed $200,000 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 in 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 20 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 will consider participation in loans 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:
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans Originated:
Construction $ 3,046 $ 1,540 $ 1,625 $ 3,488 $ 962
1 to 4 Family 10,768 11,256 6,271 7,082 5,466
Home equity line
of credit 883 212 532 570 385
5 or more units 710 433 - 220 -
Nonresidential real estate 431 438 485 844 -
Deposit accounts 6 43 - 56 85
------ ------ ------ ------ -----
Total loans originated $15,844 $13,922 $ 8,913 $12,260 $6,898
====== ====== ====== ====== =====
Mortgage-backed
securities purchased:
Insured, guaranteed or
collaterized mortgage-backed
securities $11,967 $26,992 $18,205 $12,972 $2,013
====== ====== ====== ====== =====
Mortgage-backed securities sold $ - $ 1,878 $ 141 $ 267 $ -
====== ====== ====== ====== =====
</TABLE>
Federal Lending Limit. 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 $1.5 million to one borrower
at September 30, 1999. 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 revenue 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.
11
<PAGE>
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.
12
<PAGE>
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998 September 30, 1997
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 11 $506 0.96% 6 $290 0.60% 13 $461 1.02%
60 - 89 days 5 429 0.81 4 142 0.29 5 376 0.83
90 days and over 1 25 0.05 1 49 0.10 2 95 0.21
--- ---- ---- --- ---- ---- --- ---- ----
Total delinquent
loans 17 $960 1.82% 11 $481 0.99% 20 $932 2.06%
== === ==== == === ==== == === ====
</TABLE>
1) At September 30, 1999, delinquencies include 15 one-to-four family
residential loans with principal balances totaling $735,531, one
multi-family residential loan with a principal balance of $195,122 and one
nonresidential loan with a principal balance of $29,777.
13
<PAGE>
The following table sets forth the amounts and categories of Harvest
Home's non-performing assets as indicated by the dates on the accrual status
when they become past due 90 days or more.
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans
delinquent 90
days or more $ - $ - $ -
=== === ===
Loans accounted for on a nonaccrual basis:
Real Estate:
Residential 25 49 64
Nonresidential - - 31
Deposit account - - -
--- --- ---
Total nonaccrual loans 25 49 95
Other non-performing assets - - -
--- --- ---
Total non-performing assets $ 25 $ 49 $ 95
=== === ===
Total non-performing
assets as a percentage
of total assets .03% .05% .10%
Specific loan loss
allowance $ - $ - $ -
General loan loss
allowance (unallocated
as to any specific
loan type) 139 127 115
--- --- ---
Total loan loss allowance $139 $127 $115
=== === ===
Loan loss allowance
as a percent of
non-performing loans 556.0% 259.2% 121.1%
Loan loss allowance as
a percent of non-
performing assets 556.0% 259.2% 121.1%
</TABLE>
14
<PAGE>
Harvest Home had one non-performing loan at both September 30, 1999 and
1998. During the periods shown, Harvest Home had no restructured loans within
the meaning of SFAS No. 114.
Harvest Home's classification policy provides for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that Harvest Home will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are designated "special mention" by management. An insured institution is
required to establish general allowances for loan losses in an amount deemed
prudent by management for loans classified substandard or doubtful, as well as
for other problem loans. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of the amount of the asset so classified or to charge off such
amount.
Generally, Harvest Home classifies as "substandard" all loans that are
more than 90 days delinquent unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 90 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate.
The aggregate amounts of Harvest Home's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Substandard $524 $228 $219
Doubtful - - -
Loss - - -
--- --- ---
Total classified
assets $524 $228 $219
=== === ===
</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.
15
<PAGE>
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, 1999, 1998,
and 1997, Harvest Home's allowance for loan losses totaled $139,000, $127,000
and $115,000, 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,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> C>
Balance at
beginning of year $127 $115 $111
Loans charged-off - - (5)
Recoveries - - -
Provision for losses
on loans (charged to
operations) 12 12 9
--- --- ---
Balance at end of period $139 $127 $115
=== === ===
Ratio of allowance for
losses on loans to
non-accrual loans 556.0% 259.2% 121.1%
Ratio of allowance
for losses on loans
to total loans 0.26% 0.25% 0.25%
</TABLE>
16
<PAGE>
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 FNMA and FHLMC. At September 30,
1999, $24.0 million, or 71.2% 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, 1999, Harvest Home's CMO/REMICS totaled $26.8
million, or 79.5%, of the mortgage-backed securities portfolio. All of the
CMO/REMICs owned by Harvest Home are insured or guaranteed directly, or
indirectly, through mortgage-backed securities underlying the obligations by
FNMA or FHLMC. 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, 1999, 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
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
FHLMC participation
certificates $ 4,901 $ - $ 128 $ 4,773
FHLMC CMOs 22,236 - 858 21,378
FNMA participation
certificates 2,158 2 52 2,108
FNMA CMOs 5,420 33 1 5,452
------ --- ----- ------
$34,715 $ 35 $1,039 $33,711
====== === ===== ======
</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".
17
<PAGE>
The following table sets forth the composition of HHFC's interest-bearing
deposits and investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
Amortized % of Market % of Amortized % of Market % of Amortized % of Market % of
Cost Total Value Total Cost Total Value Total Cost Total Value Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Securities:
U.S. Gov't
& Agency
obligations $6,000 65.0% $5,951 64.8% $4,005 57.2% $4,032 57.4% $ 7,972 57.4% $ 8,039 57.6%
Other
investments:
Interest-
bearing
deposits
in other
financial
institutions 1,402 15.2 1,402 15.3 1,182 16.9% 1,182 16.8% 2,106 15.1% 2,106 15.1%
Federal funds
sold 100 1.1 100 1.1 200 2.9% 200 2.8% 2,600 18.7% 2,600 18.6%
Federal Home
Loan Bank
Stock 1,723 18.7 1,723 18.8 1,606 23.0% 1,606 23.0% 1,219 8.8% 1,219 8.7%
----- ----- ----- ----- ----- ----- ----- ----- ------ ----- ------ -----
Total investment
securities,
interest-bearing
deposits and
other $9,225 100.0% $9,176 100.0% $6,993 100.0% $7,020 100.0% $13,897 100.0% $13,964 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ====== ===== ====== =====
</TABLE>
18
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for Harvest Home's investment
securities at September 30, 1999. All of such securities mature in three years
or less.
<TABLE>
<CAPTION>
At September 30, 1999
One year or Less One to Five Years
Amortized Average Amortized Average
Cost Yield Cost Yield
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government
and agency
securities $- $- $6,000 5.50%
== == ===== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
Total Investment Securities
Average Life Amortized Fair Weighted
In Years Cost Value Average Yield
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government
and agency
securities 1.5 $6,000 $5,951 5.50%
=== ===== ===== ====
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Harvest
Home's funds for use in lending and other investment activities. In addition to
deposits, Harvest Home derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, income on earning assets,
and service charges. Loan payments are a relatively stable source of funds,
while deposit inflows and outflows fluctuate more in response to general
interest rates and money market conditions.
Deposits. Deposits are attracted principally from within Harvest Home's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, Super
NOW accounts, money market deposit accounts, regular passbook savings accounts,
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, 1999, Harvest Home's certificates of deposit totaled
$47.0 million, or 71.0% of total deposits. Of such amount, approximately $34.4
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.
19
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Harvest Home at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997
Percent Percent Percent
of total of total of total
Amount deposit Amount deposit Amount deposit
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction
accounts:
NOW accounts(1) $ 3,806 5.7% $ 3,208 5.3% $ 2,699 4.6%
Super NOW
accounts(1) 405 .6 253 .4 300 .5
Passbook
savings(2) 10,437 15.8 9,494 15.8 9,143 15.6
Money market
deposit
account(3) 4,534 6.9 4,107 6.8 4,332 7.4
------ ----- ------ ----- ------ -----
Total transaction
accounts 19,182 29.0 17,062 28.3 16,474 28.1
Certificates
of Deposit(4):
4.00-5.99% 42,304 63.9 38,275 63.6 38,031 64.7
6.00-7.99% 4,734 7.1 4,888 8.1 4,281 7.2
------ ----- ------ ----- ------ -----
Total certificates
of deposit 47,038 71.0 43,163 71.7 42,312 71.9
------ ----- ------ ----- ------ -----
Total deposits $66,220 100.0% $60,225 100.0% $58,786 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
1) Harvest Home's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September 30,
1999, 1998, and 1997, the weighted average rates on NOW accounts were
1.84%, 1.84% and 2.69%, respectively. At September 30, 1999, 1998, and
1997, the weighted average rates of Super NOW accounts was 2.75%.
2) Harvest Home's weighted average interest rate paid on passbook accounts
fluctuates with the general movement of interest rates. At September 30,
1999, 1998, and 1997, the weighted average rates on passbook accounts were
2.53%, 2.53% 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, 1999, 1998, and 1997, the weighted average rates on money
market accounts was 3.00%.
4) IRAs are generally offered under certificate of deposit programs.
20
<PAGE>
The following table shows interest rate and original contractual
maturity information for Harvest Home's certificates of deposit as of September
30, 1999:
<TABLE>
<CAPTION>
Over 1 Over 2
Up to one year to 2 years to 3 Over 3
year years years years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00 - 5.99% $30,622 $6,922 $1,191 $3,569 $42,304
6.00 - 7.99% 3,750 984 - - 4,734
------ ----- ----- ----- ------
Total certificates
of deposit $34,372 $7,906 $1,191 $3,569 $47,038
====== ===== ===== ===== ======
</TABLE>
The following table presents the amount of Harvest Home's certificates
of deposit of $100,000 or more by the time remaining until maturity as of
September 30, 1999:
<TABLE>
<CAPTION>
Maturity At September 30, 1999
(In thousands)
<S> <C>
Three months or less $ 743
Over 3 months to 6 months 511
Over 6 months to 12 months 1,425
Over 12 months 1,440
-----
Total $4,119
=====
</TABLE>
The following table sets forth Harvest Home's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $60,225 $58,786 $57,958
Deposits 75,155 65,375 58,930
Withdrawals (72,135) (66,862) (60,904)
Interest credited 2,975 2,926 2,802
------ ----- -----
Ending balance $66,220 $60,225 $58,786
====== ====== ======
Net increase $ 5,995 $ 1,439 $ 828
Percent increase 9.95% 2.45% 1.43%
</TABLE>
21
<PAGE>
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. All standards required
are currently met by Harvest Home. Harvest Home is a member of the FHLB and is
required to own capital stock in 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:
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances $22,600 $25,850 $24,000
Weighted average interest rate
of FHLB advances 5.23% 5.26% 5.82%
</TABLE>
The following table sets forth the maximum balance and average balance
of FHLB advances during the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances $26,000 $25,850 $24,000
Average Balance:
FHLB advances 23,827 21,738 15,615
Weighted average interest rate
Of FHLB advances 5.08% 5.62% 5.78%
</TABLE>
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of
income. The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. In
managing its interest rate risk, Harvest Home begins with an objective to
increase the interest rate sensitivity of its assets by originating loans with
interest rates subject to period adjustment and market conditions and/or shorter
maturities. Harvest Home has historically had to rely upon retail deposit
accounts as a source of funds and intends to continue to do so. Management
believes that reliance on retail deposit accounts as a source of funds compared
to brokered deposits and long-term borrowings reduces the effects of interest
rate fluctuations because these deposits generally represent a more stable
source of funds.
