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U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB
 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934 For the fiscal year ended December 31, 2003
Commission File Number 0-21809   HOME CITY FINANCIAL CORPORATION  Ohio
    
    34-1839475(State or other Jurisdiction
of incorporation or organization)
    
    (IRS Employer
Identification Number)2454 North Limestone Street
    
    45503(Address of principal executive offices)
    
    (zip code)
 Issuers telephone number (937) 390-0470 Securities registered under Section 12(b) of the Exchange Act:
not applicable 
 Securities registered under Section 12(g) of the Exchange Act Common Shares (No Par Value) Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.YES [X] NO[   ] Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in
this form, and no disclosure will be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X] State issuers revenues for the most recent fiscal year. $9,425,000 State the aggregate market value of the voting and nonvoting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity as
of a specified date within the past 60 days. As of March 4, 2004, 824,316
common shares of the Registrant were outstanding.The aggregate market value
of the shares held by non-affiliates was $9,361,345 based upon the closing sale
price of $16.10 per share as quoted by The Nasdaq Stock Market. Documents Incorporated by Reference The following sections of the definitive Proxy Statement for the 2004
Annual Meeting of Shareholders of Home City Financial Corporation are
incorporated by reference into Part III of this Form 10-KSB:  1.
    
    Election of Directors2.
    
    Compensation of Directors and Executive Officers3.
    
    Voting Securities and Ownership of Certain Beneficial Owners and
Management4.
    
    Section 16(a) Beneficial Ownership Reporting ComplianceTransitional Small Business Disclosure Format
YES[   ] NO [X] -1-




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TABLE OF CONTENTS  PART IITEM 1. Description of BusinessITEM 2. Description of PropertyITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPART IIITEM 5. Market for Common Equity and Related Shareholder MattersITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF SHAREHOLDERSEQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureITEM 8A. Controls and ProceduresPART IIIITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16 (a) of the Exchange Act of the RegistrantITEM 10. Executive CompensationITEM 11. Security Ownership of Certain Beneficial Owners and ManagementITEM 12. Certain Relationships and Related Transactions and Related Stockholder MattersITEM 13. Exhibits and Reports on Form 8-KITEM 14. Principal Accountant Fees and ServicesSIGNATURESINDEX TO EXHIBITSEX-10.2EX-10.5EX-21EX-31.1EX-31.2EX-32EX-99.2 
 PART I 
 ITEM 1. Description of Business General Home City Financial Corporation, a unitary savings and loan holding
company incorporated in 1996 under the laws of the State of Ohio (HCFC), owns
all of the issued and outstanding common shares of Home City Federal Savings
Bank of Springfield, a savings association chartered under the laws of the
United States (Home City). In December 1996, HCFC acquired all of the common
shares issued by Home City upon its conversion from a mutual savings
association to a stock savings association (the Conversion). Since its
formation, HCFCs activities have been limited primarily to holding the common
shares of Home City. In December 2000, HCFC incorporated Home City Insurance
Agency, Inc. (HCIA),
as a wholly-owned subsidiary, which acquired the business of a local
insurance agency. Most of the business of HCIA was sold effective December
2002, and HCIA was dissolved in 2003. Home City is a savings association principally engaged in the business of
making permanent first and second mortgage loans secured by one- to four-family
residential real estate and nonresidential real estate located in Home Citys
primary lending area and investing in U.S. Government and federal agency
obligations, interest-bearing deposits in other financial institutions,
mortgage-backed securities and municipal securities. Home City also originates
loans for the construction of residential real estate and loans secured by
multifamily real estate (over four units), commercial loans and consumer loans.
The origination of commercial and consumer loans, both secured and unsecured,
constitutes a growing portion of Home Citys lending activities. Funds for
lending and investment activities are obtained primarily from deposits, which
are insured up to applicable limits by the Federal Deposit Insurance
Corporation (the FDIC), repayments of loans and mortgage-backed and related
securities, advances from the Federal Home Loan Bank (the FHLB) and other
short-term borrowings. Home City conducts business from its two offices
located in Springfield, Ohio. Home Citys primary lending area consists of
Clark County, Ohio, and adjacent counties. As a savings and loan holding company, HCFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the OTS). As a savings association
chartered under the laws of the United States, Home City is subject to
regulation, supervision and examination by the OTS and the FDIC. Home City is
also a member of the FHLB of Cincinnati. Market Area Home City conducts business from its two offices, located in Springfield,
Ohio. Springfield is located 25 miles east of Dayton, 40 miles west of
Columbus and 80 miles north of Cincinnati. Home Citys primary market area
consists of Clark County, Ohio, and adjacent counties. Clark County, Ohio, is
characterized by slightly lower than average levels of income and housing
values and a higher unemployment level. Its strongest employment categories are
wholesale/retail trade, services and manufacturing, with smaller numbers of
residents employed in the finance, insurance and real estate industry
categories. -2-




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Forward-Looking Statements When used in this Form 10-KSB, the words or phrases will likely result,
are expected to, will continue, is anticipated, estimated, projected,
or similar expressions are intended to identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties, including
changes in economic conditions in Home Citys market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in
Home Citys market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect HCFCs financial performance and
could cause HCFCs actual results for future periods to differ materially from
any statements expressed with respect to future periods. See Exhibit 99.2
hereto Safe Harbor Under the Private Securities Litigation Reform Act of
1995, which is incorporated herein by reference. In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Home City, and HCFCs
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein, but also include changes in the
economy and changes in interest rates in the nation and HCFCs primary market
area. Without limiting the generality of the foregoing, some of the
forward-looking statements included herein are the statements under the
following headings and regarding the following matters:  1.
    
    Financial Condition. Managements statements regarding the
amount and adequacy of the
allowance for loan losses at December 31, 2003.2.
    
    Comparison of Results of Operations for the Fiscal Years
Ended December 31, 2003 and 2002  Provision for Loan Losses.
Managements statements regarding the adequacy of the allowance for
loan losses at December 31, 2003.3.
    
    Liquidity and Capital Resources. Managements belief that liquidity
and capital reserves are sufficient to meet its outstanding short- and
long-term needs. HCFC does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Lending Activities General.Home Citys primary lending activity is the origination of
conventional mortgage loans and home equity loans secured by one- to
four-family homes and nonresidential real estate located in Home Citys primary
lending area. Loans for the construction of one- to four-family homes and
mortgage loans on multifamily properties containing five units or more are
also offered by Home City. Home City does not originate loans insured by the
Federal Housing Administration or loans guaranteed by the Veterans
Administration. In addition to mortgage lending, Home City makes commercial
loans secured by assets of the borrower other than real estate and secured and
unsecured consumer loans. Home City does not originate its loans in strict
accordance with traditional secondary market guidelines. -3-




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Loan Portfolio Composition.The following table presents certain
information with respect to the composition of Home Citys loan portfolio at
the dates indicated: At December 31,2003
    
    2002(Dollars in thousands)Percent of
    
    
    
    
    
    Percent ofAmount
    
    total loans
    
    Amount
    
    total loansResidential real estate loans:One- to four-family (first mortgage)
    
    $
    64,879
    
    
    
    50.88
    %
    
    $
    62,981
    
    
    
    49.24
    %Multifamily
    
    
    6,700
    
    
    
    5.25
    
    
    
    7,359
    
    
    
    5.75Home equity (second mortgage)
    
    
    3,494
    
    
    
    2.74
    
    
    
    3,695
    
    
    
    2.88Nonresidential real estate loans
    
    
    29,883
    
    
    
    23.44
    
    
    
    32,040
    
    
    
    25.05Land loans
    
    
    1,400
    
    
    
    1.10
    
    
    
    856
    
    
    
    0.67Construction loans
    
    
    4,577
    
    
    
    3.59
    
    
    
    3,238
    
    
    
    2.53Total real estate loans
    
    
    110,933
    
    
    
    87.00
    
    
    
    110,169
    
    
    
    86.12Commercial loans:Secured, other than by real estate
    
    
    11,357
    
    
    
    8.91
    
    
    
    12,662
    
    
    
    9.90Other, unsecured credit lines
    
    
    2,376
    
    
    
    1.86
    
    
    
    1,389
    
    
    
    1.09Total commercial loans
    
    
    13,733
    
    
    
    10.77
    
    
    
    14,051
    
    
    
    10.99Consumer loans:Loans on deposits
    
    
    63
    
    
    
    0.05
    
    
    
    67
    
    
    
    0.05Other consumer loans
    
    
    2,778
    
    
    
    2.18
    
    
    
    3,631
    
    
    
    2.84Total consumer loans
    
    
    2,841
    
    
    
    2.23
    
    
    
    3,698
    
    
    
    2.89Total loans
    
    
    127,507
    
    
    
    100.00
    %
    
    
    127,918
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    (995
    )
    
    
    
    
    
    
    (503
    )Net loans
    
    $
    126,512
    
    
    
    
    
    
    $
    127,415
 Loan Maturity Schedule.The following table sets forth certain
information as of December 31, 2003, regarding the dollar amount of loans
maturing in Home Citys portfolio based on their contractual terms to maturity.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. Due moreDue during the
    
    Due 4-5
    
    Due 6-10
    
    Due 11-15
    
    than 15year ending December 31,
    
    years after
    
    years after
    
    years after
    
    years after2004
    
    2005
    
    2006
    
    12/31/03
    
    12/31/03
    
    12/31/03
    
    12/31/03
    
    Total(Dollars in thousands)Mortgage loans:Residential
    
    $
    7,735
    
    
    $
    1,461
    
    
    $
    1,268
    
    
    $
    7,922
    
    
    $
    15,572
    
    
    $
    31,114
    
    
    $
    10,001
    
    
    $
    75,073Nonresidential
    
    
    3,261
    
    
    
    1,365
    
    
    
    1,482
    
    
    
    6,463
    
    
    
    11,151
    
    
    
    7,162
    
    
    
    4,976
    
    
    
    35,860Consumer loans
    
    
    256
    
    
    
    457
    
    
    
    366
    
    
    
    550
    
    
    
    509
    
    
    
    703
    
    
    
    0
    
    
    
    2,841Commercial loans
    
    
    9,126
    
    
    
    549
    
    
    
    1,183
    
    
    
    2,219
    
    
    
    170
    
    
    
    347
    
    
    
    139
    
    
    
    13,733Total loans
    
    $
    20,378
    
    
    $
    3,832
    
    
    $
    4,299
    
    
    $
    17,154
    
    
    $
    27,402
    
    
    $
    39,326
    
    
    $
    15,116
    
    
    $
    127,507
 -4-




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Of the loans due more than one year after December 31, 2003, loans with
aggregate balances of $80.0 million have fixed rates of interest, and loans
with aggregate balances of $27.1 million have adjustable interest rates. One- to Four-family Residential Real Estate Loans.The primary lending
activity of Home City has been the origination of permanent conventional loans
secured by one- to four-family residences, primarily single-family residences,
located within Home Citys designated lending area. Home City also originates
loans for the construction of one- to four-family residences and home equity
loans. Each of such loans is secured by a mortgage on the underlying real
estate and improvements thereon, if any. OTS regulations limit the amount that Home City may lend in relationship
to the appraised value of the real estate and improvements at the time of loan
origination. In accordance with such regulations, Home City primarily makes
fixed-rate first mortgage loans on single-family or duplex, owner occupied
residences up to 95% of the value of the real estate and improvements (the
Loan-to-Value Ratio or
LTV). Home equity loans secured by first or second mortgages are
generally made with a maximum combined LTV for the first and second mortgage of
89%. Home City makes adjustable-rate first mortgage loans for investment
purposes on one- to four-family, non-owner occupied residences primarily in
amounts up to 80% LTV. Home City may require private mortgage insurance
(PMI) for the amount of loans in excess of 80% of the value of the real
estate securing such loans. Fixed-rate residential real estate loans are
offered by Home City for terms of up to 15 years. Home City has been originating adjustable-rate mortgage loans (ARMs) for
several years. ARMs are offered by Home City for terms of up to 30 years and
with various alternative features. The interest rate adjustment periods on the
ARMs are either one year or three years, followed by one- or three-year
adjustment periods. The interest rate adjustments on ARMs presently originated
by Home City are tied to changes in the weekly average yield on the one- and
three-year U.S. Treasury constant maturities index. Rate adjustments are
computed by adding a stated margin, typically 2.75%, to the index. The maximum
allowable adjustment at each adjustment date is 2% with a maximum adjustment of
6% over the term of the loan. The initial rate is dependent, in part, on how
often the rate can be adjusted. Home City also offers ARMs on one- to
four-family properties with a margin of 3.0% over the index and 2% and 6%
maximum adjustments at each adjustment date and over the term of the loan.
Home City originates ARMs which have initial interest rates slightly lower than
the sum of the index plus the margin. Such loans are subject to increased risk
of delinquency or default due to increasing monthly payments as the interest
rates on such loans increase to the fully-indexed level, although such increase
is generally lower than industry standards and is considered in Home Citys
underwriting of any such loans with a one- to three-year adjustment period. The aggregate amount of Home Citys one- to four-family residential real
estate loans equaled approximately $64.9 million at December 31, 2003, and
represented 50.88 % of loans at such date. The largest individual loan balance
on a one- to four-family loan at such date was $729,000. At such date, loans
secured by one- to four-family residential real estate with outstanding
balances of $250,000, or 0.39%, of Home Citys one- to four-family residential
real estate loan balance, were more than 90 days delinquent or nonaccruing.
See Delinquent Loans, Non-performing Assets and Classified Assets. Multifamily Residential Real Estate Loans. In addition to loans on one-
to four-family properties, Home City makes loans secured by multifamily
properties containing over four units. Such loans are made with adjustable
interest rates, a maximum LTV of 75% and a maximum term of 20 years or with a
fixed rate, a maximum LTV of 75% and a maximum term of up to seven years. -5-