22
<PAGE>
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 1.7% at September 30, 1999. 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.
23
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1999, which are
expected to reprice or mature in each of the future periods shown. The analysis
of this interest-rate sensitivity, which is prepared quarterly by a financial
advisory firm, Performance Analysis, Inc., for Harvest Home, incorporates the
assumptions set forth in the footnotes of the following table.
<TABLE>
<CAPTION>
Six
Within Months
Six to One 1-3 3-5 5-10 Over 10
Months Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans
Adjustable Rate(1) $ 6,173 $13,235 $ - $ - $ - $ - $19,408
Fixed Rate(2) 2,842 2,491 6,686 4,718 6,872 3,039 26,648
Non-Residential
Adjustable Rate(1) 1,742 3,630 - - - - 5,372
Other Loans
Home Equity 1,480 - - - - - 1,480
Consumer 20 - - - - - 20
Investments(3) 1,823 - 6,000 - - - 7,823
Mortgage-backed securities 27,628 2,442 4,645 - - - 34,715
------ ------- ------- ------ ----- ----- ------
TOTAL RATE
SENSITIVE ASSETS 41,708 21,798 17,331 4,718 6,872 3,039 95,466
Interest-bearing
liabilities
Deposits
Certificates of Deposit (4) 9,502 24,871 9,097 3,570 - - 47,040
Money Market Deposits (5) 649 562 1,591 895 877 273 4,847
NOW Accounts 564 489 1,382 777 762 237 4,211
Passbook Accounts 1,370 1,186 3,355 1,887 1,851 575 10,224
FHLB Advances 19,100 3,500 - - - - 22,600
------ ------- ------- ------ ----- ----- ------
TOTAL RATE
SENSITIVE LIABILITIES 31,185 30,608 15,425 7,129 3,490 1,085 88,922
------ ------ ------ ------ ----- ----- ------
Interest Sensitivity
Gap $10,523 $ (8,810) $ 1,906 $(2,411) $3,382 $1,954 $ 6,544
====== ======= ======= ===== ===== ===== =======
Cumulative Interest Rate
Sensitivity Gap $10,523 $ 1,713 $ 3,619 $1,208 $4,590 $6,544 $ 6,544
====== ======= ======= ===== ===== ===== =======
Cumulative Interest Rate
Sensitivity Gap as a Percent
of Total Assets 10.64% 1.73% 3.66% 1.22% 4.64% 6.61% 6.61%
===== ==== ==== ==== ==== ==== ====
</TABLE>
(Footnotes on next page)
24
<PAGE>
- --------------------------------------------------
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.
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 assumptions supplied by Harvest Home's asset/liability management
provider, money market deposits, NOW accounts and passbook accounts are
assumed to decay over a five-year period.
These assumptions change over time based upon changes in the economy.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable. However, the interest rate
sensitivity of Harvest Home's assets and liabilities illustrated in the table
above would vary substantially if different assumptions were used or if actual
experience differed from that indicated by such assumptions.
Competition
Harvest Home competes for deposits with other savings banks and
associations, commercial banks and credit unions, and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Harvest Home competes with
other savings banks and associations, commercial banks, consumer finance
companies, credit unions, leasing companies, and other lenders. Harvest Home
competes for loan originations primarily through the interest rates and loan
fees it charges, and through the efficiency and quality of services it provides
to borrowers. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels, and other factors which are not readily predictable.
Due to Harvest Home's size relative to the many other financial
institutions in its market area, management believes that Harvest Home has a
small share of the deposit and loan markets.
The size of financial institutions competing with Harvest Home is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Harvest Home.
25
<PAGE>
The following table sets forth, for the years and at the date
indicated, the weighted average yields earned on Harvest Home's interest-earning
assets, the weighted average interest rates paid on interest-bearing
liabilities, the interest rate spread and the net interest margin on
interest-earning assets. Such yields and costs are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for each
period presented.
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Weighted average yield on loan portfolio 7.49% 7.70% 7.87%
Weighted average yield on mortgage-
backed securities 5.86 6.24 6.38
Weighted average yield on investment
securities 5.97 6.81 6.86
Weighted average yield on other
interest-earning assets 5.74 6.17 5.57
Weighted average yield on all
interest-earning assets 6.70 7.02 7.19
Weighted average interest rate
paid on deposits 4.61 4.87 4.81
Weighted average interest rate
paid on borrowings 5.08 5.26 5.82
Weighted average rate on all
interest-bearing liabilities 4.74 5.07 5.02
Interest rate spread
(spread between weighted average
interest rate on all
interest-bearing assets and all
interest-bearing liabilities) 1.96 1.95 2.17
Net yield (net interest income
as a percentage of average
interest-earning assets 2.35% 2.45% 2.76%
</TABLE>
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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.
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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. The
FDIC restrictions on state-chartered institutions have not been material to the
operations of Harvest Home.
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Transactions with Affiliates
Transactions with affiliates must be substantially 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.
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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, 1999:
At September 30, 1999
Total Capital to Risk-Weighted Assets $9,876
Tier I Capital to Risk-Weighted Assets $9,737
Tier I Leverage Ratio $9,737
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") required 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.
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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.
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.
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Federal Home Loan Banks
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances.
Harvest Home is a member of the FHLB of Cincinnati, and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1% of the aggregate outstanding principal amount of Harvest
Home's residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
Harvest Home is in compliance with this requirement, with an investment in FHLB
of Cincinnati stock having a book value of $1.7 million at September 30, 1999.
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, 1999, 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%.
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"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.
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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 $46.5 million (subject to an exemption of up to
$4.9 million), and that reserves of 10% be maintained against the portion of
total transaction accounts in excess of $46.5 million. These percentages are
subject to adjustment by the FRB. At September 30, 1999, 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, 1999, HHFC was in compliance with this requirement.
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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 are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, HHFC and Harvest Home may be subject to an alternative minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. However, the Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration. HHFC's
average gross receipts for the three tax years ending on September 30, 1999 is
$576,000, and, as a result, HHFC does qualify as a small corporation exempt from
the alternative minimum tax. Harvest Home's average gross receipts for the three
tax years ending on September 30, 1999, is $6.4 million, and, as a result,
Harvest Home does not qualify as a small corporation exempt from the alternative
minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Harvest Home, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
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institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years prior to 1996,
Harvest Home generally used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Harvest Home, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
and its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that began after December 31, 1995, and before
January 1, 1998, if a thrift met the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift met the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
36
<PAGE>
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Harvest Home to HHFC is deemed paid out of its
pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and
the gross income of Harvest Home for tax purposes would be increased by the
amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of September 30, 1999, the pre-1988 reserves of
Harvest Home for tax purposes totaled approximately $1.3 million. Harvest Home
believes it had approximately $4.5 million of accumulated earnings and profits
for tax purposes as of September 30, 1999, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. No representation can be made as to whether Harvest Home will
have current or accumulated earnings and profits in subsequent years.
The tax returns of Harvest Home have been audited or closed without
audit through fiscal year 1995. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Harvest Home.
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. For tax years beginning after December 31, 1998,
the rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) .400% times taxable net worth.
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 was imposed annually at a rate of 1.5% (for
years prior to 1999) of the taxable book net worth of Harvest Home determined in
accordance with generally accepted accounting principles. For tax year 1999,
however, the franchise tax on financial institutions is computed as 1.4% of the
taxable book net worth and for tax year 2000 and years thereafter the tax will
be 1.3% of the taxable book net worth. 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.
37
<PAGE>
Item 2. Properties
The following table sets forth certain information at September 30,
1999, regarding the properties on which the main office and each branch office
of Harvest Home is located:
<TABLE>
<CAPTION>
Approx. Net
Owned Date square book
Location or leased acquired footage value(1)
(In thousands)
<S> <C> <C> <C> <C>
Main office:
3621 Harrison Ave. Various
Cheviot, OH 45211 Owned from 1926 6,000 $418
to present
Branch offices:
7030 Hamilton Ave.
Cinti., OH 45231 Owned 1975 1,200 $277
3663 Ebenezer Road
Cinti., OH 45248 Owned 1985 1,000 $287
</TABLE>
1) At September 30, 1999, Harvest Home's office premises and equipment had a
total net book value of $1.2 million. For additional information regarding
Harvest Home's office premises and equipment, see Notes A-6 and E of Notes
to Consolidated Financial Statements.
Harvest Home has contracted for the data processing and reporting
services of NCR Corporation. The cost of these data processing services is
approximately $9,000 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.
38
<PAGE>
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 10, 1999, the stock was trading at $17.00 per share.
As of December 10, 1999, 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 1999. Such values do not include retail markups,
markdowns or commissions. Information relating to prices has been obtained by
the Corporation from NASDAQ for fiscal 1999.
<TABLE>
<CAPTION>
Cash
Fiscal year ending September 30, 1999 High Low Dividends
<S> <C> <C> <C>
Quarter ending December 31, 1998 $15.00 $12.00 $.11
Quarter ending March 31, 1999 $17.00 $13.88 $.11
Quarter ending June 30, 1999 $15.50 $11.75 $.11
Quarter ending September 30, 1999 $15.25 $11.50 $.11
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from
Harvest Home Financial Corporation's 1999 Annual Report to Shareholders ("Annual
Report"), the Managements Discussion and Analysis of which is included in
Exhibit 13 as attached hereto.
Item 7. Consolidated Financial Statements
The financial statements required herein are incorporated by reference
from the Annual Report, the financial statements of which are included in
Exhibit 13 attached hereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes or disagreements with regard to accountants.
39
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
<TABLE>
<CAPTION>
POSITION WITH DATE OF TERMS
NAME AGE HARVEST HOME SERVICE EXPIRE
<S> <C> <C> <C> <C>
John E. Rathkamp 57 President, 1971 2001
Secretary, Director,
Managing Officer
Dennis J. Slattery 47 Executive Vice 1978 N/A
President
Richard F. Hauck 70 Vice President, 1985 2000
Director
Walter A. Schuch 82 Chairman of Board, 1955 2001
Director
Thomas L. Eckert 76 Director 1973 2000
Marvin J. Ruehlman 78 Director 1955 2001
Herbert E. Menkhaus 71 Director 1985 2001
George C. Eyrich 80 Director 1954 2001
</TABLE>
The business experience of each director of HHFC is set forth below.
John E. Rathkamp joined Harvest Home in 1965 as Treasurer. He became
Secretary and Managing Officer in 1976. He has been a Director of Harvest Home
since 1971. In 1991 he was elected President of the Bank and currently is
serving as President, Secretary and Managing Officer of Harvest Home and
President of HHFC.
40
<PAGE>
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 December 13, 1999.
All Section 16(a) filing requirements applicable to its officers, directors and
greater than ten (10) percent beneficial owners were complied with the during
the fiscal year ended September 30, 1999. The only director who had any changes
in his level of ownership was Richard F. Hauck, who exercised options, the ESOP
and through distribution from his retirement plan.
41
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
Name and Principal Position Fiscal Annual Compensation
Year-End
All
Salary Bonus Other
<S> <C> <C> <C> <C>
John E. Rathkamp, President,
Secretary, Managing Officer 1997 $100,350 $3,295 $77,952
1998 $104,550 $3,875 $42,508
1999 $107,137 $4,325 $46,067
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name of Beneficial Ownership Shares Outstanding
<S> <C> <C>
John E. Rathkamp 14,959 1.7%
Dennis J. Slattery 7,475 .8%
Richard F. Hauck 24,915 2.9%
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 122,144 14.1%
Harvest Home Financial Corporation
Employee Stock Ownership Plan (1) 74,469 8.5%
Tontine Financial Partners, L.P. 67,000 7.7%
Johnson Trust Company 46,000 5.3%
</TABLE>
1) The amount reported represents shares held by the HHFC Employee Stock
Ownership Plan ("ESOP") 54,132 shares of which have been allocated to
accounts of participants.
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.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HARVEST HOME
/s/John E. Rathkamp
Date: December 17, 1999 John E. Rathkamp
President and Director (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By/s/Dennis J. Slattery By/s/Richard F. Hauck
Dennis J. Slattery Richard F. Hauck
Executive Vice President Vice President and Director
(Principal Accounting Officer)
Date: December 17, 1999 Date: December 17, 1999
By/s/Walter A. Schuch By/s/Thomas L. Eckert
Walter A. Schuch Thomas L. Eckert
Director Director
Date: December 17, 1999 Date: December 17, 1999
By/s/Marvin J. Ruehlman By/s/Herbert E. Menkhaus
Marvin J. Ruehlman Herbert E. Menkhaus
Director Director
Date: December 17, 1999 Date: December 17, 1999
By/s/George C. Eyrich
George C. Eyrich
Director
Date: December 17, 1999
43
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Articles of Incorporation of Harvest Home Financial Corporation
Incorporated by reference to the Registration Statement on Form S-1
filed by HHFC on February 26, 1994 (the "S-1") with the Securities
and Exchange Commission (the "SEC"), Exhibit 3.1
3.2 Code of Regulations of Harvest Home Financial Corporation Incorporated
by reference to the S-1, Exhibit 3.1
4 Forms 10-QSB for the first three quarters of FY 1998
Incorporated by reference filed by HHFC on August 14, 1998;
June 13, 1998; February 14, 1998
10.1 The Stock Ownership Plan
Incorporated by reference to S-1, Exhibit 10.4
10.2 The Stock Option and Incentive Plan
Incorporated by reference to the S-1, Exhibit 10.2 and as
Exhibit A to the Definitive Proxy Statement filed by HHFC on
December 2, 1995.
10.3 The Recognition and Retention Plan
Incorporated by reference to the S-1, Exhibit 10.3 and as
Exhibit B to the Definitive Proxy Statement filed by HHFC on
December 2, 1995
10.4 Employment Agreements, Incorporated by reference to the S-1
13 The 1999 Annual Report to Shareholders of Harvest Home Financial Corporation
22 Subsidiary of Harvest Home Financial Corporation
27 1999 Financial Data Schedule
</TABLE>
44
TABLE OF CONTENTS
President's Letter of Stockholders 2
The Business of Harvest Home Financial Corporation
and Subsidiary 3
Common Stock and Related Information 4
Selected Consolidated Financial Data 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Discussion of Changes in Financial Condition from
September 30, 1998 to September 30, 1999 10
Comparison of Results of Operations for Fiscal Years Ended
September 30, 1999 and 1998 11
Comparison of Results of Operations for Fiscal Years Ended
September 30, 1998 and 1997 13
Average Yield Analysis 15
Rate/Volume Table 16
Liquidity and Capital Resources 17
Potential Impact of Current Legislation on Future
Results of Operations 18
Effect of Recent Accounting Pronouncements 19
Year 2000 Compliance Matters 20
Report of Independent Certified Public Accountants 22
Consolidated Financial Statements 23
Directors and Officers 53
Stockholder Services 55
1
<PAGE>
Dear Stockholder:
We are pleased to present Harvest Home Financial's Annual Report to Stockholders
for the fiscal year ending September 30, 1999.
Fiscal 1999 concluded with the most significant event in Harvest Home's
illustrious 80 year history. Specifically, on October 1, 1999, your Corporation
entered into a merger agreement with The People's Building, Loan and Savings
Company of Lebanon, Ohio (immediately following that Company's proposed merger
with Oakley Improved of Cincinnati). The resulting company, Peoples Community
Bancorp, will have pro forma assets of approximately $215 million, ranking fifth
in size among Tri-State thrift holding companies. While we still believe that
Harvest Home could press forward as an independent community bank, it is our
present opinion that our stockholders could receive greater rewards through the
revenue opportunities associated with immediate asset growth. We are truly
excited with the prospects presented by our merger with People's. At the heart
of this combination is a continued commitment to remain an independent community
bank.
Our branch network after the merger will position the new holding company as one
of two Cincinnati thrift franchises with both an east and west side presence.
Moreover, our proposed expansion plans call for near-term entry into the
fast-growing Butler County market. We operate in an environment of declining
margins where growth is critical to our success. We believe that our merger with
People's provides the perfect avenue for achieving the requisite level of
profitable growth in the future.
The continuing margin compression in the financial services industry was evident
in our fiscal year results. Net earnings for fiscal 1999 totaled $514,000,
representing a modest 5% reduction from the $541,000 of net earnings reported in
fiscal 1998.
The aforementioned economic considerations with respect to interest margins were
the foundation of your Board's decision to affiliate with People's. We believe
that Harvest Home Financial is receiving a fair price along with significant
upside potential in Peoples Community common stock. Adding to an already
impressive return on our shares, we are pleased to advise you that approximately
47% of your calendar 1999 dividends will be tax-free. You will be advised in
January 2000 as to the exact percentage of the 1999 dividend distributions that
are considered tax-free.
As always, we sincerely appreciate your past and continuing support.
Very truly yours,
/s/John E. Rathkamp
John E. Rathkamp
President
2
<PAGE>
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 in 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.
3
<PAGE>
COMMON STOCK AND RELATED INFORMATION
The Corporation's common stock is listed on the Nasdaq System under the 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 1999, 1998 and 1997. 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 1999, 1998
and 1997.
<TABLE>
<CAPTION>
Market Cash
Fiscal year ending September 30, 1999 value dividends (1)
<S> <C> <C>
Quarter ending December 31, 1998 $14.750 $.11
Quarter ending March 31, 1999 $14.875 $.11
Quarter ending June 30, 1999 $11.750 $.11
Quarter ending September 30, 1999 $14.375 $.11
Market Cash
Fiscal year ending September 30, 1998 value dividends (2)
Quarter ending December 31, 1997 $15.75 $.11
Quarter ending March 31, 1998 $15.00 $.11
Quarter ending June 30, 1998 $14.75 $.11
Quarter ending September 30, 1998 $12.88 $.11
Market Cash
Fiscal year ending September 30, 1997 value dividends (3)
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
</TABLE>
As of December 10, 1999, the Corporation had outstanding 875,289 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. As of
December 10, 1999, the Corporation held a total of 116,586 shares of its common
stock in treasury.
1) Approximately $.21 of fiscal 1999 dividends are deemed to constitute a
non-taxable return of capital.
2) Approximately $.33 of fiscal 1998 dividends are deemed to constitute a
non-taxable return of capital.
3) Approximately $.37 of fiscal 1997 dividends are deemed to constitute a
non-taxable return of capital.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial condition and other data:
<TABLE>
<CAPTION>
At September 30,
1999 1998 1997 1996 1995
(Dollars in thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $98,935 $96,894 $93,832 $78,718 $69,532
Cash and cash equivalents (1) 2,849 2,887 5,264 1,708 2,313
Investment securities held to maturity -
at cost - - - - 18,032
Investment securities available for sale -
at market 5,951 4,032 8,039 12,105 -
Mortgage-backed securities held to
maturity - at cost - - - - 9,009
Mortgage-backed securities available for
sale - at market 33,711 37,864 32,466 20,429 -
Loans receivable - net 52,790 48,797 45,229 42,267 38,245
Deposits 66,220 60,225 58,786 57,958 56,425
Advances from the FHLB 22,600 25,850 24,000 10,000 -
Stockholders' equity 9,653 9,977 10,344 9,725 12,706
Number of:
Real estate loans outstanding 925 919 1,054 1,038 1,000
Deposit accounts 7,226 6,879 6,946 7,078 7,164
Full service offices 3 3 3 3 3
</TABLE>
<TABLE>
<CAPTION>
Summary of consolidated earnings and other data:
Year ended September 30,
1999 1998 1997 1996 1995
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Interest income $6,482 $6,367 $5,983 $5,209 $4,872
Interest expense 4,211 4,143 3,689 2,969 2,569
----- ----- ----- ----- -----
Net interest income 2,271 2,224 2,294 2,240 2,303
Provision for losses on loans 12 12 9 1 12
----- ----- ----- ----- -----
Net interest income after provision for
losses on loans 2,259 2,212 2,285 2,239 2,291
Other income 92 109 64 74 50
General, administrative and other expense 1,572 1,516 1,409 2,136 1,372
----- ----- ----- ----- -----
Earnings before income taxes 779 805 940 177 969
Federal income taxes 265 264 313 45 329
----- ----- ----- ----- -----
Net earnings $ 514 $ 541 $ 627 $ 132 $ 640
===== ===== ===== ===== =====
Earnings per share:
Basic $.60 $.63 $.71 $.16 $.73
=== === === === ===
Diluted $.59 $.60 $.70 $.16 $.73
=== === === === ===
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest rate spread 1.96% 1.95% 2.17% 2.24% 2.48%
Net yield on average interest-earning assets 2.35 2.45 2.76 3.07 3.27
Return on equity (net earnings divided by
average equity) 5.14 5.28 6.09 1.05 5.09
Return on assets (net earnings
divided by average total assets) 0.51 0.58 0.73 0.18 0.89
Equity-to-assets ratio (average equity
divided by average total assets) 10.01 11.05 12.06 16.94 17.56
Loan loss allowance as a percentage of
non-performing loans 556.00% 259.18% 121.05% 67.68% 76.92%
</TABLE>
1) Includes cash and due from banks, federal funds sold and interest-bearing
deposits in other financial institutions.
5
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
As stated previously, the Corporation's activities have been primarily limited
to holding the stock of Harvest Home. As a result, the discussion that follows
focuses primarily 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, 1999, are greater than interest-bearing liabilities repricing within the
same period by approximately $1.7 million, resulting in a positive cumulative
one-year gap of 1.7% of total assets. The Corporation's interest-earning assets
repricing within three years of September 30, 1999, were $3.6 million greater
than interest bearing liabilities repricing during the same period, resulting in
a positive cumulative gap for such period of 3.7% of total assets.
In the event that interest rates rise during the forthcoming year, Harvest
Home's positive cumulative one-year gap may have a positive effect on earnings
because interest-earning assets may reprice at a faster pace than
interest-bearing liabilities. However, rising interest rates could also affect
Harvest Home's earnings in a negative manner as a result of diminished loan
demand and the increased risk of delinquencies resulting from increased payment
amounts on adjustable-rate loans.