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Multifamily lending is generally considered to involve a higher degree of
risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. Home City attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Home City currently requires that borrowers
agree to submit financial statements, rent rolls and tax returns annually to
enable Home City to monitor the loans. At December 31, 2003, loans secured by multifamily properties totaled
approximately $6.7 million, or 5.25% of Home Citys total loan portfolio, all
of which were secured by property located within Home Citys primary market
area. At such date, all such loans were performing in accordance with their
terms. See Delinquent Loans, Non-performing Assets and Classified Assets.
The largest loan secured by a multifamily property had a balance at December
31, 2003, of approximately $1.7 million. Home Equity Loans.Home City offers home equity loans secured by first or
second mortgages on one- to four-family residential real estate located in
Clark County, Ohio, and adjacent counties. Such loans are made for various
purposes, including home improvement, debt consolidation and consumer
purchases. The interest rates on loans secured by such mortgages are
adjustable, generally with a maximum combined LTV for the first and second
mortgage of 89%. At December 31, 2003, home equity loans totaled approximately $3.5
million, or 2.74% of Home Citys total loan portfolio. All of such loans were
secured by property located within Home Citys primary market area. At such
date, no such loans were more than 90 days delinquent or nonaccruing. See
Delinquent Loans, Non-performing Assets and Classified Assets. The balance of
the largest single home equity loan was $196,000 at December 31, 2003. Nonresidential Real Estate Loans.Home City also makes loans secured by
nonresidential real estate consisting of retail stores, office buildings and
businesses. (The nonresidential real estate loans category does not include
loans made for commercial purposes that are secured by real estate, which are
described under the heading Commercial Loans.) Nonresidential real estate
loans generally are originated with terms of up to 20 years and a maximum loan
amount of $1.7 million. Such loans generally have a maximum LTV of 80%. Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger
loan amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrowers
ability to repay may be impaired. Home City has endeavored to reduce such risk
by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
propertys valuation. Home City also requires personal guarantees on such
loans. At December 31, 2003, Home City had a total of $29.9 million invested in
nonresidential real estate loans, all of which were secured by property located
within Home Citys primary market area. Such loans comprised approximately
23.44 % of Home Citys total loans at such date. At such date, all such loans
were performing in accordance with their terms. See Delinquent Loans,
Non-performing Assets and Classified Assets. The balance of the largest
nonresidential real estate loan was $1.5 million. -6-




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Federal regulations limit the amount of nonresidential mortgage loans that
an association may make to 400% of its tangible capital. At December 31, 2003,
Home Citys nonresidential mortgage loans totaled 256.53% of Home Citys
tangible capital. Land Loans.Home City makes two varieties of land loans. First, loans
are made for the acquisition of land to be developed for construction. Such
loans are usually made for relatively short periods of time, generally not more
than three years, with fixed interest rates. Second, loans are also made to
borrowers who purchase and hold land for various reasons, such as the future
construction of a residence. Such loans are generally originated with fixed
interest rates and terms of up to 15 years. Land loans are secured by the land
being purchased with the loan proceeds and have maximum LTVs of 65% to 80%. At December 31, 2003, land loans totaled approximately $1.4 million, or
1.10% of Home Citys total loan portfolio. The largest land loan at December
31, 2003, had a balance of approximately $181,000. All of such loans were
secured by property located within Home Citys primary market area, of which no
loans were more than 90 days delinquent or nonaccruing. See Delinquent Loans,
Non-performing Assets and Classified Assets. Construction Loans. Home City makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates of interest and for terms of up to 15 years or
adjustable rates of interest and terms of up to 30 years. Most of the
construction loans originated by Home City have been made to owner-occupants
for the construction of single-family homes by a general contractor. Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTV
and the total loan funds required to complete a project. In the event a
default on a construction loan occurs and foreclosure follows, Home City must
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Additional risk exists with
respect to loans made to developers who do not have a buyer for the property,
as the developer may lack funds to pay the loan if the property is not sold
upon completion. Home City attempts to reduce such risks on loans to
developers by requiring personal guarantees and reviewing current personal
financial statements and tax returns and other projects undertaken by the
developers. At December 31, 2003, a total of $4.6 million, or approximately 3.59% of
Home Citys total loans, consisted of construction loans. All of Home Citys
construction loans are secured by property located within Home Citys primary
market area, and the economy of such lending area has been relatively stable.
At December 31, 2003, all of such loans were performing in accordance with
their terms. Commercial Loans.Home City also originates loans for commercial
purposes. Such loans are primarily of two types: those secured by
nonresidential real estate and those secured by assets of the borrower other
than real estate, such as equipment or receivables. -7-




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Various chattels, other than real estate, secured commercial loans
totaling $29.9 million or approximately 23.44% of Home Citys total loans at
December 31, 2003. The real estate securing commercial loans at December 31,
2003, was comprised of warehouses, office buildings and industrial buildings.
This type of loan is made with terms of up to 20 years and a maximum loan
amount of $1.7 million and may have a maximum LTV of 80% or more. These loans
are made with adjustable interest rates, with the interest rates based on prime
or one-, three- or five-year U.S. Treasury obligations. The borrowers of commercial loans totaling $11.4 million at December 31,
2003, were classified as small business borrowers. These loans were
primarily secured by accounts receivable, inventory and equipment. The
commercial loans secured other than by real estate are made with terms of up to
seven years, a maximum loan amount of $1.7 million and a maximum LTV of 75%.
These loans are made with adjustable interest rates, with the interest rates
based on prime or prime plus a specified percentage above prime. Commercial lending entails significant risks. The loans are subject to
greater risk of default during periods of adverse economic conditions.
Particularly with respect to loans secured by equipment, inventory, accounts
receivable and other non-real estate assets, the collateral may not be
sufficient to ensure full payment in the event of default. Home City tries to
minimize such risks through its prudent underwriting, which includes guidelines
to determine the acceptability of the collateral to be pledged. An evaluation
is made of the real estate, if any, accounts receivable, inventory and
equipment securing the loan as to their value, marketability, strength of brand
names, stability of conditions and environmental impact in order to mitigate or
minimize the risk of loss. Loan advance amounts are established in accordance
with the type of collateral asset. Credit guidelines have been established
relative to debt service coverage, leveraging, established profitability,
guarantor strength, liquidity and sales concentration. The guarantee of the
principals will generally be required on all loans made to closely held
business entities and affiliates. The credit information required includes
fully completed financial statements, two years federal income tax returns, a
current credit report and, generally, a formal business plan. Adequate
insurance, appropriate regulatory disclosures and both a preliminary and final
lawyers title opinion or title insurance are required when real estate is
involved. At December 31, 2003, Home City had commercial loans in the aggregate
amount of $13.7 million, or approximately 10.77% of Home Citys total loans.
At such date, commercial loans with outstanding balances of $27,000, or 0.20%
of the commercial loan balances, were more than 90 days delinquent or
nonaccruing. See Delinquent Loans, Non-performing Assets and Classified
Assets. The total indebtedness of the largest single borrower within the
commercial portfolio was $1.2 million at December 31, 2003. Consumer Loans.Home City makes various types of consumer loans,
including unsecured loans and loans secured by deposits. Such loans are made
only at fixed rates of interest for terms of up to 15 years. Home City has
been attempting to increase its consumer loan portfolio as part of its interest
rate risk management efforts and because a higher rate of interest is received
on consumer loans, although during 2003 consumer loans decreased as a percent
of Home Citys loan portfolio. Consumer loans may entail greater credit risk than do residential mortgage
loans. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse
economic conditions. Although Home City has not had significant
delinquencies on consumer loans, no assurance can be provided that
delinquencies will not increase. At December 31, 2003, Home City had approximately $2.8 million, or 2.23%
of its total loans, invested in consumer loans. At such date, consumer loans
with outstanding balances of $16,000, or -8-




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0.56% of the consumer loan balances,
were more than 90 days delinquent or nonaccruing. See Delinquent Loans,
Non-performing Assets and Classified Assets. The balance of the largest
consumer loan was $86,000 at December 31, 2003. Loan Solicitation and Processing.Loan originations are developed from a
number of sources, including continuing business with depositors, borrowers and
real estate developers, periodic newspaper solicitations by Home Citys lending
staff and walk-in customers. Loan applications for permanent mortgage loans are taken by loan
personnel. Home City obtains a credit report, verification of employment and
other documentation concerning the credit-worthiness of the borrower. Home City
generally limits the ratio of mortgage loan payments to the borrowers income
to 25% and the ratio of the borrowers total debt payments to income to 35-42%.
An appraisal of the fair market value of the real estate on which Home City
will be granted a mortgage to secure the loan is prepared by an independent fee
appraiser approved by the Board of Directors. Unless Home City is aware of factors that may lead to an environmental
concern, Home City generally does not require any form of specific
environmental study at the time a loan secured by one- to four-family
residential real estate is made. If, however, Home City is aware of any such
factor at the time of loan origination, Home City requires the completion and
satisfactory review of a Phase I Environmental Assessment before such loan is
made. For loans secured by multifamily and nonresidential real estate, a Phase
I Environmental Assessment is generally completed and satisfactorily reviewed
before the loan is made. Upon the completion of the appraisal and the receipt of information on the
borrower, the application for a loan is submitted to various management
officials for approval or rejection if the loan amount does not exceed
$500,000. If the loan amount exceeds $500,000, or if the application does not
conform in all respects with Home Citys underwriting guidelines, the
application is submitted to the Executive Loan Committee or the Board of
Directors for review and for final disposition. If a mortgage loan application
is approved, an attorneys opinion of title is obtained on the title to the
real estate that will secure the mortgage loan. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Home City as an insured mortgagee. The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Home
City also evaluates the feasibility of the proposed construction project and
the experience and record of the builder. Consumer loans are underwritten on
the basis of the borrowers credit history and an analysis of the borrowers
income and expenses, ability to repay the loan and the value of the collateral,
if any. Commercial loans are underwritten on the basis of the source of the
cash flow required to service the debt and the value of the security for the
loan. Home Citys loans carry no prepayment penalties, but do provide the entire
balance of the loan is due upon sale of the property securing the loan. Home
City generally enforces such due-on-sale provisions. Loan Originations, Purchases and Sales.Home City originates a greater
number of fixed-rate loans than adjustable-rate loans. See DESCRIPTION OF
BUSINESS  Loan Maturity Schedule. Home City occasionally will participate in
loans originated by other institutions. During 2003 and 2002 Home City did not
participate in any loans originated by other institutions. Although Home City
generally does not sell loans, it sold a participation in two such loans to
remain within the loans to one borrower limitation. -9-




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##### 



The following table presents Home Citys loan origination and
participation activity for the years indicated: December 31,2003
    
    2002(Dollars in thousands)Loans originated:One- to four-family residential real estate (1)
    
    $
    21,042
    
    
    $
    27,828Multifamily residential real estate
    
    
    60
    
    
    
    900Nonresidential real estate
    
    
    7,814
    
    
    
    13,348Commercial
    
    
    7,812
    
    
    
    14,291Consumer
    
    
    2,461
    
    
    
    2,945Total loans originated
    
    $
    39,189
    
    
    $
    59,312Loans purchased
    
    
    0
    
    
    
    0Reductions:Principal repayments
    
    
    (40,126
    )
    
    
    (46,773
    )Sales of loans
    
    
    (167
    )
    
    
    (797
    )Increase in other items, net (2)
    
    
    201
    
    
    
    300Net increase (decrease)
    
    $
    (903
    )
    
    $
    12,042
    (1)
    
    Includes construction loans.(2)
    
    Consists of unearned and deferred fees, costs and the allowance for
loan losses. OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
associations total capital under the regulatory capital requirements plus any
additional loan reserve not included in total capital. A savings association
may lend to one borrower an additional amount not to exceed 10% of total
capital plus additional reserves if the additional amount is fully secured by
certain forms of readily marketable collateral. Real estate is not
considered readily marketable collateral. In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated for
purposes of such limits. An exception to these limits permits loans to one
borrower of up to $500,000 for any purpose. Based on such limits, Home City was able to lend approximately $1.7
million to one borrower at December 31, 2003. The largest amount Home City had
outstanding to one borrower at December 31, 2003, was $1.7 million. Such loans
were secured by commercial real estate properties. All of such loans were
current at December 31, 2003. The aggregate amount of commercial loans not primarily secured by real
estate that Home City may have outstanding may not exceed 20% of Home Citys
total assets, and any amount in excess of 10% of total assets must be for small
business loans. At December 31, 2003, Home City was in compliance with those
limitations. Delinquent Loans, Non-performing Assets and Classified Assets.When a
borrower fails to make a required payment on a loan, Home City attempts to
cause the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly. -10-