Harvest Home's earnings are also vulnerable to changes in interest rates due to
the amount of adjustable-rate mortgage loans ("ARMs") originated with low
margins and adjustment caps. Harvest Home originates 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.
6
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management
Harvest Home's interest rate spread is the principal determinant of income. The
interest rate spread, and therefore net interest income, can vary considerably
over time because asset and liability repricing do not coincide. Moreover, the
long-term or cumulative effect of interest rate changes can be substantial.
Interest rate risk is defined as the sensitivity of an institution's earnings
and net asset values to changes in interest rates. In managing its interest rate
risk, Harvest Home begins with an objective to increase the interest rate
sensitivity of its assets by originating loans with interest rates subject to
period adjustment and market conditions and/or shorter maturities. Harvest Home
has historically had to rely primarily upon retail deposit accounts as a source
of funds and intends to continue to do so. Management believes that reliance on
retail deposit accounts as a source of funds compared to brokered deposits and
long-term borrowings may reduce the effects of interest rate fluctuations
because these deposits generally represent a more stable source of funds.
However, Harvest Home has utilized FHLB advances as a source of financing to
fund purchases of certain mortgage-backed securities when favorable spreads
became available.
7
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1999, which are
expected to reprice or mature in each of the future periods shown. The analysis
of this interest-rate sensitivity, which is prepared quarterly by a financial
advisory firm, Performance Analysis, Inc., for Harvest Home, incorporates the
assumptions set forth in the footnotes of the following table.
<TABLE>
<CAPTION>
Six
Within Months
Six to One 1-3 3-5 5-10 Over 10
Months Year Years Years Years Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans
Adjustable Rate(1) $ 6,173 $13,235 $ - $ - $ - $ - $19,408
Fixed Rate(2) 2,842 2,491 6,686 4,718 6,872 3,039 26,648
Non-Residential
Adjustable Rate(1) 1,742 3,630 - - - - 5,372
Other Loans
Home Equity 1,480 - - - - - 1,480
Consumer 20 - - - - - 20
Investments(3) 1,823 - 6,000 - - - 7,823
Mortgage-backed securities 27,628 2,442 4,645 - - - 34,715
------ ------- ------- ------ ----- ----- ------
TOTAL RATE
SENSITIVE ASSETS 41,708 21,798 17,331 4,718 6,872 3,039 95,466
Interest-bearing
liabilities
Deposits
Certificates of Deposit (4) 9,502 24,871 9,097 3,570 - - 47,040
Money Market Deposits (5) 649 562 1,591 895 877 273 4,847
NOW Accounts 564 489 1,382 777 762 237 4,211
Passbook Accounts 1,370 1,186 3,355 1,887 1,851 575 10,224
FHLB Advances 19,100 3,500 - - - - 22,600
------ ------ ------ ----- ----- ----- ------
TOTAL RATE
SENSITIVE LIABILITIES 31,185 30,608 15,425 7,129 3,490 1,085 88,922
------ ------ ------ ----- ----- ----- ------
Interest Sensitivity
Gap $10,523 $(8,810) $ 1,906 $(2,411) $3,382 $1,954 $ 6,544
====== ====== ====== ===== ===== ===== ======
Cumulative Interest Rate
Sensitivity Gap $10,523 $ 1,713 $ 3,619 $1,208 $4,590 $6,544 $ 6,544
====== ====== ====== ===== ===== ===== ======
Cumulative Interest Rate
Sensitivity Gap as a Percent
of Total Assets 10.64% 1.73% 3.66% 1.22% 4.64% 6.61% 6.61%
===== ==== ==== ==== ==== ==== ====
</TABLE>
(Footnotes on next page)
8
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------
1) Includes all adjustable rate mortgage loans based on contractual term to
repricing.
2) Includes all fixed-rate mortgage loans 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.
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 assumptions supplied by Harvest Home's asset/liability management
provider, money market deposits, NOW accounts and passbook accounts are
assumed to decay over a five-year period.
Savings banks have historically presented a gap analysis as a measure of
interest rate risk. The gap analysis above presents the projected maturities and
periods to repricing of the Savings Bank's rate sensitive assets and
liabilities. As stated previously, Harvest Home's cumulative one-year gap, which
represents the difference between the amount of interest sensitive assets
maturing or repricing in one year and the amount of interest sensitive
liabilities maturing or repricing in the same period, was a positive 1.7% of
total assets at September 30, 1999. A positive cumulative gap indicates that
interest sensitive assets exceed interest sensitive liabilities at a specific
date. In a rising interest rate environment, institutions with positive
repricing or maturity gaps generally experience a more rapid increase in
interest income earned on assets than the interest expense paid on liabilities.
Conversely, in an environment of falling interest rates, interest income earned
on assets will generally decrease more rapidly than the interest expense paid on
liabilities. A negative gap will have the opposite effect. Harvest Home's one to
three year gap was a positive 1.9% (of total assets), while all other maturities
greater than three years reflected a positive gap of 3.0% of total assets. The
foregoing totals have been based on certain prepayment and repricing data that
may not reflect actual performance in a rapidly rising or declining interest
rate environment.
Forward-Looking Statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Corporation's operations and the Corporation's
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Corporation's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of the allowance
for loan losses, the effect of the year 2000 on information technology systems
and the effect of recent accounting pronouncements.
9
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1998 to
September 30, 1999
The Corporation's assets totaled $98.9 million at September 30, 1999, an
increase of $2.0 million, or 2.1%, over September 30, 1998 levels. The increase
in total assets was funded primarily by a $6.0 million increase in deposits,
partially offset by a $3.3 million decrease in Federal Home Loan Bank advances.
Cash, federal funds sold and interest-bearing deposits in other financial
institutions totaled $2.8 million at September 30, 1999, a decrease of $38,000,
or 1.3%, from 1998 levels. Federal funds sold decreased by $100,000, while
interest-bearing deposits and cash increased by $62,000, or 2.3%, during 1999.
Investment securities totaled $6.0 million at September 30, 1999, an increase of
$1.9 million, or 47.6%, over the balance at September 30, 1998. This increase
resulted primarily from the purchase of $6.0 million of investment securities,
offset by the maturity of $4.0 million of investment securities during the 1999
period.
Mortgage-backed securities decreased by $4.2 million, or 11.0%, to a total of
$33.7 million at September 30, 1999, compared to September 30, 1998, as
principal repayments of $15.0 million exceeded purchases of $12.0 million.
During fiscal 1999, management purchased $8.0 million of long-term,
adjustable-rate U.S. Government agency collateralized mortgage obligations with
a weighted-average yield of 6.38%. Such purchases were funded with proceeds from
Federal Home Loan Bank advances. Additionally, the Savings Bank acquired $4.0
million of intermediate-term U. S. Government agency collateralized mortgage
obligations at a fixed rate of 5.50%.
Loans receivable increased by $4.0 million, or 8.2%, to a total of $52.8 million
at September 30, 1999, compared to September 30, 1998 levels. Loan disbursements
totaled $15.8 million during fiscal 1999, as compared to $13.9 million during
fiscal 1998, and were partially offset by principal repayments totaling $11.9
million. Growth in the loan portfolio was primarily focused on one- to
four-family residential and construction loans, which increased by $3.2 million,
or 6.9%, year to year.
At September 30, 1999, Harvest Home's allowance for loan losses totaled
$139,000, representing .25% of total loans and 556.0% of nonperforming loans. At
September 30, 1998, the allowance for loan losses totaled $127,000, or .25% of
total loans, and 259.2% of nonperforming loans. Nonperforming loans amounted to
$25,000, or .1%, and $49,000, or .1%, of total assets at September 30, 1999 and
1998, respectively. Although management believes that its allowance for loan
losses at September 30, 1999, 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 $66.2 million at September 30, 1999, an increase of $6.0
million, or 10.0%, over the $60.2 million total at September 30, 1998. Harvest
Home has historically sought to maintain a moderate rate of deposit growth
through marketing and pricing strategies. The increase in deposits during fiscal
1999 can be attributed primarily to consolidation in the financial services
industry in Harvest Home's market area, and the consumers' preference for
conducting financial business with a smaller, locally-owned institution.
10
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1998 to
September 30, 1999 (continued)
Federal Home Loan Bank advances totaled $22.6 million at September 30, 1999, a
decrease of $3.3 million, or 12.6%, from September 30, 1998, as repayments of
mortgage-backed securities were used to repay advances. At September 30, 1999,
the advances carried a 5.23% weighted-average interest rate and are scheduled to
mature through fiscal 2008.
Stockholders' equity totaled $9.7 million at September 30, 1999, a decrease of
$324,000, or 3.2%, from September 30, 1998 levels. The decrease resulted
primarily from cash dividends paid totaling $376,000, coupled with an increase
of $781,000 in unrealized losses on securities designated as available for sale,
which were partially offset by net earnings of $514,000, amortization of stock
benefit plan expense of $197,000, and the exercise of stock options totaling
$122,000.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1999 and 1998
General
Net earnings for the year ended September 30, 1999, totaled $514,000, a decrease
of $27,000, or 5.0%, from the $541,000 in net earnings reported for the fiscal
year ended September 30, 1998. The decrease in net earnings resulted primarily
from a $56,000 increase in general, administrative and other expense, coupled
with a $17,000 decrease in other income, which were partially offset by a
$47,000 increase in net interest income.
Net Interest Income
Total interest income amounted to $6.5 million for the fiscal year ended
September 30, 1999, an increase of $115,000, or 1.8%, over fiscal 1998. Interest
income on loans totaled $3.7 million in fiscal 1999, an increase of $177,000, or
5.0%. This increase was due primarily to a $3.7 million, or 7.9%, increase in
the weighted-average balance outstanding, which was partially offset by a 21
basis point decrease in weighted-average yield, to 7.49% in 1999. Interest
income on mortgage-backed securities increased by $41,000, or 2.0%, as a result
of a $2.9 million increase in the weighted-average balance outstanding, which
was partially offset by a 38 basis point decrease in weighted-average yield, to
5.86% in fiscal 1999. Interest income on investment securities and
interest-bearing deposits decreased by $103,000, or 14.5%, due to a $515,000, or
4.7%, decrease in the weighted-average balance outstanding, coupled with a 64
basis point decrease in weighted-average yield, to 5.85% in fiscal 1999.