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##### 



When a loan is fifteen days or more delinquent, the borrower is sent a
delinquency notice. When a loan is thirty days delinquent, Home City generally
telephones the borrower. Depending upon the circumstances, Home City may also
inspect the property and inform the borrower of the availability of credit
counseling from Home City and counseling agencies. Before a loan becomes 90
days delinquent, Home City will make further contact with the borrower and,
depending upon the circumstances, may arrange appropriate alternative payment
arrangements. After a loan becomes 90 days delinquent, Home City may refer the
matter to an attorney for foreclosure. A decision as to whether and when to
initiate foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of the
delinquency and the borrowers ability and willingness to cooperate in curing
delinquencies. If a foreclosure occurs, the real estate is sold at public sale
and may be purchased by Home City. Real estate acquired, or deemed acquired, by Home City as a result of
foreclosure proceedings is classified as real estate owned (REO) until it is
sold. When property is so acquired, or deemed to have been acquired, it is
initially recorded by Home City at the lower of cost or fair value of the real
estate, less estimated costs to sell. Any reduction in fair value is reflected
in a valuation allowance account established by a charge to income. Costs
incurred to carry other real estate are charged to expense. Home City places a loan on nonaccrual status when the principal and
interest is delinquent 90 days or more and deducts from income the interest
previously accrued. The following table reflects the amount of loans in a delinquent status as
of the dates indicated: December 31, 2003
    
    December 31, 2002Percent
    
    
    
    
    
    
    
    
    
    Percentof total
    
    
    
    
    
    
    
    
    
    of totalNumber
    
    Amount
    
    loans
    
    Number
    
    Amount
    
    loans(Dollars in thousands)Loans delinquent for (1):30-59 days
    
    
    28
    
    
    $
    1,550
    
    
    
    1.22
    %
    
    
    25
    
    
    $
    1,111
    
    
    
    0.87
    %60-89 days
    
    
    3
    
    
    
    127
    
    
    
    0.10
    
    
    
    10
    
    
    
    290
    
    
    
    0.2390 days and over
    
    
    13
    
    
    
    543
    
    
    
    0.42
    
    
    
    5
    
    
    
    423
    
    
    
    0.33Total delinquent loans
    
    
    44
    
    
    $
    2,220
    
    
    
    1.74
    %
    
    
    40
    
    
    $
    1,824
    
    
    
    1.43
    %
   (1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement. -11-




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##### 



The following table sets forth information with respect to the nonaccrual
status of Home Citys loans which are 90 days or more past due and other
non-performing assets at the dates indicated: December 31,2003
    
    2002
    
    2001(Dollars in thousands)Loans accounted for on a nonaccrual basis:Real estate:Residential
    
    $
    170
    
    
    $
    173
    
    
    $
    613Nonresidential
    
    
    0
    
    
    
    0
    
    
    
    760Commercial
    
    
    27
    
    
    
    0
    
    
    
    104Consumer
    
    
    0
    
    
    
    0
    
    
    
    11Subtotal non-accrual loans
    
    $
    197
    
    
    $
    173
    
    
    $
    1,488Loans 90 days or more past due and still accruing
    
    
    346
    
    
    
    250
    
    
    
    0Total non-performing loans
    
    $
    543
    
    
    $
    423
    
    
    $
    1,488Real estate owned
    
    
    31
    
    
    
    145
    
    
    
    0Total non-performing assets
    
    $
    574
    
    
    $
    568
    
    
    $
    1,488Total loan loss allowance
    
    $
    995
    
    
    $
    503
    
    
    $
    592Total non-performing assets as
a percentage of total assets
    
    
    0.38
    %
    
    
    0.38
    %
    
    
    1.03
    %Loan loss allowance as a percent
of non-performing loans
    
    
    183.24
    %
    
    
    118.91
    %
    
    
    39.78
    %
 During the fiscal year ended December 31, 2003, $ 26,000 in interest
income was recognized and an additional $3,000 would have been recorded as
interest income on nonaccruing loans had such loans been accruing pursuant to
contractual terms. During such period, Home City had no restructured loans
within the meaning of SFAS No. 15. There are no loans which are not currently
classified as nonaccrual, more than 90 days past due or restructured but which
may be so classified in the near future because management has concerns as to
the ability of the borrowers to comply with repayment terms. For additional
information, see Note 3 of the Notes to Financial Statements. OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as substandard,
doubtful, or loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the same weaknesses as Substandard assets, with the
additional characteristics that (i) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (ii) there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. The regulations
also contain a special mention category, consisting of assets which do not
currently expose an institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving managements close attention. -12-




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##### 



Generally, Home City classifies as substandard all loans that are
delinquent more than 90 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 90
days may also be classified if the loans have the characteristics described
above rendering classification appropriate. The aggregate amount of Home Citys classified assets at the dates
indicated were as follows: December 31,2003
    
    2002
    
    2001(Dollars in thousands)Classified assets:Substandard
    
    $
    3,044
    
    
    $
    2,166
    
    
    $
    2,229Doubtful
    
    
    216
    
    
    
    32
    
    
    
    0Total classified assets
    
    $
    3,260
    
    
    $
    2,198
    
    
    $
    2,229
 Federal examiners are authorized to classify an associations assets. If
an association does not agree with an examiners classification of an asset, it
may appeal this determination to the Regional Director of the OTS. Home City
had no disagreements with the examiners regarding the classification of assets
at the time of the last examination. OTS regulations require that Home City establish prudent general
allowances for loan losses for any assets classified as substandard or
doubtful. If an asset, or portion thereof, is classified as loss, Home City
must either establish specific allowances for losses in the amount of 100% of
the portion of the asset classified loss, or charge off such amount. Allowance for Loan Losses.Home City maintains an allowance for loan
losses based upon a number of relevant factors, including but not limited to,
trends in the level of non-performing assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio. The single largest component of Home Citys loan portfolio consists of
one- to four-family residential real estate loans. Substantially all of these
loans are secured by residential real estate and
required down payments of 20% of the lower of the sales price or appraisal
value of the real estate. In addition, these loans are secured by property in
Home Citys lending area of a 100-mile radius from Springfield, Ohio. Home
Citys practice of making loans only in their market area and requiring a 20%
down payment have contributed to a low historical charge-off history. In addition to one- to four-family residential real estate loans, Home
City makes additional real estate loans, including home equity, multifamily
residential real estate, nonresidential real estate and construction loans.
These loans are secured by property in Home Citys lending area and also
require the borrower to provide a down payment. Home City also makes
commercial and consumer loans. These types of loans are considered to involve
a higher degree of risk than loans secured by one- to four-family residential
real estate. The allowance for loan losses is reviewed quarterly by the Board of
Directors. The review process includes a credit analysis of loans on the
watch list, past due loans, new significant borrowings and random samples of
new loans made. The analysis of loans secured by multifamily and
nonresidential real estate and commercial loans includes a review of tax
returns and financial statements, and the review of all loans includes an
estimation of the value of the collateral. The amounts of provisions for loan
losses for the periods shown in the table below were determined based upon such
loan review, past loss -13-




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##### 



experience, anticipated growth and prevailing economic
conditions. While the Board of Directors believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected, if circumstances differ substantially from
the assumptions used in making the final determination. The following table sets forth an analysis of Home Citys allowance for
loan losses for the years indicated: (Dollars in thousands)2003
    
    2002Balance at beginning of year
    
    $
    503
    
    
    $
    592Charge-offs:Residential loans
    
    $
    (11
    )
    
    $
    (193
    )Consumer loans
    
    
    (10
    )
    
    
    (66
    )Commercial loans
    
    
    (2
    )
    
    
    (231
    )Subtotal charge-offs
    
    $
    (23
    )
    
    $
    (490
    )Recoveries
    
    
    15
    
    
    
    25Net (charge-offs) recoveries
    
    $
    (8
    )
    
    $
    (465
    )Provision for loan losses (charged to operations)
    
    
    500
    
    
    
    376Balance at end of year
    
    $
    995
    
    
    $
    503Ratio of net (charge-offs) recoveries to average net
loans outstanding during the year
    
    
    0.01
    %
    
    
    0.39
    %Ratio of allowance for loan losses to total loans
    
    
    0.78
    %
    
    
    0.39
    %
 The following table sets forth the allocation of Home Citys allowance for
loan losses at the dates indicated: December 31,(Dollars in thousands)2003
    
    2002Allowance for loan losses:Residential loans
    
    $
    467
    
    
    $
    194Consumer loans
    
    
    52
    
    
    
    40Commercial loans
    
    
    476
    
    
    
    269995
    
    
    
    503Unallocated
    
    
    0
    
    
    
    0Total allowance for loan losses
    
    $
    995
    
    
    $
    503
 Mortgage-Backed Securities Home City maintains a portfolio of mortgage-backed securities in the form
of Government National Mortgage Association (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC) and Federal National Mortgage Association
(FNMA) participation certificates. Mortgage-backed securities generally
entitle Home City to receive a portion of the cash flows from an identified
pool of mortgages. GNMA, FHLMC and FNMA are government agencies. GNMA
securities are backed by Federal Housing Authority-insured and Veterans
Administration-guaranteed loans. The timely payment of principal and interest
on GNMA, FHLMC and FNMA securities is guaranteed by the respective agencies. -14-




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##### 



The following table sets forth the composition of Home Citys
mortgage-backed securities at the dates indicated: December 31, 2003
    
    December 31, 2002(Dollars in thousands)Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    value
    
    cost
    
    valueGNMA, FHLMC and FNMA
certificates
    
    $
    3,034
    
    
    $
    3,035
    
    
    $
    3,409
    
    
    $
    3,432Total mortgage-backed
securities
    
    $
    3,034
    
    
    $
    3,035
    
    
    $
    3,409
    
    
    $
    3,432
 The following table sets forth information regarding scheduled maturities,
amortized costs, market value and weighted-average yields of Home Citys
mortgage-backed securities at December 31, 2003. Expected maturities will
differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments. At December 31, 2003After one to
    
    After five to
    
    
    
    
    
    
    
    
    
    Total mortgage-backedOne year or less
    
    five years
    
    ten years
    
    After ten years
    
    securities portfolioCarrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    Market
    
    Averagevalue
    
    yield
    
    value
    
    yield
    
    value
    
    yield
    
    value
    
    yield
    
    value
    
    value
    
    yield(Dollars in thousands)GNMA,
FHLMC & FNMA
certificates
    
    $
    0
    
    
    
    0
    %
    
    $
    1,578
    
    
    
    1.85
    %
    
    $
    0
    
    
    
    0
    %
    
    $
    1,457
    
    
    
    3.35
    %
    
    $
    3,035
    
    
    $
    3,035
    
    
    
    2.57
    %Total
    
    $
    0
    
    
    
    0
    %
    
    $
    1,578
    
    
    
    1.85
    %
    
    $
    0
    
    
    
    0
    %
    
    $
    1,457
    
    
    
    3.35
    %
    
    $
    3,035
    
    
    $
    3,035
    
    
    
    2.57
    %
 For additional information, see Note 2 of the Notes to Consolidated Financial
Statements. Investment Activities OTS regulations require that Home City maintain a minimum amount of liquid
assets, which may be invested in U.S. Treasury obligations, securities of
various federal agencies, certificates of deposit at insured banks, bankers
acceptances and federal funds. Home City is also permitted to make investments
in certain commercial paper, corporate debt securities rated in one of the four
highest rating categories by one or more nationally recognized statistical
rating organizations, and mutual funds, as well as other investments permitted
by federal regulations. See Regulation and MANAGEMENTS DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION. -15-




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##### 



The following table sets forth information concerning Home Citys
investments at the dates indicated: At December 31,
    
    At December 31,2003
    
    2002Carrying
    
    % of
    
    Market
    
    % of
    
    Carrying
    
    % of
    
    Market
    
    % ofvalue
    
    total
    
    value
    
    total
    
    value
    
    total
    
    value
    
    total(Dollars in thousands)Interest-bearing demand
deposits in other
financial
institutions
    
    $
    1,876
    
    
    
    13.64
    %
    
    $
    1,876
    
    
    
    13.64
    %
    
    $
    3,289
    
    
    
    32.78
    %
    
    $
    3,289
    
    
    
    32.78
    %Federal funds sold
    
    
    7,562
    
    
    
    54.97
    
    
    
    7,562
    
    
    
    54.97
    
    
    
    1,614
    
    
    
    16.08
    
    
    
    1,614
    
    
    
    16.08Time deposits in other
financial institutions
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    24
    
    
    
    .24
    
    
    
    24
    
    
    
    .24Investment securities:U.S. government and
federal agencies
    
    
    893
    
    
    
    6.49
    
    
    
    893
    
    
    
    6.49
    
    
    
    1,589
    
    
    
    15.84
    
    
    
    1,589
    
    
    
    15.84Municipal securities (1)
    
    
    404
    
    
    
    2.94
    
    
    
    404
    
    
    
    2.94
    
    
    
    499
    
    
    
    4.97
    
    
    
    499
    
    
    
    4.97Equity securities:FHLB stock
    
    
    2,265
    
    
    
    16.46
    
    
    
    2,265
    
    
    
    16.46
    
    
    
    2,177
    
    
    
    21.69
    
    
    
    2,177
    
    
    
    21.69FNMA preferred stock
    
    
    757
    
    
    
    5.50
    
    
    
    757
    
    
    
    5.50
    
    
    
    843
    
    
    
    8.40
    
    
    
    843
    
    
    
    8.40Total investments
    
    $
    13,757
    
    
    
    100.00
    %
    
    $
    13,757
    
    
    
    100.00
    %
    
    $
    10,035
    
    
    
    100.00
    %
    
    $
    10,035
    
    
    
    100.00
    %
   (1)
    
    Bonds issued mainly by local school districts and municipalities. The following tables set forth the contractual maturities, carrying

values, market values and average yields for Home Citys investment securities
at December 31, 2003. At December 31, 2003One year or less
    
    After one to five years
    
    After five yearsCarrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    Averagevalue
    
    yield
    
    value
    
    yield
    
    value
    
    yield(Dollars in thousands)Investment securities:U.S. government and federal
agency securities
    
    $
    103
    
    
    
    2.26
    %
    
    $
    549
    
    
    
    2.27
    %
    
    $
    241
    
    
    
    2.38
    %Municipal securities
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    404
    
    
    
    4.34
    %Equity securities: (1)FNMA preferred stock
    
    
    757
    
    
    
    4.74
    %
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total investments
    
    $
    860
    
    
    
    4.45
    %
    
    $
    549
    
    
    
    2.27
    %
    
    $
    645
    
    
    
    3.61
    %
   (1)
    
    By their nature, equity securities have no maturity date. -16-




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##### 



At December 31, 2003Average
    
    
    
    
    
    
    
    
    
    Weighted-life
    
    Carrying
    
    Market
    
    averagein years
    
    value
    
    value
    
    yield(Dollars in thousands)Investment securities:U.S. government and federal
agency securities
    
    
    2.50
    
    
    $
    893
    
    
    $
    893
    
    
    
    2.30
    %Municipal securities
    
    
    6.92
    
    
    
    404
    
    
    
    404
    
    
    
    4.34
    %Equity securities (1)
    
    
    
    
    
    
    757
    
    
    
    757
    
    
    
    4.74
    %Total
    
    
    
    
    
    $
    2,054
    
    
    $
    2,054
    
    
    
    3.60
    %
   (1)
    
    By their nature, equity securities have no maturity date. Deposits and Borrowings General.Deposits have traditionally been the primary source of Home
Citys funds for use in lending and other investment activities. In addition
to deposits, Home City derives funds from FHLB advances, interest payments and
principal repayments on loans and mortgage-backed and related securities,
income on earning assets, service charges and gains on the sale of assets. See
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Loan payments are
a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions. Deposits.Deposits are attracted principally from within Home Citys
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, statement savings
accounts, passbook savings accounts and term certificate accounts. Home City
also offers individual retirement accounts (IRA), both in passbook and
certificate form. Interest rates paid, maturity terms, service fees and
withdrawal penalties for the various types of accounts are established
periodically by the management of Home City based on Home Citys liquidity
requirements, growth goals and interest rates paid by competitors. At December 31, 2003, Home Citys certificates of deposit totaled $51.2
million, or 49.28% of total deposits. Of such amount, approximately $20.3
million in certificates of deposit mature within one year. Based on past
experience and Home Citys prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with Home City at
maturity. If there is a significant deviation from historical experience, Home
City can utilize borrowings from the FHLB and commercial banks as alternatives
to this source of funds. -17-




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##### 



The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Home City at the dates indicated: At December 31,2003
    
    2002Percent
    
    
    
    
    
    Percentof total
    
    
    
    
    
    of totalAmount
    
    deposits
    
    Amount
    
    deposits(Dollars in thousands)Transaction accounts:Demand
    
    $
    5,352
    
    
    
    5.15
    %
    
    $
    5,468
    
    
    
    5.52
    %NOW accounts (1)
    
    
    3,955
    
    
    
    3.81
    
    
    
    3,759
    
    
    
    3.79Passbook/statement savings accounts (2)
    
    
    43,400
    
    
    
    41.76
    
    
    
    25,867
    
    
    
    26.10Total transaction accounts
    
    
    52,707
    
    
    
    50.72
    
    
    
    35,094
    
    
    
    35.41Certificates of deposit:1.01 - 2.00%
    
    
    7,897
    
    
    
    7.60
    
    
    
    5,647
    
    
    
    5.702.01 - 400 %
    
    
    23,943
    
    
    
    23.04
    
    
    
    19,311
    
    
    
    19.484.01 - 6.00%
    
    
    17,015
    
    
    
    16.37
    
    
    
    30,312
    
    
    
    30.586.01 - 8.00%
    
    
    2,360
    
    
    
    2.27
    
    
    
    8,755
    
    
    
    8.83Total certificates of deposit
    
    
    51,215
    
    
    
    49.28
    
    
    
    64,025
    
    
    
    64.59Total deposits (3)
    
    $
    103,922
    
    
    
    100.00
    %
    
    $
    99,119
    
    
    
    100.00
    %
   (1)
    
    Home Citys weighted-average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At December 31,
2003 and 2002, the weighted-average rates on NOW accounts were 0.79% and
1.01%, respectively.(2)
    
    Home Citys weighted-average rate on passbook/statement savings accounts
fluctuates with the general movement of interest rates. The
weighted-average interest rate on passbook/statement savings accounts was
1.89% and 2.40% at December 31, 2003 and 2002, respectively.(3)
    
    Retirement accounts are included in the various certificates of deposit
balances. Retirement accounts totaled $7.7 million and $7.6 million as of
December 31, 2003 and 2002, respectively. The following table shows rate and maturity information for Home Citys
certificates of deposit as of December 31, 2003: Amount DueOver
    
    OverUp to
    
    1 year to
    
    2 years to
    
    OverRate
    
    1 year
    
    2 years
    
    3 years
    
    3 years
    
    Total(Dollars in thousands)1.01 - 2.00%
    
    $
    7,138
    
    
    $
    759
    
    
    $
    0
    
    
    $
    0
    
    
    $
    7,8972.01 - 4.00%
    
    
    8,133
    
    
    
    7,646
    
    
    
    8,164
    
    
    
    0
    
    
    
    23,9434.01 - 6.00%
    
    
    4,338
    
    
    
    4,525
    
    
    
    5,860
    
    
    
    2,292
    
    
    
    17,0156.01 - 8.00%
    
    
    729
    
    
    
    148
    
    
    
    116
    
    
    
    1,367
    
    
    
    2,360Total certificates of deposit
    
    $
    20,338
    
    
    $
    13,078
    
    
    $
    14,140
    
    
    $
    3,659
    
    
    $
    51,215
 -18-




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##### 



The following table presents the amount of Home Citys certificates of
deposit of $100,000 or more by the time remaining until maturity as of December
31, 2003. Maturity
    
    Amount(Dollars in thousands)Three months or less
    
    $
    883Over 3 months to 6 months
    
    
    1,354Over 6 months to 12 months
    
    
    2,923Over 12 months
    
    
    7,646Total
    
    $
    12,806
 The following table sets forth Home Citys deposit account balance
activity for the years indicated: Year ended December 31,2003
    
    2002(Dollars in thousands)Beginning balance
    
    $
    99,119
    
    
    $
    96,403New deposits received less withdrawals
    
    
    2,549
    
    
    
    (585
    )Interest credited
    
    
    2,254
    
    
    
    3,301Ending balance
    
    $
    103,922
    
    
    $
    99,119Net increase
    
    $
    4,803
    
    
    $
    2,716Percentage increase
    
    
    4.85
    %
    
    
    2.82
    %
 Borrowings.The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See Regulation  Federal Home Loan Banks. As a member in good standing of
the FHLB of Cincinnati, Home City is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of credit worthiness have been
met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which an
association is eligible for such advances will depend on whether it meets one
of the Qualified Thrift Lender Tests (the QTL Tests). See Regulation -
Qualified Thrift Lender Test. If an association meets one of the QTL Tests, it
will be eligible for 100% of the advances permitted. If an association does not
meet one of the QTL Tests, it will be eligible for such advances only to the
extent it holds specified QTL Test assets. At December 31, 2003, Home City met
at least one of the QTL Tests. -19-




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##### 



Home City obtained advances from the FHLB of Cincinnati, as set forth in the
following table: Year ended December 31,2003
    
    2002(Dollars in thousands)Average balance outstanding
    
    $
    36,350
    
    
    $
    36,273Maximum amount outstanding at any month end
during the year
    
    $
    41,102
    
    
    $
    38,232Balance outstanding at end of year
    
    $
    34,764
    
    
    $
    38,199Weighted-average interest rate during the year
    
    
    5.49
    %
    
    
    5.55
    %Weighted-average interest rate at end of year
    
    
    5.61
    %
    
    
    5.30
    %
 Based upon Home Citys eligible mortgage collateral, total FHLB advances
are limited to approximately $45.3 million. Subsidiaries Home City owns all of the outstanding shares of Homciti Service Corp., an
Ohio corporation (Homciti). Homciti owns common stock in Intrieve,
Incorporated (Intrieve), a data processing company which services Home City.
Home City chose to write off its $13,000 investment in Homcitis 0.875%
ownership interest in a joint venture which owned the Springfield Inn, a local
hotel. At December 31, 2003, the aggregate value of the Intrieve stock was
approximately $15,000. Competition Home City competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Home City competes with other savings associations,
commercial banks, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. Home City competes for loan originations
primarily through the interest rates and loan fees offered and through the
efficiency and quality of services provided. Competition is affected by, among
other things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors which are
not readily predictable. The size of financial institutions competing with Home City is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Home City. Personnel As of December 31, 2003, Home City had thirty-two full-time employees and
six part-time employees. Management believes that relations with its employees
are good. HCFC offers health and life insurance benefits to all eligible
employees of Home City. None of the employees of Home City is represented by
a collective bargaining unit. -20-




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##### 



Regulation General. As a savings association organized under the laws of the United
States, Home City is subject to regulatory oversight by the OTS. The OTS is an
office in the Department of the Treasury and is responsible for the regulation
and supervision of all savings associations the deposits of which are insured
by the FDIC in the SAIF and all federally-chartered institutions. The OTS
issues regulations governing the operation of savings associations, regularly
examines such institutions and imposes assessments on savings associations
based on their asset size to cover the costs of this supervision and
examination. It also promulgates regulations that prescribe the permissible
investments and activities of federally-chartered savings associations,
including the type of lending that such associations may engage in and the
investments in real estate, subsidiaries and securities they may make. The OTS
also may initiate enforcement actions against savings associations and certain
persons affiliated with them for violations of laws or regulations or for
engaging in unsafe or unsound practices. If the grounds provided by law exist,
the OTS may appoint a conservator or receiver for a savings association. Because Home Citys deposits are insured by the FDIC, Home City is also
subject to examination and regulation by the FDIC. Home City must file
periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by the OTS to determine
whether Home City is in compliance with various regulatory requirements and is
operating in a safe and sound manner. Home City is a member of the FHLB of
Cincinnati. HCFC is also subject to regulation, examination and oversight by the OTS
as the holding company of Home City and is required to submit periodic reports
to the OTS. Regulatory Capital Requirements. Home City is required by OTS regulations
to meet certain minimum capital requirements. These requirements call for
tangible capital of 1.5% of adjusted total assets, core capital (which for Home
City is equal to tangible capital) of 4% of adjusted total assets, except for
associations with the highest examination rating and acceptable levels of risk,
and risk-based capital (which for Home City consists of core capital and
general valuation allowances) equal to 8% of risk-weighted assets. Assets and
certain off-balance-sheet items are weighted at percentage levels ranging from
0% to 100% depending on their relative risk. For information concerning Home Citys capital, see MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  Liquidity and Capital
Resources. The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade an
associations designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be
placed in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Home Citys capital
at December 31, 2003, met the standards for the highest level, a well
capitalized association. -21-