Interest expense totaled $4.2 million for the fiscal year ended September 30,
1999, an increase of $68,000, or 1.6%, over the $4.1 million total recorded in
fiscal 1998. Interest expense on deposits increased by $79,000, or 2.7%, due to
a $5.1 million, or 8.5%, increase in the weighted-average balance outstanding,
which was partially offset by a 27 basis point decrease in the weighted-average
cost of funds, to 4.61% during fiscal 1999. Interest expense on borrowings
11
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1999 and 1998 (continued)
Net Interest Income (continued)
totaled $1.2 million during fiscal 1999, a decrease of $11,000, or .9%, from
fiscal 1998, due to a decrease of 54 basis points in the weighted-average
interest rate, to 5.08% during fiscal 1999, partially offset by a $2.1 million
increase in the weighted-average balance of advances outstanding from the
Federal Home Loan Bank.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $47,000, or 2.1%, from $2.2 million for the
fiscal year ended September 30, 1998, to $2.3 million for fiscal 1999. The
interest rate spread increased by 1 basis point during fiscal 1999 to 1.96%,
while the net interest margin declined by 10 basis points year-to-year,
amounting to 2.35% in fiscal 1999.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Savings Bank, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Savings
Bank's market area, and other factors related to the collectibility of the
Savings Bank's loan portfolio. As a result of such analysis, management recorded
a $12,000 provision for losses on loans during each of the fiscal years ended
September 30, 1999 and 1998. The provisions for each of the fiscal years 1999
and 1998 have been predicated primarily upon growth in the loan portfolio and a
stable level of nonperforming loans. 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 decreased by $17,000, or 15.6%, from $109,000 for the fiscal year
ended September 30, 1998 to $92,000 for fiscal 1999. The decrease was primarily
due to the absence of the $43,000 gain on sale of mortgage-backed securities
recorded in fiscal 1998, partially offset by a $20,000 increase in NOW account
fees.
General, Administrative and Other Expense
General, administrative and other expense increased by $56,000, or 3.7%, to a
total of $1.6 million for the year ended September 30, 1999, as compared to $1.5
million for fiscal 1998. The increase resulted primarily from an increase of
$33,000, or 3.9%, in employee compensation and benefits and a $21,000, or 11.4%,
increase in occupancy and equipment expense. The increase in employee
compensation and benefits resulted from normal merit increases and an increase
in staffing levels, while the increases in occupancy and equipment resulted from
the addition of new computer technology.
12
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1999 and 1998 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $265,000 for the fiscal year
ended September 30, 1999, an increase of $1,000 from the $264,000 total in
fiscal 1998. The effective tax rates for the years ended September 30, 1999 and
1998 were 34.0% and 32.8%, respectively.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1998 and 1997
General
Net earnings for the year ended September 30, 1998, totaled $541,000, a decrease
of $86,000, or 13.7%, from the $627,000 in net earnings reported for the fiscal
year ended September 30, 1997. The decrease in net earnings resulted primarily
from a $70,000 decline in net interest income, coupled with a $107,000 increase
in general, administrative and other expense, which were partially offset by a
$45,000 increase in other income and a $49,000 decrease in the provision for
federal income taxes.
Net Interest Income
Total interest income amounted to $6.4 million for the fiscal year ended
September 30, 1998, an increase of $384,000, or 6.4%, over fiscal 1997. Interest
income on loans totaled $3.6 million in fiscal 1998, an increase of $114,000, or
3.3%. This increase was due primarily to a $2.5 million, or 5.6%, increase in
the weighted-average balance outstanding, which was offset by a 17 basis point
decrease in weighted-average yield, to 7.70% in 1998. Interest income on
mortgage-backed securities increased by $431,000, or 26.1%, as a result of a
$7.5 million, or 28.7%, increase in the weighted-average balance outstanding,
which was partially offset by a 14 basis point decrease in weighted-average
yield, to 6.24% in fiscal 1998. Interest income on investment securities and
interest-bearing deposits decreased by $161,000, or 18.5%, due primarily to a
$2.5 million decrease in the weighted-average balance outstanding.
Interest expense totaled $4.1 million for the fiscal year ended September 30,
1998, an increase of $454,000, or 12.3%, over the $3.7 million total recorded in
fiscal 1997. Interest expense on deposits increased by $136,000, or 4.9%, due
primarily to a 6 basis point increase in the weighted-average cost of funds, to
4.87% during fiscal 1998. Interest expense on borrowings totaled $1.2 million
during fiscal 1998, an increase of $318,000, or 35.2%, over fiscal 1997, due to
the previously discussed $6.1 million, or 39.2%, increase in the
weighted-average balance of advances outstanding from the Federal Home Loan
Bank.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $70,000, or 3.1%, from $2.3 million for the
fiscal year ended September 30, 1997, to $2.2 million for fiscal 1998. The
interest rate spread declined by 22 basis points during fiscal 1998 to 1.95%,
while the net interest margin declined by 31 basis points year-to-year,
amounting to 2.45% in fiscal 1998.
13
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1998 and 1997 (continued)
Provision for Losses on Loans
Based upon managements analysis of historical loss 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, management recorded
a $12,000 provision for losses on loans during the fiscal year ended September
30, 1998, as compared to $9,000 for fiscal 1997.
Other Income
Other income increased by $45,000, or 70.0%, from $64,000 for the fiscal year
ended September 30, 1997 to $109,000 for fiscal 1998. The increase was due
primarily to a $36,000 increase in gain on sale of investment and
mortgage-backed securities during the year.
General, Administrative and Other Expense
General, administrative and other expense increased by $107,000, or 7.6%, to a
total of $1.5 million for the year ended September 30, 1998, as compared to $1.4
million for fiscal 1997. The increase resulted primarily from an increase of
$48,000, or 6.0%, in employee compensation and benefits, a $14,000, or 8.2%,
increase in occupancy and equipment expense and a $23,000, or 11.5%, increase in
other operating expenses. The increase in employee compensation and benefits
resulted from normal merit increases and additional staffing levels, while the
increases in occupancy and equipment resulted from the addition of new computer
technology and other related corporate expenses, respectively.
Federal Income Taxes
The provision for federal income taxes totaled $264,000 for the fiscal year
ended September 30, 1998, a decrease of $49,000, or 15.7%, from the $313,000
total in fiscal 1997. The decrease resulted primarily from a $135,000, or 14.4%,
decrease in pre-tax earnings. The effective tax rates for the years ended
September 30, 1998 and 1997 were 32.8% and 33.3%, respectively.
14
<PAGE>
Harvest Home Financial Corporation
AVERAGE YIELD ANALYSIS
The following table presents for the periods indicated, the total amount of
interest income from average interest-earning assets and the resulting yields,
and the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. Balances are based on average
monthly balances which, in the opinion of management, do not differ materially
from daily balances.
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $50,060 $3,748 7.49% $46,391 $3,571 7.70% $43,929 $3,457 7.87%
Mortgage-backed securities 36,286 2,126 5.86 33,391 2,085 6.24 25,938 1,654 6.38
Investment securities 5,046 301 5.97 5,900 402 6.81 9,846 675 6.86
Interest-bearing deposits and other 5,347 307 5.74 5,008 309 6.17 3,538 197 5.57
------ ----- ----- ------- ----- ------ ------- ------ ------
Total interest-earning assets 96,739 6,482 6.70 90,690 6,367 7.02 83,251 5,983 7.19
Non-interest-earning assets 3,161 2,031 2,153
------ ------- ------
Total assets $99,900 $92,721 $85,404
====== ====== ======
Interest-bearing liabilities:
Deposits
NOW accounts $ 3,997 75 1.88 $ 3,533 77 2.18 $ 3,477 110 3.16
Passbook 9,926 250 2.52 9,264 250 2.70 9,057 252 2.78
Money market demand deposits 4,398 132 3.00 4,354 130 2.99 4,436 144 3.25
Certificates 46,745 2,544 5.44 42,814 2,465 5.76 40,909 2,280 5.57
Borrowings 23,827 1,210 5.08 21,738 1,221 5.62 15,615 903 5.78
------ ----- ----- ------ ----- ------ ------ ----- ------
Total interest-bearing liabilities 88,893 4,211 4.74 81,703 4,143 5.07 73,494 3,689 5.02
----- ----- ----- ------ ----- ------
Non-interest-bearing liabilities 1,003 770 1,608
------ ------ ------
Total liabilities 89,896 82,473 75,102
Stockholders' equity 10,004 10,248 10,302
------ ------ ------
Total liabilities and stockholders'
equity $99,900 $92,721 $85,404
====== ====== ======
Net interest income; interest rate
spread (1) $2,271 1.96% $2,224 1.95% $2,294 2.17%
===== ====== ===== ====== ===== ======
Net yield (net interest income as a percent
of average interest-earning assets) 2.35% 2.45% 2.76%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.83% 111.00% 113.28%
====== ====== ======
</TABLE>
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
15
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and expense during the fiscal
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended September 30,
1999 vs. 1998 1998 vs. 1997
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 $276 $ (99) $177 $190 $(76) $114
Mortgage-backed securities 175 (134) 41 469 (38) 431
Investment securities (54) (47) (101) (269) (4) (273)
Other interest-earning assets(1) 21 (23) (2) 87 25 112
--- ---- --- --- --- ---
Total interest income 418 (303) 115 477 (93) 384
Interest expense attributable to:
Deposits(2) 240 (161) 79 100 36 136
Borrowings 112 (123) (11) 345 (27) 318
--- ---- --- --- --- ---
Total interest expense 352 (284) 68 445 9 454
--- ---- --- --- --- ---
Increase (decrease) in net interest income $ 47 $(70)
=== ===
</TABLE>
(1) Includes interest-bearing deposits in other financial institutions and
other interest-earning assets.
(2) Includes interest-bearing escrow deposits.
16
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Harvest Home's principal sources of funds are deposits, repayments on loans and
mortgage-backed securities, maturities of investment securities, and funds
provided by operations. While scheduled loan and mortgage-backed securities
amortization and maturing interest-bearing deposits and investment securities
are relatively predictable sources of funds, deposit flows and loan and
mortgage-backed securities prepayments are greatly influenced by economic
conditions, the general level of interest rates, and competition. The particular
sources of funds utilized by Harvest Home from time to time are selected based
on comparative costs and availability.
The FDIC requires savings banks to maintain a level of investments in specified
types of liquid assets sufficient to protect and ensure the safety and soundness
of the Savings Bank. The FDIC has no specific minimum guideline for liquidity.
The primary investing activities of Harvest Home include investing in loans,
mortgage-backed securities and investment securities. Such investments are
funded primarily from loans and mortgage-backed securities repayments, increases
in customer deposit liabilities and borrowings from the Federal Home Loan Bank.
During the fiscal year ended September 30, 1999, loan originations totaled $15.8
million and purchases of mortgage-backed and investment securities totaled $18.0
million, representing the deployment of funds from deposit growth, proceeds from
Federal Home Loan Bank advances and proceeds from maturity of investment
securities. Customer deposits increased during the fiscal year ended September
30, 1999, by $6.0 million and increased during the fiscal year ended September
30, 1998 by $1.4 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.
17
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
In addition, the FDIC established guidelines prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
The following table sets forth the regulatory capital of Harvest Home at
September 30, 1999:
Total Capital to Risk-Weighted Assets 23.5%
Tier I Capital to Risk-Weighted Assets 23.2%
Tier I Leverage Ratio 9.8%
Potential Impact of Current Legislation on Future Results of Operations
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act makes sweeping changes in the financial services in which
various types of financial institutions may engage. The Glass-Steagall Act,
which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act is not expected to have a material effect on the activities in which
HHFC and Harvest Home currently engage, except to the extent that competition
with other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act.
18
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established 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. 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.
Management adopted SFAS No. 130 effective October 1, 1998, as required, without
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 established 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. Management adopted SFAS No. 131 effective October 1, 1998, as
required, without material effect on the Corporation's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
19
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effect of Recent Accounting Pronouncements (continued)
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on the Corporation's financial statements.