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##### 



Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases and
certain other acquisitions by an association of its shares and payments to
Shareholders of another association in an acquisition of such other
association. An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings associations retained
net income for the preceding two years, (ii) if the savings association will
not be at least adequately capitalized following the capital distribution, or
(iii) if the proposed distribution would violate a prohibition contained in any
applicable statue, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association has
not received certain favorable
examination ratings for the OTS. If a savings association subsidiary of a
holding company is not required to file an application, it must file a notice
with the OTS. Qualified Thrift Lender Tests. Savings associations must meet one of two
tests in order to be a qualified thrift lender (QTL). The first test
requires a savings association to maintain a specified level of investments in
assets that are designated as qualifying thrift investments (QTIs).
Generally, QTIs are assets related to domestic residential real estate and
manufactured housing, although they also include credit card, student and small
business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under the
QTL Test, 65% of an institutions portfolio assets (total assets less
goodwill and other intangibles, property used to conduct business and 20% of
liquid assets) must consist of QTI on a monthly average basis in nine out of
every 12 months. The second test permits a savings association to qualify as a
QTL by meeting the definition of domestic building and loan association under
the Internal Revenue Code of 1986, as amended (the Code). In order for an
institution to meet the definition of a domestic building and loan
association under the Code, at least 60% of its assets must consist of
specified types of property, including cash loans secured by residential real
estate or deposits, educational loans and certain governmental obligations.
The OTS may grant exceptions to the QTL Tests under certain circumstances. If
a savings association fails to meet either one of the QTL Tests, the
association and its holding company become subject to certain operating and
regulatory restrictions and the savings association will not be eligible for
new FHLB advances. At December 31, 2003, Home City had QTIs equal to
approximately 86.2% of its total portfolio assets. Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to the lending limits on loans to one borrower and the total of such loans
cannot exceed an associations total regulatory capital plus additional loan
reserves (or 200% of such capital amount for qualifying institutions with less
than $100 million in deposits). Most loans to directors, executive officers
and principal shareholders must be approved in advance by a majority of the
disinterested members of the board of directors of the association with any
interested director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the
same as offered in comparable transactions to the general public or as offered
to all employees in a company-wide benefit program, and loans to executive
officers are subject to additional limitations. Home City was in compliance
with such restrictions at December 31, 2003. Savings associations must also comply with Sections 23A and 23B of the
Federal Reserve Act (the FRA) pertaining to transactions with affiliates. An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. HCFC is
an affiliate of Home City. Generally, Sections 23A and 23B of the FRA limit
the extent to which the savings institution or its subsidiaries may engage in
specified transactions with affiliates and -22-




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##### 



require that all such transactions
be on terms substantially the same, or at least as favorable to the
institution, as those provided in transactions with a non-affiliate. Home City
was in compliance with these requirements and restrictions at December 31,
2003. Holding Company Regulation. HCFC is a savings and loan holding company
within the meaning of the Home Owners Loan Act (the HOLA). As such, HCFC
has registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting requirements, in addition to the reporting
requirements of the Securities and Exchange Commission (the SEC). HCFC is a unitary savings and loan holding company, (i.e., it owns only
one savings association). There are generally no restrictions on the
activities of a unitary savings and loan holding company, and such companies
are the only financial institution holding companies that may engage in
commercial,
securities and insurance activities without limitation. The broad latitude
to engage in activities under current law can be restricted, however, if the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
association. Notwithstanding the foregoing rules as to permissible business
activities of a unitary savings and loan holding company, if the savings
association subsidiary of a holding company fails to meet one of the QTL Tests,
then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. At December 31, 2003,
Home City met at least one of the QTL Tests. See Qualified Thrift Lender
Tests. Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured banks and
thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund. Home City is a member of the SAIF and its deposit accounts are insured by
the FDIC up to the prescribed limits. The FDIC has examination authority over
all insured depository institutions, including Home City, and has authority to
initiate enforcement actions against federally-insured savings associations if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund. The FDIC is authorized to establish separate annual assessment rates for
deposit insurance for members of the BIF and members of the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the funds
ratio of reserves to insured deposits to the target level within a reasonable
time and may decrease such rates if such target level has been met. Reserve Requirements. Federal Reserve Bank (FRB) regulations require
savings associations to maintain reserves against their transaction accounts
(primarily NOW accounts) of 3% of deposits in net transaction accounts for that
portion of accounts up to $45.4 million (subject to an exemption of up to $6.6
million), and to maintain reserves of 10% of deposits in net transaction
accounts against that portion of total transaction accounts in excess of $45.4
million. These percentages are subject to adjustment by the FRB. At December
31, 2003, Home City was in compliance with its reserve requirements. -23-




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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. Home City is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of Home
Citys residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
Home City is in compliance with this requirement with an investment in FHLB of
Cincinnati stock of $2,265,000 at December 31, 2003. FHLB advances to members such as Home City who meet one of the QTL Tests
are generally limited to the lower of (i) 50% of the members assets or (ii) 20
times the members investment in FHLB stock. At December 31, 2003, Home Citys
maximum limit on advances was approximately $45.3 million and Home Citys
advances totaled $34.8 million. The granting of advances is subject also to
the FHLBs collateral and credit underwriting guidelines. Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the United States government or an agency thereof; deposits in
any FHLB; or other real estate related collateral (up to 30% of the member
associations capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral. Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a members
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance. Taxation Federal Taxation. HCFC and each of its consolidated subsidiaries are
subject to the federal tax laws and regulations which apply to corporations
generally. In addition to the regular income tax, HCFC and its subsidiaries
may be subject to alternative minimum tax. An alternative minimum tax is
imposed at a minimum tax rate of 20% on alternative minimum taxable income
(which is the sum of a corporations regular taxable income, with certain
adjustments, and tax preference items), less any available exemption. Such tax
preference items include interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, 75% of the amount by which a corporations
adjusted current earnings exceeds its alternative minimum taxable income
computed without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporations regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. Certain thrift institutions such as Home City are allowed deductions for
bad debts under methods more favorable to those granted to other taxpayers.
Qualified thrift institutions may compute deductions for bad debts using either
the specific charge-off method of Section 166 of the Code or the experience
method of Section 585 of the Code. Under the experience method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on -24-




---



##### 



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. 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. The balance of the pre-1988 reserves is subject to the provisions of Section
593(e) as modified by the Small Business Jobs Protection Act, which require
recapture in the case of certain excessive distributions to shareholders. The
pre-1988 reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institutions post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by Home City to HCFC
is deemed paid out of its pre-1988 reserves under these rules, the pre-1998
reserves would be reduced and Home Citys gross income for tax purposes would
be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of December 31, 2003, Home
Citys pre-1988 reserves for tax purposes totaled approximately $1.1 million.
Home City believes it had approximately $6.3 million of accumulated earnings
and profits for tax purposes as of December 31, 2003, which would be available
for dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. No representation can be made as to whether Home
City will have current or accumulated earnings and profits in subsequent years. The tax returns of HCFC and its consolidated subsidiaries have been
audited or closed without audit through fiscal year 1999. In the opinion of
management, any examination of open returns would not result in a deficiency
that could have a material adverse effect on the consolidated financial
condition of HCFC. Ohio Taxation.HCFC is subject to the Ohio corporation franchise tax,
which, as applied to HCFC, is a tax measured on either net earnings or net
worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed taxable income in excess of
$50,000 or (ii) 0.04% times taxable net worth. A special litter tax is also applicable to all corporations, including HCFC,
subject to the Ohio corporation franchise tax other than financial
institutions. If the franchise tax is paid on the net income basis, the litter
tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and
0.22% of computed Ohio taxable income in excess of $50,000. If the franchise
tax is paid on the net worth basis, the litter tax is equal to 0.014% times
taxable net worth. HCFC may elect to be a qualifying holding company and as such be exempt
from the net worth tax. A corporation franchise tax based solely on net
earnings would still apply. To be exempt HCFC must satisfy all the
requirements of the applicable statutes including making adjustments that could
affect the taxable net worth of HCFCs subsidiary, Home City. Home City is a financial institution for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on financial
institutions, imposed annually at a rate of 1.3% of Home Citys book net worth
determined in accordance with GAAP, less statutory deductions. As a financial
institution Home City is not subject to any tax based upon net income or net
profits imposed by the State of Ohio. -25-




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##### 



Recently Issued Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for classification and measurement in
the statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
FASBs Staff Position 150-3 deferred indefinitely the guidance in SFAS No. 150
on certain mandatorily redeemable noncontrolling interests. HCFC has
determined that it has no such instruments covered by SFAS No. 150 and Staff
Bulletin 150-3. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement clarifies
reporting of contracts as either derivatives or hybrid instruments. HCFC has
determined that all derivatives or hybrid instruments covered under this
statement have been properly reported under SFAS No. 149. In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. FIN 46 provides guidance with respect to
variable interest entities and when the assets, liabilities, noncontrolling
interest, and results of operations of a variable interest entity need to be
included in a companys consolidated financial statements. A variable interest
entity exists when either the total equity investment at risk is not sufficient
to permit the entity to finance its activities by itself, or the equity
investors lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics are the direct or
indirect ability to make decisions about an entitys activities through voting
rights or similar rights, the obligation to absorb the expected losses of an
entity if they occur, and the right to receive the expected residual returns of
the entity if they occur. In December 2003 the FASB deferred certain effective dates for
Interpretation No. 46. For all variable interest entities other than special
purpose entities, the revised Interpretation is effective for periods ending
after March 15, 2004. For variable interest entities meeting the definition of
special purpose entities under earlier accounting rules, the Interpretation
remains effective for periods ending after December 31, 2003. HCFC has
determined that it has no such instruments covered by Interpretation No. 46. In November 2002, FASB Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Otherswas issued. FIN 45 requires the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The most significant FIN 45 instruments of the Company are standby
letters of credit. HCFC has determined that its standby letters of credit
obligations under FIN 45 are not material for disclosure. -26-




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##### 



Impact of Inflation and Changing Prices The financial statements and related data presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and results of operations primarily in terms of historical dollars
without considering changes in the relative purchasing power of money over time
because of inflation. Virtually all assets and liabilities of HCFC are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. ITEM 2. Description of Property Home Citys main office is located at 2454 North Limestone Street,
Springfield, Ohio 45503, which property is owned by Home City. HCFC operates
out of Home Citys main office. HCFC reimburses Home City for the fair value
of the space occupied. Home City also has a branch office facility located at
63 West Main Street, Springfield, Ohio 45502, its former main office location. The following table sets forth certain information at December 31, 2003,
regarding the ownership by Home City of land, building and improvements, other
than real estate acquired through foreclosure or deed in lieu of foreclosure. Year
    
    Square
    
    NetLocation
    
    acquired
    
    footage
    
    book value (1)63 West Main Street, Springfield, Ohio 45502
    
    
    1975
    
    
    
    5,839
    
    
    $
    299,0002454 North Limestone Street, Springfield, Ohio 45503
    
    
    1999
    
    
    
    13,000
    
    
    $
    2,537,000
   (1)
    
    At December 31, 2003, Home Citys properties and equipment had a total
net book value of $3,812,000.(2)
    
    For additional information regarding Home Citys properties and
equipment, see Notes 1 and 5 of Notes to Consolidated Financial
Statements. ITEM 3. Legal Proceedings Neither Home City nor HCFC is presently involved in any legal proceedings
of a material nature. From time to time, Home City is party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by Home City. ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable. -27-




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##### 



PART II ITEM 5. Market for Common Equity and Related Shareholder Matters There were 794,400 common shares of HCFC outstanding on December 31, 2003,
held of record by approximately 343 shareholders. Price information with
respect to HCFCs common shares is quoted on The Nasdaq SmallCap Market
(Nasdaq) under the symbol HCFC. The high and low trading prices for the
common shares of HCFC, as quoted by Nasdaq, by quarter are shown below, as well
as the dividends declared. The price quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission. March 31, 2003
    
    June 30, 2003
    
    September 30, 2003
    
    December 31, 2003High
    
    $
    13.410
    
    
    $
    14.190
    
    
    $
    15.299
    
    
    $
    17.480Low
    
    $
    11.700
    
    
    $
    12.520
    
    
    $
    12.400
    
    
    $
    14.970Dividend
declared
    
    $
    0.110
    
    
    $
    0.110
    
    
    $
    0.110
    
    
    $
    0.110
 March 31, 2002
    
    June 30, 2002
    
    September 30, 2002
    
    December 31, 2002High
    
    $
    12.250
    
    
    $
    12.460
    
    
    $
    11.650
    
    
    $
    11.700Low
    
    $
    10.300
    
    
    $
    11.060
    
    
    $
    10.660
    
    
    $
    9.150Dividend
declared
    
    $
    0.110
    
    
    $
    0.110
    
    
    $
    0.110
    
    
    $
    0.110
 The income of HCFC consists of dividends that may periodically be declared
and paid by the Board of Directors of Home City on the common shares of Home
City held by HCFC and earnings on the net proceeds retained by HCFC from the
sale of HCFCs common shares in connection with the Conversion. In addition to
certain federal income tax considerations, OTS regulations impose limitations
on the payment of dividends and other capital distributions by savings
associations. Under OTS regulations applicable to converted savings associations, Home
City is not permitted to pay a cash dividend on its common shares if the
regulatory capital of Home City would, as a result of the payment of such
dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Home City, in the event of a complete liquidation, to those
members of Home City before the Conversion who maintain a savings account at
Home City after the Conversion) or applicable regulatory capital requirements
prescribed by the OTS. An application must be submitted and approval from the OTS must be obtained (1)
if the proposed distribution would cause total distributions for the calendar
year to exceed net income for that date plus the banks retained net income for
the preceding two years; (2) if the bank will not be at least adequately
capitalized following the capital distribution; (3) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the bank and the OTS (or the FDIC), or a
condition imposed on the bank in an OTS-approved application or notice; or (4)
if the bank has not received certain favorable examination ratings from the
OTS. -28-




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##### 



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Home City Federal Savings Bank of Springfield converted from a mutual
federal savings association to a stock federal savings association on December
30, 1996. In connection with the Conversion, 952,200 common shares of Home City
Financial Corporation were sold, generating net proceeds of $8.3 million after
Conversion expenses. Of this amount, $4.6 million was utilized to purchase 100%
of the common stock of Home City, and the balance was utilized to purchase
investments, loan funds to the Home City Financial Corporation Employee Stock
Ownership Plan (the ESOP) and for other purposes. The following discussion and analysis of the financial condition and
results of operations of HCFC and Home City should be read in conjunction with
and with reference to the consolidated financial statements, and the notes
thereto, presented in the Annual Report. During both 2003 and 2002, HCFC did not initiate a repurchase program. Forward-Looking Statements In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Home City, and HCFCs
actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein, but also include changes in the
economy and changes in interest rates in the nation and HCFCs primary market
area. Without limiting the generality of the foregoing, some of the
forward-looking statements included herein are the statements under the
following headings and regarding the following matters:  1.
    