Year 2000 Compliance Matters
As with all providers of financial services, the Corporation's operations are
heavily dependent on information technology systems. The Corporation has
addressed the potential problems associated with the possibility that the
computers that control or operate the Corporation's information technology
system and infrastructure may not be programmed to read four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900, causing systems to fail to function or to generate erroneous data.
Harvest Home's primary data processing applications are handled by a third-party
service bureau, NCR. NCR has advised Harvest Home that it has migrated to a
fully Year 2000 compliant processing system that has been fully tested as of
January 1, 1999. Management has also reviewed Harvest Home's ancillary equipment
and has provided the appropriate remedial measures, including requesting service
providers to assure the Savings Bank that their systems and products are fully
year 2000 compliant. Harvest Home has upgraded its existing teller operating
system with capital expense of approximately $170,000.
No assurance can be given, however, that significant expense will not be
incurred in future periods. In the unlikely event that the Savings Bank is
ultimately required to purchase replacement computer systems, programs and
equipment, or incur substantial expense to make the Savings Bank's current
systems, programs and equipment year 2000 compliant, the Savings Bank's net
earnings and financial condition could be adversely affected.
20
<PAGE>
Harvest Home Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
Management has developed a contingency plan which includes access to an
alternative processing site provided by NCR. Additionally, the Savings Bank can
process transactions manually for a period of several weeks, if necessary, upon
arrival of the year 2000.
In addition to possible expense related to its own systems, Harvest Home could
incur losses if loan payments are delayed due to year 2000 problems affecting
any major borrowers in Harvest Home's primary market area. Because Harvest
Home's loan portfolio is highly diversified with regard to individual borrowers
and types of businesses and Harvest Home's primary market area is not
significantly dependent upon one employer or industry, Harvest Home does not
expect any significant or prolonged difficulties that will affect net earnings
or cash flow.
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Harvest Home Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Harvest Home Financial Corporation as of September 30, 1999 and 1998, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity, and cash flows for each of the three years ended September 30, 1999,
1998 and 1997. 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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the years ended
September 30, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
November 19, 1999
22
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 1,347 $ 1,505
Federal funds sold 100 200
Interest-bearing deposits in other financial institutions 1,402 1,182
------ ------
Cash and cash equivalents 2,849 2,887
Investment securities designated as available for sale - at market 5,951 4,032
Mortgage-backed securities designated as available for sale - at market 33,711 37,864
Loans receivable - net 52,790 48,797
Office premises and equipment - at depreciated cost 1,236 1,117
Federal Home Loan Bank stock - at cost 1,723 1,606
Accrued interest receivable on loans 287 257
Accrued interest receivable on mortgage-backed securities 160 173
Accrued interest receivable on investments and interest-
bearing deposits 55 47
Prepaid expenses and other assets 117 114
Deferred federal income tax asset 56 -
------ ------
Total assets $98,935 $96,894
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $66,220 $60,225
Advances from the Federal Home Loan Bank 22,600 25,850
Advances by borrowers for taxes and insurance 105 119
Accrued interest payable 115 126
Other liabilities 232 230
Accrued federal income taxes 10 65
Deferred federal income taxes - 302
------ ------
Total liabilities 89,282 86,917
Commitments - -
Stockholders' equity
Common stock - 2,000,000 shares of no par value authorized;
991,875 shares issued - -
Additional paid-in capital 6,887 6,903
Retained earnings - restricted 5,329 5,191
Shares acquired by Employee Stock Ownership Plan (224) (301)
Shares acquired by Recognition and Retention Plan (194) (291)
Accumulated other comprehensive income, unrealized gains (losses)
on securities designated as available for sale, net of related tax effects (694) 87
Less 116,586 and 129,518 shares of treasury stock - at cost (1,451) (1,612)
------ ------
Total stockholders' equity 9,653 9,977
------ ------
Total liabilities and stockholders' equity $98,935 $96,894
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $3,748 $3,571 $3,457
Mortgage-backed securities 2,126 2,085 1,654
Investment securities 417 504 734
Interest-bearing deposits and other 191 207 138
----- ----- -----
Total interest income 6,482 6,367 5,983
Interest expense
Deposits 3,001 2,922 2,786
Borrowings 1,210 1,221 903
----- ----- -----
Total interest expense 4,211 4,143 3,689
----- ----- -----
Net interest income 2,271 2,224 2,294
Provision for losses on loans 12 12 9
----- ----- -----
Net interest income after provision
for losses on loans 2,259 2,212 2,285
Other income
Gain on sale of investment and mortgage-backed securities - 43 7
Other operating 92 66 57
----- ----- -----
Total other income 92 109 64
General, administrative and other expense
Employee compensation and benefits 884 851 803
Occupancy and equipment 205 184 170
Federal deposit insurance premiums 37 36 28
Franchise taxes 115 124 121
Data processing 107 98 87
Other operating 224 223 200
----- ----- -----
Total general, administrative and
other expense 1,572 1,516 1,409
----- ----- -----
Earnings before income taxes 779 805 940
Federal income taxes
Current 219 241 130
Deferred 46 23 183
----- ----- -----
Total federal income taxes 265 264 313
----- ----- -----
NET EARNINGS $ 514 $ 541 $ 627
===== ===== =====
EARNINGS PER SHARE
Basic $.60 $.63 $.71
=== === ===
Diluted $.59 $.60 $.70
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Net earnings for the year $ 514 $541 $627
Other comprehensive income (loss), net of tax effects:
Unrealized holding gains (losses) on securities during
the period, net of tax effects of $(403), $39 and $28
in 1999, 1998 and 1997, respectively (781) 75 54
Reclassification adjustment for unrealized gains included
in earnings, net of tax effects of $15 and $2 in 1998
and 1997, respectively - (28) (5)
--- ---- -----
Comprehensive income (loss) $(267) $588 $676
==== === ===
Accumulated comprehensive income (loss) $(694) $ 87 $ 40
==== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended September 30, 1999, 1998 and 1997
(In thousands, except share data)
Unrealized
Shares gain (loss)
acquired n securities
Additional by stock esignated as
Common paid-in Retained benefit available Treasury
stock capital earnings plans for sale stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $- $6,740 $4,787 $(1,160) $ (9) $ (633) $ 9,725
Net earnings for the year ended September 30, 1997 - - 627 - - - 627
Cash dividends of $.40 per share - - (371) - - - (371)
Purchase of treasury shares - at cost - - - - - (223) (223)
Amortization of expense related to stock benefit plans - 144 - 393 - - 537
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 49 - 49
-- ----- ----- ------ ---- ------ ------
Balance at September 30, 1997 - 6,884 5,043 (767) 40 (856) 10,344
Net earnings for the year ended September 30, 1998 - - 541 - - - 541
Cash dividends of $.44 per share - - (393) - - - (393)
Purchase of treasury shares - at cost - - - - - (756) (756)
Amortization of expense related to stock benefit plans - 19 - 175 - - 194
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - 47 - 47
-- ----- ----- ------ ---- ------ ------
Balance at September 30, 1998 - 6,903 5,191 (592) 87 (1,612) 9,977
Net earnings for the year ended September 30, 1999 - - 514 - - - 514
Cash dividends of $.44 per share - - (376) - - - (376)
Exercise of stock options - (39) - - - 161 122
Amortization of expense related to stock benefit plans - 23 - 174 - - 197
Unrealized losses on securities designated as available
for sale, net of related tax effects - - - - (781) - (781)
-- ----- ----- ------ ---- ------ ------
Balance at September 30, 1999 $- $6,887 $5,329 $ (418) $(694) $(1,451) $ 9,653
== ===== ===== ======= ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 514 $ 541 $ 627
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (44) (34) (34)
Depreciation and amortization 77 57 51
Amortization of premiums on mortgage-backed securities 15 5 6
Amortization of premiums (discounts) on investment securities - net 5 (33) 17
Gain on sale of investment and mortgage-backed securities - (43) (7)
Amortization expense of stock benefit plans 197 194 537
Provision for losses on loans 12 12 9
Federal Home Loan Bank stock dividends (117) (102) (59)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (30) (12) (36)
Accrued interest receivable on mortgage-backed securities 13 (34) (37)
Accrued interest receivable on investments and interest-
bearing deposits (8) 79 85
Prepaid expenses and other assets (3) (41) 1
Accrued interest payable (11) 37 12
Other liabilities 2 (23) (563)
Federal income taxes
Current (55) 116 22
Deferred 46 23 183
------ ------ ------
Net cash provided by operating activities 613 742 814
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 14,992 19,867 2,644
Purchase of mortgage-backed securities (11,963) (26,992) (18,205)
Proceeds from sale of mortgage-backed securities
available for sale - 1,878 141
Proceeds from maturity of mortgage-backed securities - - 3,500
Purchase of investment securities (6,000) - -
Proceeds from maturity of investment securities 4,000 4,000 2,003
Proceeds from sale of investment securities available
for sale - - 2,003
Principal repayments on loans 11,883 10,376 5,976
Loan disbursements (15,844) (13,922) (8,913)
Purchase of Federal Home Loan Bank stock - (285) (572)
Purchase of office equipment (196) (193) (80)
------ ------ ------
Net cash used in investing activities (3,128) (5,271) (11,503)
------ ------ ------
Net cash used in operating and investing
activities (balance carried forward) (2,515) (4,529) (10,689)
------ ------ ------
</TABLE>
27
<PAGE>
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(2,515) $(4,529) $(10,689)
Cash flows provided by (used in) financing activities:
Net increase in deposits 5,995 1,439 828
Proceeds from Federal Home Loan Bank advances 10,000 38,200 18,200
Repayment of Federal Home Loan Bank advances (13,250) (36,350) (4,200)
Advances by borrowers for taxes and insurance (14) 12 11
Dividends on common stock (376) (393) (371)
Proceeds from exercise of stock options 122 - -
Purchase of treasury stock - (756) (223)
------ ------ -------
Net cash provided by financing activities 2,477 2,152 14,245
------ ------ -------
Net increase (decrease) in cash and cash equivalents (38) (2,377) 3,556
Cash and cash equivalents at beginning of year 2,887 5,264 1,708
------ ------ -------
Cash and cash equivalents at end of year $ 2,849 $ 2,887 $ 5,264
====== ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 180 $ 121 $ 96
====== ====== =======
Interest paid on deposits and borrowings $ 4,222 $ 4,106 $ 3,677
====== ====== =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (781) $ 47 $ 49
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harvest Home Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of Harvest Home Savings Bank, (the "Savings Bank"). The Savings Bank
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and primarily applying those
funds to the origination of loans for residential, consumer and
nonresidential purposes. The Savings Bank's profitability is significantly
dependent on net interest income, which is the difference between interest
income generated from interest-earning assets (i.e. loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e. customer
deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest
rates paid or received by the Savings Bank can be significantly influenced
by a number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and the Savings Bank. All significant intercompany balances and
transactions have been eliminated.
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
115 requires that investments in debt and equity securities be categorized
as held-to-maturity, trading, or available for sale. Securities classified
as held-to-maturity are carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities designated as available for sale are carried at
fair value with resulting unrealized gains or losses recorded to operations
or stockholders' equity, respectively.