    Financial Condition: Managements statements regarding the amount
and adequacy of the allowance for loan losses at December 31, 2003.2.
    
    Comparison of Results of Operations for the Fiscal Years Ended
December 31, 2003 and 2002- Provision for Loan Losses: Managements
statements regarding the adequacy of the allowance for loan losses at
December 31, 2003.3.
    
    Liquidity and Capital Resources: Managements belief that liquidity
and capital reserves are sufficient to meet its outstanding short- and
long-term needs. Financial Condition HCFCs consolidated total assets amounted to $151.8 million at December
31, 2003, an increase of $2.1 million, or 1.37%, over the $149.7 million in
total assets at December 31, 2002. Such increase in assets was funded primarily
by the $4.8 million net increase in deposits and the $4.2 million sales and
maturities of securities, both of which were partially used to reduce $3.4
million in advances from the Federal Home Loan Bank of Cincinnati (the FHLB). Cash and cash equivalents, time deposits and investment securities totaled
$15.6 million at December 31, 2003, an increase of $3.1 million, or 25.02%,
from December 31, 2002. During the year ended December 31, 2003, $2.3 million
of investment securities matured. Those proceeds, together with $2.0 million
received from the sale of securities and ongoing repayments of loans and
mortgage-backed securities, were used to purchase $3.2 million of investment
securities and to increase our balance of federal funds by $6.0 million. With
interest rates -29-




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##### 



at historically low levels, HCFC is adjusting the maturities of its investments
so that when interest rates rise, HCFC will have minimized as much as possible
its losses on low-yielding investments, while still obtaining a reasonable
return on its investments in the short term. Net loans receivable totaled $126.5 million at December 31, 2003, a
decrease of $903,000, or 0.71%, from the $127.4 million total at December 31,
2002. During the year ended December 31, 2003, loan originations amounted to
$39.2 million, with one- to four-family mortgage loans comprising $21.0 million
and commercial lending comprising $7.8 million. Such originations were offset
by principal repayments of $40.1 million. Home Citys allowance for loan losses totaled $995,000 at December 31,
2003, which represented 0.78% of total loans and 183.24% of non-performing
loans. At December 31, 2002, the allowance for loan losses totaled $503,000, an
amount which represented 0.39% of total loans and 118.91% of non-performing
loans. With the slow recovery of the economy and higher unemployment levels in
our demographic area, some borrowers have been faced with cash flow problems.
As a result, a number of borrowers have been unable to adhere to their
contractual repayment schedules, which directly relates to an individual credit
being classified as a problem or non-performing loan. Management has maintained
its emphasis on the consideration of both local and national economic factors
in determining the adequacy of the allowance for loan losses. Non-performing loans were $543,000 and $423,000 at December 31, 2003 and
2002, respectively, and represented 0.36% and 0.28% of total assets at such
dates. All loans classified as non-performing at December 31, 2003, were either
under a workout plan or being refinanced elsewhere, the underlying collateral
was in the process of being sold, or foreclosure action was being initiated.
Although management believes that its allowance for loan losses at December 31,
2003, was adequate based upon the facts and circumstances available to it,
there can be no assurance that additions to such allowance will not be
necessary in future periods. Such additions could adversely affect HCFCs
results of operations. Deposits totaled $103.9 million at December 31, 2003, an increase of $4.8
million, or 4.85%, from $99.1 million at December 31, 2002. While time deposits
decreased by $12.8 million, other deposits increased by $17.6 million, mostly
resulting from customer acceptance of our Prime Statement Savings account,
which offered tiered competitive rates yet flexibility of account movement when
rates start moving up. Home City has generally not engaged in sporadic
increases or decreases in interest rates paid or offered the highest rates
available in its deposit market. Advances from the FHLB decreased from $38.2
million at December 31, 2002, to $34.8 million at December 31, 2003, a decrease
of $3.4 million, or 8.99%, as funds provided were used to pay down advances. Shareholders equity totaled $11.9 million at December 31, 2003, an
increase of $348,000, or 3.01%, from $11.6 million at December 31, 2002,
primarily due to undistributed net earnings of $303,000. Comparison of Results of Operations for the Fiscal Years Ended December 31, 2003 and 2002 General.Net income for the year ended December 31, 2003, was $649,000, an
increase of $192,000, or 42.01%, from the $457,000 in net income recorded in
2002. The increase in net income resulted primarily from a $711,000 increase in
net interest income, an $88,000 decrease in noninterest expense and a $48,000
decrease in the net loss on discontinued operations, which were partially
offset by a $420,000 decrease in noninterest income, an additional provision
for loan losses of $124,000 and an increase of $111,000 in the provision for
federal income taxes from continuing operations.. -30-




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##### 



Net Interest Income.Net interest income totaled $4.5 million for the year
ended December 31, 2003, an increase of $711,000, or 18.68%, from the $3.8
million recorded in 2002. Interest income on loans decreased by $207,000, or
2.27%, during 2003 due primarily to a decrease in yield from 7.59% in 2002 to
6.96% in 2003, which was partially offset by an increase in the average balance
of the loans outstanding of $7.9 million, or 6.60%. Interest income on
investment securities decreased by $402,000, or 73.76%, for the year ended
December 31, 2003, compared to fiscal 2002, as the average balance decreased by
$6.0 million year-to-year and the related yield decreased by 212 basis points
to 1.88% in 2003. The average investment in federal funds sold during 2003 was
$3.1 million, compared to an average investment of $1.3 million in 2002, which
yielded 0.97% in 2003, compared to 1.50% in 2002, resulting in increased
interest of $11,000. Interest expense on deposits decreased by $1.3 million, or 32.87%, during
2003, due primarily to a decrease in the weighted-average rate from 4.24% in
2002 to 2.81% in 2003, being offset partially by an increase in the average
balance of deposits outstanding of $1.3 million, or 1.44%. Interest expense on
FHLB advances decreased by $18,000, or 0.89%, primarily due to a decrease in
the weighted-average rate from 5.55% in 2002 to 5.49% in 2003 with average
balances remaining almost unchanged at $36.3 million. As a result of the foregoing changes in interest income and interest
expense, the interest rate spread increased by 43 basis points, to 2.95% for
2003, as compared to 2.52% for 2002, while the net interest margin increased by
43 basis points to 3.20% for the year ended December 31, 2003, from 2.77% for
last year. Provision for Loan Losses.Home City maintains an allowance for loan
losses in an amount that, in managements judgment, is adequate to absorb
reasonably foreseeable losses inherent in the loan portfolio. The provision for
loan losses is determined by management as the amount to be added to the
allowance for loan losses, after net charge-offs have been deducted, to bring
the allowance to a level that is considered adequate to absorb losses inherent
in the loan portfolio in accordance with generally accepted accounting
principles (GAAP). A discussion of Home Citys policy for determining the
appropriate allowance is discussed below under Critical Accounting Policies.
As a result of its analysis, management concluded that the allowance was
adequate as of December 31, 2003. There can
be no assurance that the allowance will be adequate to cover future losses
on non-performing assets. Home City had net charge-offs of $8,000 and $465,000 during the years
ended December 31, 2003 and 2002, respectively. Home Citys charge-off history
is a product of a variety of factors, including Home Citys underwriting
guidelines and the composition of its loan portfolio. Loans secured by real
estate made up 87.00% of Home Citys loan portfolio, and loans secured by first
mortgages on one- to four-family residential real estate made up 50.88% of
total loans at December 31, 2003. Such loans typically present less risk to a
lender than loans not secured by real estate. Substantially all of Home Citys
loans are secured by properties in its primary market area. The provision for loan losses was $500,000 and $376,000 for the years
ended December 31, 2003 and 2002, respectively. The ratio of non-performing
loans to total assets decreased to 0.28% in 2003 from 1.03% in 2002. At
December 31, 2003 and 2002, Home City had a ratio of allowance for loan losses
to total loans of 0.78% and 0.39%, respectively, and ratios of allowance for
loan losses to non-performing loans of 183.24% and 118.91%. Due to such ratios
of non-performing loans to total loans, historical charge-offs, delinquency
history, and the increase in commercial and consumer installment lending, the
provisions of $500,000 and $376,000 made in 2003 and 2002, respectively, were
deemed appropriate by management to absorb reasonably foreseeable loan losses. Noninterest Income.Noninterest income totaled $254,000 for the year ended
December 31, 2003, a decrease of $420,000, or 62.31%, from the $674,000
recorded in 2002. The decrease resulted primarily from a decrease of $315,000
in net gains recognized on the sale of securities. Decreases of $20,000 in
income from life insurance, and $88,000 in other miscellaneous income were
slightly offset by an increase of $3,000 in service charges on deposit
accounts. -31-




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##### 



Noninterest Expense.Noninterest expense decreased by $88,000, or 2.55%,
to a total of $3.4 million for the year ended December 31, 2003, as compared to
2002. Increases in components of noninterest expense were led by increased
salaries and employee benefits, $115,000, or 7.42%. A decrease in professional
fees of $42,000, or 11.26%, was primarily due to decreased consultants fees
for the loan review process. Federal Income Taxes.The provision for federal income taxes totaled
$264,000 for the year ended December 31, 2003, an increase of $135,000, or
104.65%, from the $129,000 provision recorded in fiscal 2002. This increase was
primarily the result of a lesser percentage of nontaxable income in 2003, which
resulted in an effective tax rate of 28.92% in 2003 versus 23.3% in 2002. Off-Balance Sheet Arrangements.The off-balance sheet arrangements of HCFC
are considered immaterial for additional comment and cross-referenced to Note
16 to the Consolidated Financial Statements Critical Accounting Policies.The accounting and reporting policies of
Home City are in accordance with accounting principles generally accepted in
the United States and conform to general practices within the banking industry.
Home Citys significant accounting policies are described in detail in the
notes to Home Citys consolidated financial statements for the year
ended December 31, 2003. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions. The financial position and results of
operations can be affected by these estimates and assumptions and are integral
to the understanding of reported results. Critical accounting policies are
those policies that management believes are the most important to the portrayal
of Home Citys financial condition and results, and they require management to
make estimates that are difficult, subjective, or complex. The policy of management with respect to the amount of the allowance for
loan losses is a critical accounting policy for Home City. Management evaluates
the adequacy of the allowance for loan losses each quarter based on
managements regular review of the loan portfolio and consideration of such
factors as historical loss experience, generally prevailing economic
conditions, changes in the size and composition of the loan portfolio and
considerations relating to specific loans, including the ability of the
borrower to repay the loan and the estimated value of the underlying
collateral. Some types of loans are inherently more risky than others. The allowance
for commercial loans, nonresidential real estate loans and multifamily real
estate loans, which generally carry more risk than single-family residential
real estate loans, is determined based upon the individual credit relationships
and national and local economic factors that could affect such borrowers, as
well as actual loss histories. The allowance recorded for homogeneous consumer
loans is based on an analysis of loan mix, risk characteristics of the
portfolio, fraud loss and bankruptcy experiences, and historical losses,
adjusted for current trends, for each homogeneous category or group of loans.
The allowance for one- to four-family residential real estate is based upon an
analysis of national and local economic conditions and loss histories. The
allowance for impaired loans is based on the collateral for
collateral-dependent loans or the discounted cash flows using the loans
effective interest rate. Although management utilizes its best judgment and information available,
the ultimate adequacy of the allowance is dependent upon a variety of factors.
Undetected losses are probable due to inherent delays in obtaining information
regarding a borrowers financial condition or changes in their unique business
conditions; the judgmental nature of individual loan evaluations, collateral
assessments and interpretations of economic trends; the volatility of economic
or customer-specific conditions affecting the identification and estimation of
losses for larger non-homogeneous credits; and the sensitivity of assumptions
utilized to establish allowances for homogeneous groups of loans. -32-




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##### 



Yields Earned and Rates Paid The following table presents certain information relating to HCFCs
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of customer deposits and FHLB
advances for the periods indicated. Such yields and costs are derived by
dividing annual income or expense by the average monthly balance of
interest-earning assets or customer deposits and FHLB advances, respectively,
for the years presented. Average balances are derived from daily balances,
which included nonaccruing loans in the loan portfolio, net of the allowance
for loan losses. Year ended December 31,2003
    
    2002Average
    
    Interest
    
    
    
    
    
    Average
    
    Interestoutstanding
    
    earned/
    
    Yield/
    
    outstanding
    
    earned/
    
    Yield/balance
    
    paid
    
    rate
    
    balance
    
    paid
    
    rate(Dollars in thousands)Interest-earning assets:Interest-earning demand deposits
    
    $
    150
    
    
    $
    1
    
    
    