29
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
At September 30, 1999, the Corporation's stockholders' equity reflected net
unrealized losses on securities designated as available for sale totaling
$694,000. At September 30, 1998, the Corporation's stockholders' equity
reflected net unrealized gains on securities designated as available for
sale totaling $87,000.
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.
30
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Losses on Loans
It is the Savings Bank's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in the level
of delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Savings Bank records a loan charge-off equal to the difference
between the fair value of the property securing the loan and the loan's
carrying value. Major loans (including development projects) and major
lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to
earnings and decreased by charge-offs (net of recoveries).
The Savings Bank accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which requires that
impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral. The Savings Bank's current procedures for evaluating impaired
loans result in carrying such loans at the lower of cost or fair value.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Savings Bank
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Savings Bank's investment in multi-family and nonresidential loans, and its
evaluation of impairment thereof, such loans are collateral dependent, and
as a result, are carried as a practical expedient at the lower of cost or
fair value.
It is the Savings Bank's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment under
SFAS No. 114 at that time.
At September 30, 1999, the Savings Bank had one loan account totaling
$195,000 that is defined as impaired under SFAS No. 114. The Savings Bank
had no such loans at September 30, 1998. No portion of the allowance for
credit losses was allocated to such impaired loans at September 30, 1999 or
1998.
31
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
forty years for buildings, ten to forty years for building improvements, and
five to ten years for furniture and equipment. An accelerated method is used
for tax reporting purposes.
7. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the
amount determined at the recording date. In determining the lower of cost or
fair value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
8. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". Pursuant to the
provisions of SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and
its reported amount in the consolidated financial statements that will
result in taxable or deductible amounts in future periods. Deferred tax
assets are recorded only to the extent that the amount of net deductible
temporary differences or carryforward attributes may be utilized against
current period earnings, carried back against prior years' earnings, offset
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result from different methods of accounting for
deferred loan origination fees and costs, Federal Home Loan Bank stock
dividends, 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.
32
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Benefit Plans
The Savings Bank provides a supplemental retirement plan to certain key
officers. The Savings Bank's obligations under the supplemental plan have
been funded via the purchase of key man life insurance policies for which
the Savings Bank is the beneficiary. Expense under the supplemental plan
totaled approximately $1,000 during each of the fiscal years ended September
30, 1999, 1998 and 1997.
The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides
retirement benefits for substantially all full-time employees who have
completed one year of service. The Corporation accounts for the ESOP in
accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting
for Employee Stock Ownership Plans". SOP 93-6 requires that compensation
expense recorded by employers equal the fair value of ESOP shares allocated
to participants during a given fiscal year. Expense recognized related to
the ESOP totaled approximately $114,000, $111,000 and $48,000 for the fiscal
years ended September 30, 1999, 1998 and 1997, respectively.
The Corporation also has a Recognition and Retention Plan ("RRP"). During
fiscal 1996, the RRP purchased 39,675 shares of the Corporation's common
stock in the open market. At September 30, 1999, 37,211 shares had been
awarded to executive officers and members of the Board of Directors of the
Corporation. Common stock awarded under the RRP vests ratably over a five
year period, commencing with the date of the award. A provision of $97,000
related to the RRP was charged to expense for each of the fiscal years ended
September 30, 1999, 1998 and 1997.
10. Earnings Per Share and Dividends Per Share
Basic earnings per share for the years ended September 30, 1999, 1998 and
1997 is computed based upon the weighted-average shares outstanding during
the period, less 20,337, 28,252 and 36,774 shares, respectively, in the ESOP
that are unallocated and not committed to be released. Weighted-average
common shares deemed outstanding totaled 851,799, 859,891 and 881,720 for
the years ended September 30, 1999, 1998 and 1997, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
878,289, 894,437 and 893,942 for the fiscal years ended September 30, 1999,
1998 and 1997, respectively. Incremental shares related to the assumed
exercise of stock options included in the computation of diluted earnings
per share totaled 26,490, 34,546 and 12,222 for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively. Options to purchase 1,000
shares of common stock with an exercise price of $14.00 per share were
outstanding at September 30, 1999, but were excluded from the computation of
diluted earnings per share because the exercise price was greater than the
average market price of the common shares.
33
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Earnings Per Share and Dividends Per Share (continued)
Capital distributions paid in excess of the Corporation's earnings and
profits (computed on a stand-alone basis for federal income tax purposes)
are deemed by management to constitute a return of excess capital.
Management has determined that $.21, $.33 and $.37 of fiscal 1999, 1998 and
1997 dividends constitute tax-free distributions.
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, 1999 and 1998:
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.
34
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
Deposits: The fair value of NOW accounts, passbook accounts,
money market demand and escrow deposits is deemed to
approximate the amount payable on demand. Fair values for
fixed-rate certificates of deposit have been estimated using a
discounted cash flow calculation using the interest rates
currently offered for deposits of similar remaining
maturities.
Advances from the Federal Home Loan Bank: The fair value of
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At September 30, 1999 and 1998, 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>
1999 1998
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,849 $ 2,849 $ 2,887 $ 2,887
Investment securities 5,951 5,951 4,032 4,032
Mortgage-backed securities 33,711 33,711 37,864 37,864
Loans receivable 52,790 52,512 48,797 50,590
Federal Home Loan Bank stock 1,723 1,723 1,606 1,606
------ ------ ------ ------
$97,024 $96,746 $95,186 $96,979
====== ====== ====== ======
Financial liabilities
Deposits $66,220 $66,439 $60,225 $61,304
Advances from Federal Home Loan Bank 22,600 22,598 25,850 25,775
Escrow deposits 105 105 119 119
------ ------ ------ ------
$88,925 $89,142 $86,194 $87,198
====== ====== ====== ======
</TABLE>
35
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of October 1, 1998. The Statement established standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It 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 presented
with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital. Financial statements for earlier periods were
restated for comparative purposes. The Corporation's accumulated
comprehensive income consists solely of the change in unrealized gains and
losses on securities designated as available for sale in accordance with
SFAS No. 115.
13. 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.
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
consolidated financial statement presentation.
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at September 30, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
obligations $6,000 $- $ 49 $5,951
===== == ==== =====
</TABLE>
36
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
obligations $4,005 $27 $- $4,032
===== == == =====
</TABLE>
The amortized cost and estimated fair values of U.S. Government agency
obligations by contractual term to maturity at September 30 are shown below:
<TABLE>
<CAPTION>
1999 1998
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Due within one year $ - $ - $4,005 $4,032
Due after one year through
five years 6,000 5,951 - -
----- ----- ----- -----
$6,000 $5,951 $4,005 $4,032
===== ===== ===== =====
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at September 30, 1999
and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation:
Participation certificates $ 4,901 $- $ 128 $ 4,773
Collateralized mortgage obligations 22,236 - 858 21,378
Federal National Mortgage Association:
Participation certificates 2,158 2 52 2,108
Collateralized mortgage obligations 5,420 33 1 5,452
------- ---- ------ -------
Total mortgage-backed securities $34,715 $ 35 $1,039 $33,711
====== ==== ===== ======
</TABLE>
37
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
Available for sale: (In thousands)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation:
Participation certificates $ 6,140 $ 3 $ 26 $ 6,117
Collateralized mortgage obligations 15,358 8 29 15,337
Federal National Mortgage Association:
Participation certificates 3,068 29 37 3,060
Collateralized mortgage obligations 13,193 172 15 13,350
------ --- ---- ------
Total mortgage-backed securities $37,759 $212 $107 $37,864
====== === === ======
</TABLE>
The amortized cost of mortgage-backed securities, by contractual terms to
maturity at September 30, are shown below. Expected maturities will differ
from contractual maturities because borrowers may generally prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Due within three years $ 1,044 $ 1,010
Due in three to five years 4,016 5,713
Due in five to ten years 8,055 8,761
Due in ten to twenty years 1,261 2,857
Due after twenty years 20,339 19,418
------ ------
$34,715 $37,759
====== ======
</TABLE>
38
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family $43,083 $41,214
Home equity lines of credit 1,480 1,275
Multifamily 2,178 1,367
Construction 5,964 4,663
Nonresidential real estate and land 3,085 3,024
Deposit account 20 25
------ ------
55,810 51,568
Less:
Undisbursed portion of loans in process 2,823 2,556
Deferred loan origination fees 58 88
Allowance for loan losses 139 127
------ ------
$52,790 $48,797
====== ======
</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 $49.9 million, or 94%, of the
total loan portfolio at September 30, 1999, and $46.0 million, or 94%, of
the total loan portfolio at September 30, 1998. 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 had sold participating interests in loans in the secondary
market, retaining servicing on the loans sold. Loans sold and serviced for
others totaled approximately $196,000 at September 30, 1998. There were no
loans serviced for others at September 30, 1999.
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 $132,000
and $157,000 at September 30, 1999 and 1998, respectively. During the fiscal
year ended September 30, 1999, $75,000 in new loans were disbursed to
officers and directors, while principal repayments of $100,000 were received
from officers and directors.
39
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $127 $115 $111
Provision for losses on loans 12 12 9
Charge-off of loans - - (5)
--- --- ---
Balance at end of year $139 $127 $115
=== === ===
</TABLE>
At September 30, 1999, 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, 1999, 1998 and 1997, the Savings Bank's nonaccrual and
nonperforming loans totaled $25,000, $49,000 and $95,000, respectively.
Interest income which would have been recognized if such loans had performed
pursuant to contractual terms totaled approximately $1,000, $2,000 and
$6,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following at September
30:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Land and improvements $ 119 $ 119
Office buildings and improvements 1,425 1,397
Furniture, fixtures and equipment 642 474
Automobile 14 14
------- -------
2,200 2,004
Less accumulated depreciation 964 887
------ ------
$1,236 $1,117
===== =====
</TABLE>
40
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-average 1999 1998
interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts - 1.84% in 1999 and
1998 $ 3,806 5.7 $ 3,208 5.3
Super NOW accounts - 2.75% in 1999
and 1998 405 .6 253 .4
Passbook accounts - 2.53% in 1999
and 1998 10,437 15.8 9,494 15.8
Money market demand deposit -
3.00% in 1999 and 1998 4,534 6.9 4,107 6.8
------ ----- ------ -----
Total demand, transaction and
passbook deposits 19,182 29.0 17,062 28.3
Certificates of deposit:
Original maturities of:
Less than 12 months
4.57% in 1999 and 5.13% in 1998 4,012 6.1 3,163 5.3
12 months
4.90% in 1999 and 5.15% in 1998 21,751 32.8 21,945 36.4
18 months
5.45% in 1999 and 5.86% in 1998 5,231 7.9 4,760 7.9
30 months
5.60% in 1999 and 5.80% in 1998 6,844 10.3 5,254 8.7
48 months and greater
6.02% in 1999 and 6.12% in 1998 9,200 13.9 8,041 13.4
------ ----- ------ ------
Total certificates of deposit 47,038 71.0 43,163 71.7
------ ----- ------ ------
Total deposits $66,220 100.0% $60,225 100.0%
====== ===== ====== =====
</TABLE>
At September 30, 1999 and 1998, the Savings Bank had certificate of deposit
accounts with balances greater than $100,000 totaling $4.1 million and $2.9
million, respectively.