    0.67
    %
    
    $
    127
    
    
    $
    2
    
    
    
    1.41
    %Federal funds sold
    
    
    3,058
    
    
    
    30
    
    
    
    0.97
    
    
    
    1,288
    
    
    
    19
    
    
    
    1.50Time deposits
    
    
    12
    
    
    
    0
    
    
    
    1.27
    
    
    
    24
    
    
    
    0
    
    
    
    1.25Investment securities (1)
    
    
    7,598
    
    
    
    143
    
    
    
    1.88
    
    
    
    13,618
    
    
    
    545
    
    
    
    4.00Federal Home Loan Bank stock
    
    
    2,210
    
    
    
    88
    
    
    
    4.00
    
    
    
    2,116
    
    
    
    98
    
    
    
    4.62Loans receivable (2)
    
    
    127,972
    
    
    
    8,909
    
    
    
    6.96
    
    
    
    120,052
    
    
    
    9,116
    
    
    
    7.59Total interest-earning assets (3)
    
    
    141,000
    
    
    
    9,171
    
    
    
    6.50
    
    
    
    137,225
    
    
    
    9,780
    
    
    
    7.13Noninterest-earning assets:Less: Allowance for loan losses
    
    
    (714
    )
    
    
    
    
    
    
    
    
    
    
    (471
    )Other non-earning assets
    
    
    9,943
    
    
    
    
    
    
    
    
    
    
    
    10,324Total assets
    
    $
    150,229
    
    
    
    
    
    
    
    
    
    
    $
    147,078Interest-bearing liabilities:NOW accounts
    
    $
    3,303
    
    
    $
    26
    
    
    
    0.79
    %
    
    $
    2,814
    
    
    $
    28
    
    
    
    1.01
    %Money market accounts
    
    
    680
    
    
    
    8
    
    
    
    1.18
    
    
    
    695
    
    
    
    13
    
    
    
    1.86Passbook accounts
    
    
    39,150
    
    
    
    740
    
    
    
    1.89
    
    
    
    21,203
    
    
    
    509
    
    
    
    2.40Certificates of deposit
    
    
    51,531
    
    
    
    1,885
    
    
    
    3.66
    
    
    
    68,607
    
    
    
    3,411
    
    
    
    4.97Total deposits
    
    
    94,664
    
    
    
    2,659
    
    
    
    2.81
    
    
    
    93,319
    
    
    
    3,961
    
    
    
    4.24Federal Home Loan Bank advances
    
    
    36,350
    
    
    
    1,995
    
    
    
    5.49
    
    
    
    36,273
    
    
    
    2,013
    
    
    
    5.55Total interest-bearing liabilities
    
    
    131,014
    
    
    
    4,654
    
    
    
    3.55
    
    
    
    129,592
    
    
    
    5,974
    
    
    
    4.61Noninterest-bearing liabilities
    
    
    7,522
    
    
    
    
    
    
    
    
    
    
    
    6,072Total liabilities
    
    
    138,536
    
    
    
    
    
    
    
    
    
    
    
    135,664Total shareholders equity
    
    
    11,693
    
    
    
    
    
    
    
    
    
    
    
    11,414Total liabilities and
shareholders equity
    
    $
    150,229
    
    
    
    
    
    
    
    
    
    
    $
    147,078Net interest income; net interest rate spread
    
    
    
    
    
    $
    4,517
    
    
    
    2.95
    %
    
    
    
    
    
    $
    3,806
    
    
    
    2.52
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.20
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Average interest-earning assets to interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    107.62
    %
    
    
    
    
    
    
    
    
    
    
    105.89
    %
   (1)
    
    Includes $21,000 and $35,000 of nontaxable municipal income recorded in
2003 and 2002, respectively. The tax-equivalent yield on investments is 3.66%
and 4.13% for 2003 and 2002, respectively.(2)
    
    Calculated net of deferred loan fees, loan discounts, loans in
process and allowance for loan losses.(3)
    
    Tax-equivalent yield on
interest-earning assets is 6.51% and 7.14% for 2003 and 2002,
respectively.(4)
    
    Net interest income as a percent of average
interest-earning assets. -33-




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##### 



The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected HCFCs interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in
rate and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate: Year ended December 31,2003 vs. 2002
    
    2002 vs. 2001Increase
    
    
    
    
    
    
    
    
    
    Increase(decrease)
    
    
    
    
    
    
    
    
    
    (decrease)due to
    
    due toVolume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(Dollars in thousands)Interest income attributable to:Interest-earning demand deposits
    
    $
    (0
    )
    
    $
    (1
    )
    
    $
    (1
    )
    
    $
    (6
    )
    
    $
    (4
    )
    
    $
    (10
    )Federal funds sold
    
    
    20
    
    
    
    (9
    )
    
    
    11
    
    
    
    (26
    )
    
    
    (30
    )
    
    
    (56
    )Time deposits
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Investment securities
    
    
    (183
    )
    
    
    (219
    )
    
    
    (402
    )
    
    
    257
    
    
    
    (108
    )
    
    
    149Federal Home Loan Bank stock
    
    
    4
    
    
    
    (14
    )
    
    
    (10
    )
    
    
    8
    
    
    
    (44
    )
    
    
    (36
    )Loans receivable
    
    
    578
    
    
    
    (785
    )
    
    
    (207
    )
    
    
    426
    
    
    
    (1,025
    )
    
    
    (599
    )Total interest income
    
    
    419
    
    
    
    (1,028
    )
    
    
    (609
    )
    
    
    659
    
    
    
    (1,211
    )
    
    
    (552
    )Interest expenses attributable to:NOW accounts
    
    
    4
    
    
    
    (6
    )
    
    
    (2
    )
    
    
    19
    
    
    
    (19
    )
    
    
    (0
    )Money market accounts
    
    
    0
    
    
    
    (5
    )
    
    
    (5
    )
    
    
    6
    
    
    
    (8
    )
    
    
    (2
    )Passbook savings accounts
    
    
    357
    
    
    
    (126
    )
    
    
    231
    
    
    
    191
    
    
    
    (134
    )
    
    
    57Certificates of deposit
    
    
    (741
    )
    
    
    (785
    )
    
    
    (1,526
    )
    
    
    86
    
    
    
    (746
    )
    
    
    (660
    )Federal Home Loan Bank advances
    
    
    4
    
    
    
    (22
    )
    
    
    (18
    )
    
    
    10
    
    
    
    (93
    )
    
    
    (83
    )Total interest expense
    
    
    (376
    )
    
    
    (944
    )
    
    
    (1,320
    )
    
    
    312
    
    
    
    (1,000
    )
    
    
    (688
    )Increase (decrease) in net interest income
    
    $
    795
    
    
    $
    (84
    )
    
    $
    711
    
    
    $
    347
    
    
    $
    (211
    )
    
    $
    136
 Asset and Liability Management Home City, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than
its interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Home City uses the net portfolio value (NPV) methodology
adopted by the OTS. Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash
flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
that would result from a theoretical change in market interest rates. Both an
increase in market interest rates and a decrease in market interest rates are
considered. Presented below, as of December 31, 2003, is an analysis of Home Citys
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates. The
table also contains the policy limits set by the Board of Directors of Home
City as the maximum changes in NPV that the Board of Directors deems advisable
in the event of various changes in interest rates. Such limits have been
established with consideration of the dollar impact of various rate changes and
Home Citys strong capital position. -34-




---



##### 



As illustrated in the table, Home Citys NPV is slightly more sensitive to
declining rates than rising rates. Differences in sensitivity occur principally
because, as rates rise, borrowers do not prepay fixed-rate loans as quickly as
they do when interest rates are declining. As a result, in a rising interest
rate environment, the amount of interest Home City would receive on its loans
would increase relatively slowly as loans are slowly repaid and new loans at
higher rates are made. Moreover, the interest Home City would pay on its
deposits would increase rapidly because Home Citys deposits generally have
shorter periods to repricing. Because Home City has not originated loans in
accordance with traditional secondary market guidelines, the sale of fixed-rate
loans may be difficult. In addition, increases in interest rates can also
result in the flow of funds away from savings institutions into direct
investments or other investment vehicles, such as mutual funds, which may pay
higher rates of return than savings institutions. Assumptions used in
calculating the amounts in this table are OTS assumptions. At December 31, 2003Change in interestrate
    
    Board limit
    
    $ change
    
    % change(basis points)
    
    % change
    
    in NPV
    
    in NPV(Dollars in thousands)+300
    
    
    (55
    )%
    
    $
    547
    
    
    
    4
    %+200
    
    
    (35
    )
    
    
    914
    
    
    
    6+100
    
    
    (20
    )
    
    
    762
    
    
    
    50
    
    
    0
    )
    
    
    0
    
    
    
    0-100
    
    
    (20
    )
    
    
    (1,478
    )
    
    
    (10
    )-200
    
    
    (35
    )
    
    
    
    (1)
    
    
    
    (1)-300
    
    
    (55
    )
    
    
    
    (1)
    
    
    
    (1)
   (1)
    
    As a result of the low interest rate environment at December 31,
2003, the OTS NPV Model did not produce results for a reduction of 200
and 300 points. The NPV table indicates that at each 100 basis point increment, the change
in Home Citys NPV that would have been caused by the respective interest rate
shock was within the policy limits set by the Board of Directors. The Board of
Directors considers the results of each quarterly analysis and factors the
information into its decisions in adjusting the pricing of loans and deposits
in the future. As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, expected
rates of prepayment on loans and mortgage-backed securities and early
withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations. If interest rates continue to rise from the recent levels, Home Citys net
interest income will be slightly positively affected. Rising interest rates
may negatively affect Home Citys earnings due to diminished loan demand. In

order to maintain Home Citys net interest margin, management is continually
developing and modifying its strategies to stimulate the demand for quality
loans and tailoring the types of loan products available that can be adjusted
to match the current market conditions. Additional alternative sources of
funding are being explored in anticipation of possible interest rate
fluctuations. -35-




---



##### 



Liquidity and Capital Resources Home Citys liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. These
activities are summarized below for the years presented: Year ended December 31,2003
    
    2002(Dollars in thousands)Net income
    
    $
    649
    
    
    $
    457Adjustments to reconcile net income to net cash
from operating activities
    
    
    1,222
    
    
    
    831Net cash provided by operating activities
    
    
    1,871
    
    
    
    1,288Net cash provided by (used in) investing activities
    
    
    1,399
    
    
    
    (5,224
    )Net cash provided by financing activities
    
    
    1,142
    
    
    
    4,987Net change in cash and cash equivalents
    
    
    4,412
    
    
    
    1,051Cash and cash equivalents at beginning of year
    
    
    6,061
    
    
    
    5,010Cash and cash equivalents at end of year
    
    $
    10,473
    
    
    $
    6,061
 Home Citys principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. Home City also borrows from the FHLB. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan and mortgage-backed security prepayments are more
influenced by interest rates, general economic conditions and competition. Home
City maintains investments in liquid assets based upon managements assessment
of (i) the need for funds, (ii) expected deposit flows, (iii) the yields
available on short-term liquid assets and (iv) the objectives of the
asset/liability management program. In the ordinary course of business, part
of such liquid investment portfolio is composed of deposits at correspondent
banks. Although the amount on deposit at such banks often exceeds the $100,000
limit covered by FDIC insurance, Home City monitors the capital of such
institutions to ensure that such deposits do not expose Home City to undue risk
of loss. OTS regulations require Home City to maintain an average daily balance of
liquid assets, which may include, but are not limited to, investments in United
States Treasury obligations, federal agency obligations and other investments
having maturities of five years or less, in an amount sufficient to provide a
source of relatively liquid funds upon which Home City may rely if necessary to
fund deposit withdrawals or other short-term funding needs. At December 31,
2003, Home Citys regulatory liquidity ratio was 14.35% of its average daily
balances of net withdrawable deposit accounts and borrowings payable in one
year or less. At such date, Home City had commitments to originate loans
totaling $1.5 million and no commitments to purchase or sell loans. Home City
considers its liquidity and capital reserves sufficient to meet its outstanding
short- and long-term needs. Adjustments to liquidity and capital reserves may
be necessary, however, if loan demand increases more than expected or if
deposits decrease substantially. See Note 10 of the Notes to Consolidated
Financial Statements. Home City is required by applicable law and regulation to meet certain
minimum capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement. Home City exceeded all of its capital requirements at
December 31, 2003 and 2002. Savings associations are required to maintain tangible capital of not
less than 1.5% of the associations adjusted total assets. Tangible capital is
defined in OTS regulations as core capital less intangible assets. Core capital is comprised of common shareholders equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 4% of the associations total
assets, except for those associations with the highest examination rating and
acceptable levels of risk, which may maintain a minimum of 3% core capital. -36-




---



##### 



OTS regulations require that savings associations maintain risk-based
capital in an amount not less than 8% of risk-weighted assets. Assets are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk. Risk-based capital is defined as core capital plus certain
additional items of capital, which in the case of Home City includes a general
loan loss allowance of $995,000 at December 31, 2003: The following table summarizes Home Citys regulatory capital requirements
and actual capital (see Note 10 of the Notes to Consolidated Financial
Statements for regulatory capital amounts) at December 31, 2003: Excess of actualcapital over currentActual capital
    
    Current requirement
    
    requirement
    
    ApplicableAmount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    asset total(Dollars in thousands)Tangible capital
    
    $
    11,649
    
    
    
    7.7
    %
    
    $
    2,279
    
    
    
    1.5
    %
    
    $
    9,370
    
    
    
    6.2
    %
    
    $
    151,926Core capital
    
    
    11,649
    
    
    
    7.7
    
    
    
    6,077
    
    
    
    4.0
    
    
    
    5,572
    
    
    
    3.7
    
    
    
    151,926Risk-based capital
    
    
    12,644
    
    
    
    12.0
    
    
    
    8,414
    
    
    
    8.0
    
    
    
    4,230
    
    
    
    4.0
    
    
    
    105,176
 Impact of Inflation and Changing Prices The financial statements and related data presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and results of operations primarily in terms of historical dollars
without considering changes in the relative purchasing power of money over time
because of inflation. Virtually all assets and liabilities of HCFC are monetary in nature. As a
result, interest rates have a more significant impact on performance than the
effects of general levels of inflation. -37-




---



##### 



ITEM 7. FINANCIAL STATEMENTS

Independent Accountants Report

Board of Directors
Home City Financial
Corporation Springfield, Ohio

We have audited the accompanying consolidated balance sheets of Home City
Financial Corporation as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders equity, and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company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 auditing standards generally
accepted in the United States of America. 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 consolidated financial statements described above
present fairly, in all material respects, the consolidated financial position
of Home City Financial Corporation as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.