41
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS (continued)
Interest expense on deposit accounts is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Money market demand deposit accounts $ 132 $ 130 $ 144
Passbook and escrow accounts 253 254 256
NOW and Super NOW accounts 72 73 107
Certificates of deposit 2,544 2,465 2,279
----- ----- -----
$3,001 $2,922 $2,786
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Less than six months $18,130 $13,202
Six months to one year 16,242 16,864
One to two years 7,906 6,976
Two to three years 1,191 4,358
Three to four years 1,347 341
Over four years 2,222 1,422
------ ------
$47,038 $43,163
====== ======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1999 by pledges of certain residential mortgage loans totaling $33.9 million
and the Savings Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
Interest Rate Maturing fiscal September 30,
year ending in 1999 1998
(Dollars in thousands)
<S> <C> <C> <C>
5.58% 2000 $ - $ 3,000
5.38% 2001 5,600 -
5.43% - 5.71% 2007 - 950
4.66% - 5.64% 2008 17,000 21,900
------ ------
$22,600 $25,850
====== ======
Weighted-average interest rate 5.23% 5.26%
==== ====
</TABLE>
42
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999, the Savings Bank had commitments for unused lines of
credit under home equity loans of $3.0 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
The Corporation's provision for federal income taxes does not differ
materially from the amounts computed at the statutory corporate tax rate for
the years ended September 30, 1999, 1998 and 1997.
43
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax asset (liability) at
September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance $ 47 $ 43
Stock benefit plans 25 25
Unrealized losses on securities designated as
available for sale 359 -
--- ----
Total deferred tax assets 431 68
Deferred tax liabilities:
Percentage of earnings bad debt deduction (104) (125)
Deferred loan origination costs (39) (24)
Federal Home Loan Bank stock dividends (230) (176)
Unrealized gains on securities designated as
available for sale - (45)
Other (2) -
--- ----
Total deferred tax liabilities (375) (370)
--- ----
Net deferred tax asset (liability) $ 56 $(302)
=== ====
</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, 1999. 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.
Due to recent legislation, 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 amortize the recapture of the bad debt reserve in taxable income
over a six year period, which commenced in fiscal 1999.
44
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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.
45
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE J - REGULATORY CAPITAL (continued)
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings banks that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other savings banks are required to
maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
As of September 30, 1999 and 1998, management believes that the Savings Bank
met all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
1999
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $9,876 23.5% =>$3,365 =>8.0% =>$4,206 =>10.0%
Tier I capital
(to risk-weighed assets) $9,737 23.2% =>$1,682 =>4.0% =>$2,523 => 6.0%
Tier I leverage $9,737 9.8% =>$3,985 =>4.0% =>$4,981 => 5.0%
</TABLE>
<TABLE>
<CAPTION>
1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $9,419 23.7% =>$3,174 =>8.0% =>$3,967 =>10.0%
Tier I capital
(to risk-weighed assets) $9,292 23.4% =>$1,587 =>4.0% =>$2,380 => 6.0%
Tier I leverage $9,292 9.6% =>$3,860 =>4.0% =>$4,825 => 5.0%
</TABLE>
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 area, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
46
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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. In order to give effect to a return of capital distribution paid
in fiscal 1996, the number of shares granted under option and the exercise
price were adjusted in fiscal 1997 to 96,879 and $9.42 per share,
respectively.
The Corporation accounts for its stock option plan in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service period,
which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue to account for stock options and similar equity
instruments under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the Corporation's
stock option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have resulted in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $514 $541 $627
=== === ===
Pro-forma $514 $541 $627
=== === ===
Earnings per share
Basic As reported $.60 $.63 $.71
=== === ===
Pro-forma $.60 $.63 $.71
=== === ===
Diluted As reported $.59 $.60 $.70
=== === ===
Pro-forma $.59 $.60 $.70
=== === ===
</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 1999: dividend yield
of 5.5%, expected volatility of 20.0%, a risk-free interest rate of 6.5% and
expected lives of ten years.
47
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE K - STOCK OPTION PLAN (continued)
A summary of the status of the Corporation's stock option plan as of
September 30, 1999, 1998 and 1997, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 96,879 $ 9.42 96,879 $9.42 74,297 $12.25
Adjustment for return of capital
distribution - - - - 22,582 (2.83)
Granted 1,000 14.00 - - - -
Exercised (12,932) 9.42 - - - -
Forfeited - - - - - -
------- ----- ------ ---- ------ ----
-
Outstanding at end of year 84,947 $ 9.47 96,879 $9.42 96,879 $ 9.42
====== ===== ====== ==== ====== =====
Options exercisable at year-end 84,947 $ 9.47 96,879 $9.42 96,879 $ 9.42
====== ===== ====== ==== ====== =====
Weighted-average fair value of
options granted during the year $ 2.98 N/A N/A
===== === ===
</TABLE>
The following information applies to options outstanding at September 30,
1999:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding 84,947
Range of exercise prices $9.42 - $14.00
Weighted-average exercise price $9.47
Weighted-average remaining contractual life 6.25 years
</TABLE>
48
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - 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, 1999 and
1998, and the results of its operations and its cash flows for the three
years ended September 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Harvest Home Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
ASSETS 1999 1998
<S> <C> <C>
Cash and cash equivalents $ 174 $ 130
Mortgage-backed securities designated as available for
sale - at market 191 397
Loan receivable from ESOP 224 301
Investment in Harvest Home Savings Bank 9,041 9,370
Prepaid expenses and other 48 69
----- ------
Total assets $9,678 $10,267
===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 25 $ 290
Stockholders' equity
Common stock and additional paid-in capital 6,887 6,903
Retained earnings 5,329 5,191
Shares acquired by stock benefit plans (418) (592)
Unrealized gains (losses) on securities designated as available
for sale, net of tax effects (694) 87
Less treasury stock - at cost (1,451) (1,612)
----- ------
Total stockholders' equity 9,653 9,977
----- ------
Total liabilities and stockholders' equity $9,678 $10,267
===== ======
</TABLE>
49
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL
CORPORATION (continued)
Harvest Home Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
For the year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Revenue
Interest income $ 29 $ 57 $108
Other income 7 26 27
Equity in earnings of Harvest Home Savings Bank 548 542 602
--- --- ---
Total revenue 584 625 737
General and administrative expenses 87 98 100
--- --- ---
Earnings before income taxes (credits) 497 527 637
Federal income taxes (credits) (17) (14) 10
--- --- ---
NET EARNINGS $514 $541 $627
=== === ===
</TABLE>
50
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE L - CONDENSED FINANCIAL STATEMENTS OF HARVEST HOME FINANCIAL
CORPORATION (continued)
<TABLE>
<CAPTION>
Harvest Home Financial Corporation
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1999 1998 1997
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $514 $ 541 $627
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Accretion of discounts on mortgage-backed securities (1) (4) (4)
Undistributed earnings of consolidated subsidiary (248) (542) (602)
Amortization expense of stock benefit plans - 8 144
Gain on sale of mortgage-backed securities - (6) -
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 21 (25) 66
Other liabilities (261) 257 (199)
--- ------ ---
Net cash provided by operating activities 25 229 32
Cash flows provided by investing activities:
Proceeds from repayment of loan to ESOP 77 77 296
Proceeds from sale of mortgage-backed securities - 337 -
Principal repayments on mortgage-backed securities 196 281 228
--- ------ ---
Net cash provided by investing activities 273 695 524
Cash flows provided by (used in) financing activities:
Payment of dividends on common stock (376) (393) (371)
Purchase of treasury stock - (756) (223)
Proceeds from exercise of stock options 122 - -
--- ----- --
Net cash used in financing activities (254) (1,149) (594)
--- ----- ---
Net increase (decrease) in cash and cash equivalents 44 (225) (38)
Cash and cash equivalents at beginning of year 130 355 393
--- ----- ---
Cash and cash equivalents at end of year $174 $ 130 $355
=== ===== ===
</TABLE>
51
<PAGE>
Harvest Home Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE M - PENDING MERGER
On October 1, 1999, the Corporation entered into an Agreement and Plan of
Merger (the "Agreement") whereby the Corporation would be acquired by a
newly formed holding company of The People's Building, Loan and Savings
Company ("People's") for total consideration of approximately $16.5 million
in cash and common stock. In connection with the acquisition, People's
(following a merger with The Oakley Improved Building and Loan Company) will
convert from a mutual to a stock institution and form the holding company.
Under the terms of the Agreement, each share of the Corporation's common
stock will be exchanged for a combination of $9.00 per share in cash plus
new common shares of Peoples' holding company with a value of $9.00. It is
currently anticipated that the number of shares of common stock that will be
exchanged for each share of the Corporation's common stock is 0.9 shares,
assuming the initial offering price of People's common stock is $10 per
share.
52
<PAGE>
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 Teresa O'Quinn
Vice President and Controller
Marvin J. Ruehlman
Director Deborah Mundstock
Assistant Vice President and
Thomas L. Eckert Loan Officer
Director
Herbert E. Menkhaus
Director
George C. Eyrich
Director
53
<PAGE>
HARVEST HOME SAVINGS BANK
DIRECTORS AND OFFICERS
John E. Rathkamp
Director, President, Chief Executive Officer and Secretary
Dennis J. Slattery
Executive Vice President, Treasurer
Teresa O'Quinn
Vice President, Controller
Deborah Mundstock
Assistant Vice President, Loan Officer
Richard F. Hauck
Director
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
54
<PAGE>
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
Harvest Home Financial Corporation executed a merger agreement with People's
Building Loan and Savings Company on October 1, 1999. Due to the need to hold a
special meeting of shareholders to ratify the proposed merger, the Annual
Meeting of Shareholders usually held in December of each year has been
postponed. Subject to regulatory approval of the merger, a special shareholders
meeting is anticipated during the second calendar quarter of year 2000.
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
55
EXHIBIT 22
Subsidiary of Harvest Home Financial Corporation
Harvest Home Savings Bank
3621 Harrison Avenue
Cheviot, Ohio 45211
(513)661-6612
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,347
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 1,402
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,662
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 52,790
<ALLOWANCE> 139
<TOTAL-ASSETS> 98,935
<DEPOSITS> 66,220
<SHORT-TERM> 0
<LIABILITIES-OTHER> 462
<LONG-TERM> 22,600
0
0
<COMMON> 0
<OTHER-SE> 9,653
<TOTAL-LIABILITIES-AND-EQUITY> 98,935
<INTEREST-LOAN> 3,748
<INTEREST-INVEST> 2,543
<INTEREST-OTHER> 191
<INTEREST-TOTAL> 6,482
<INTEREST-DEPOSIT> 3,001
<INTEREST-EXPENSE> 4,211
<INTEREST-INCOME-NET> 2,271
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,572
<INCOME-PRETAX> 779
<INCOME-PRE-EXTRAORDINARY> 514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 514
<EPS-BASIC> .60
<EPS-DILUTED> .59
<YIELD-ACTUAL> 2.35
<LOANS-NON> 25
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 195
<ALLOWANCE-OPEN> 127
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 139
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 139
</TABLE>