/s/ BKD, LLP
Cincinnati, Ohio
January 27, 2004

-38-



---



##### 



Home City Financial Corporation CONSOLIDATED BALANCE SHEETS

|                                                                                              |                                            |                |         |                        |         |      |         |         |        | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------- | ------- | ---------------------- | ------- | ---- | ------- | ------- | ------ | 
|                                                                                              |                                            |                |         | (Dollars in thousands)
|                                                                                              |                                            |                |         | December 31,          
|                                                                                              |                                            |                |         |                       
|                                                                                              |                                            |                |         | 2003                   |         | 2002
|                                                                                              |                                            |                |         |                        |         |     
|ASSETS                                                                                        |                                            |                |         |                        |         |      |         |        
|Cash and due from banks                                                                       |                                            | $              | 1,035   |                        |         | $    | 1,158   |        
|Interest-bearing demand deposits                                                              |                                            |                | 1,876   |                        |         |      | 3,289   |        
|Federal funds sold                                                                            |                                            |                | 7,562   |                        |         |      | 1,614   |        
|                                                                                              |                                            |                |         |                        |         |      |         |        
|                                                                                              | Cash and cash equivalents                  |                |         | 10,473                 |         |      |         | 6,061   |       
|                                                                                              |                                            |                |         |                        |         |      |         |        
|Interest-bearing deposits                                                                     |                                            |                | 0       |                        |         |      | 24      |        
|Available-for-sale securities                                                                 |                                            |                | 5,089   |                        |         |      | 6,363   |        
|Loans, net of allowance for loan losses of $995 and $503 at
December 31, 2003 and 2002        |                                            |                | 126,512 |                        |         |      | 127,415 |        
|Premises and equipment                                                                        |                                            |                | 3,812   |                        |         |      | 3,935   |        
|Federal Home Loan Bank stock                                                                  |                                            |                | 2,265   |                        |         |      | 2,177   |        
|Interest receivable                                                                           |                                            |                | 578     |                        |         |      | 600     |        
|Cash surrender value of life insurance                                                        |                                            |                | 2,952   |                        |         |      | 2,829   |        
|Other                                                                                         |                                            |                | 103     |                        |         |      | 331     |        
|                                                                                              |                                            |                |         |                        |         |      |         |        
|                                                                                              | TOTAL ASSETS                               |                | $       | 151,784                |         |      | $       | 149,735 |       
|                                                                                              |                                            |                |         |                        |         |      |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                          |                                            |                |         |                        |         |      |         |        
|Liabilities                                                                                   |                                            |                |         |                        |         |      |         |        
|Deposits                                                                                      |                                            |                |         |                        |         |      |         |        
|                                                                                              | Demand                                     |                | $       | 5,352                  |         |      | $       | 5,468   |       
|                                                                                              | Savings, NOW and money market              |                |         | 47,355                 |         |      |         | 29,626  |       
|                                                                                              | Time                                       |                |         | 51,215                 |         |      |         | 64,025  |       
|                                                                                              |                                            |                |         |                        |         |      |         |        
|                                                                                              |                                            | Total deposits |         |                        | 103,922 |      |         |         | 99,119 | 
|                                                                                              |                                            |                |         |                        |         |      |         |        
|Federal Home Loan Bank advances                                                               |                                            |                | 34,764  |                        |         |      | 38,199  |        
|Interest payable and other liabilities                                                        |                                            |                | 1,191   |                        |         |      | 858     |        
|                                                                                              |                                            |                |         |                        |         |      |         |        
|TOTAL LIABILITIES                                                                             |                                            |                | 139,877 |                        |         |      | 138,176 |        
|                                                                                              |                                            |                |         |                        |         |      |         |        
|Shareholders Equity                                                                          |                                            |                |         |                        |         |      |         |        
|Preferred shares, no par value: authorized 1,000,000 shares; none issued                      |                                            |                |         |                        |         |      |         |        
|Common shares, no par value: authorized 5,000,000 shares; issued - 962,200
and 952,200 shares |                                            |                |         |                        |         |      |         |        
|Additional paid-in capital                                                                    |                                            |                | 6,130   |                        |         |      | 6,013   |        
|Retained earnings                                                                             |                                            |                | 8,549   |                        |         |      | 8,246   |        
|Unearned Recognition and Retention Plan (RRP) shares                                          |                                            |                | (185    | )                      |         |      | (111    | )      
|Unearned Employee Stock Ownership Plan (ESOP) shares                                          |                                            |                | (229    | )                      |         |      | (305    | )      
|Accumulated other comprehensive loss                                                          |                                            |                | (92     | )                      |         |      | (18     | )      
|Treasury shares, at cost: 167,800 shares                                                      |                                            |                | (2,266  | )                      |         |      | (2,266  | )      
|                                                                                              |                                            |                |         |                        |         |      |         |        
|                                                                                              | TOTAL SHAREHOLDERS EQUITY                 |                |         | 11,907                 |         |      |         | 11,559  |       
|                                                                                              |                                            |                |         |                        |         |      |         |        
|                                                                                              | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                | $       | 151,784                |         |      | $       | 149,735 |       
|                                                                                              |                                            |                |         |                        |         |      |         |        



---

|See notes to consolidated financial statements.
|-----------------------------------------------

-39-



---



##### 



Home City Financial Corporation CONSOLIDATED STATEMENTS OF INCOME

|                                                             |                                                     |   |                        |       |      |   |       |       | 
|------------------------------------------------------------ | --------------------------------------------------- | - | ---------------------- | ----- | ---- | - | ----- | ----- | 
|                                                             |                                                     |   | (Dollars in thousands,
|                                                             |                                                     |   | except per share      
|                                                             |                                                     |   | amounts)              
|                                                             |                                                     |   | December 31,          
|                                                             |                                                     |   |                       
|                                                             |                                                     |   | 2003                   |       | 2002
|                                                             |                                                     |   |                        |       |     
|INTEREST AND DIVIDEND INCOME                                 |                                                     |   |                        |       |      |   |       |      
|Loans                                                        |                                                     | $ | 8,909                  |       |      | $ | 9,116 |      
|Securities                                                   |                                                     |   | 143                    |       |      |   | 545   |      
|Federal funds sold                                           |                                                     |   | 30                     |       |      |   | 19    |      
|Dividends on Federal Home Loan Bank stock                    |                                                     |   | 88                     |       |      |   | 98    |      
|Deposits with financial institutions                         |                                                     |   | 1                      |       |      |   | 2     |      
|                                                             |                                                     |   |                        |       |      |   |       |      
|                                                             | TOTAL INTEREST AND DIVIDEND INCOME                  |   |                        | 9,171 |      |   |       | 9,780 | 
|                                                             |                                                     |   |                        |       |      |   |       |      
|INTEREST EXPENSE                                             |                                                     |   |                        |       |      |   |       |      
|Deposits                                                     |                                                     |   | 2,659                  |       |      |   | 3,961 |      
|Borrowings                                                   |                                                     |   | 1,995                  |       |      |   | 2,013 |      
|                                                             |                                                     |   |                        |       |      |   |       |      
|                                                             | TOTAL INTEREST EXPENSE                              |   |                        | 4,654 |      |   |       | 5,974 | 
|                                                             |                                                     |   |                        |       |      |   |       |      
|NET INTEREST INCOME                                          |                                                     |   | 4,517                  |       |      |   | 3,806 |      
|Provision for Loan Losses                                    |                                                     |   | 500                    |       |      |   | 376   |      
|                                                             |                                                     |   |                        |       |      |   |       |      
|                                                             | NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |   |                        | 4,017 |      |   |       | 3,430 | 
|                                                             |                                                     |   |                        |       |      |   |       |      
|NONINTEREST INCOME                                           |                                                     |   |                        |       |      |   |       |      
|Service charges on deposits                                  |                                                     |   | 38                     |       |      |   | 35    |      
|Net realized gains on sales of available-for-sale securities |                                                     |   | 17                     |       |      |   | 332   |      
|Life insurance                                               |                                                     |   | 137                    |       |      |   | 157   |      
|Other                                                        |                                                     |   | 62                     |       |      |   | 150   |      
|                                                             |                                                     |   |                        |       |      |   |       |      
|                                                             | TOTAL NONINTEREST INCOME                            |   |                        | 254   |      |   |       | 674   | 
|                                                             |                                                     |   |                        |       |      |   |       |      
|NONINTEREST EXPENSE                                          |                                                     |   |                        |       |      |   |       |      
|Salaries and employee benefits                               |                                                     |   | 1,665                  |       |      |   | 1,550 |      
|Net occupancy expense                                        |                                                     |   | 337                    |       |      |   | 314   |      
|Equipment expense                                            |                                                     |   | 215                    |       |      |   | 239   |      
|Data processing fees                                         |                                                     |   | 245                    |       |      |   | 237   |      
|Professional fees                                            |                                                     |   | 331                    |       |      |   | 373   |      
|Franchise taxes                                              |                                                     |   | 146                    |       |      |   | 144   |      
|Other                                                        |                                                     |   | 419                    |       |      |   | 589   |      
|                                                             |                                                     |   |                        |       |      |   |       |      
|                                                             | TOTAL NONINTEREST EXPENSE                           |   |                        | 3,358 |      |   |       | 3,446 | 
|                                                             |                                                     |   |                        |       |      |   |       |      

-40-



---



##### 



Home City Financial Corporation CONSOLIDATED STATEMENTS OF INCOME (continued)

|                                                    |                                                                                               |            |     |                           |     |      |       |     |      | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------- | --- | ------------------------- | --- | ---- | ----- | --- | ---- | 
|                                                    |                                                                                               |            |     | (Dollars in thousands,   
|                                                    |                                                                                               |            |     | except per share amounts)
|                                                    |                                                                                               |            |     | December 31,             
|                                                    |                                                                                               |            |     |                          
|                                                    |                                                                                               |            |     | 2003                      |     | 2002
|                                                    |                                                                                               |            |     |                           |     |     
|Income from continuing operations before income tax |                                                                                               | $          | 913 |                           |     | $    | 658   |    
|Provision for income taxes                          |                                                                                               |            | 264 |                           |     |      | 153   |    
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|Income from continuing operations                   |                                                                                               |            | 649 |                           |     |      | 505   |    
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|Discontinued operations                             |                                                                                               |            |     |                           |     |      |       |    
|                                                    | Loss from operations of discontinued insurance agency
(including loss on disposal of $23,000) |            |     | 0                         |     |      |       | (72 | )   
|                                                    | Income tax benefit                                                                            |            |     | 0                         |     |      |       | (24 | )   
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|                                                    | Loss on discontinued operations                                                               |            |     | 0                         |     |      |       | (48 | )   
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|                                                    |                                                                                               | NET INCOME |     | $                         | 649 |      |       | $   | 457  | 
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|BASIC EARNINGS PER SHARE                            |                                                                                               |            |     |                           |     |      |       |    
|Income from continuing operations                   |                                                                                               | $          | .87 |                           |     | $    | 0.68  |    
|Discontinued operations                             |                                                                                               |            | 0   |                           |     |      | (0.06 | )  
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|                                                    |                                                                                               | NET INCOME |     | $                         | .87 |      |       | $   | 0.62 | 
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|DILUTED EARNINGS PER SHARE                          |                                                                                               |            |     |                           |     |      |       |    
|Income from continuing operations                   |                                                                                               | $          | .85 |                           |     | $    | 0.68  |    
|Discontinued operations                             |                                                                                               |            | 0   |                           |     |      | (0.06 | )  
|                                                    |                                                                                               |            |     |                           |     |      |       |    
|                                                    |                                                                                               | NET INCOME |     | $                         | .85 |      |       | $   | 0.62 | 
|                                                    |                                                                                               |            |     |                           |     |      |       |    



---

|See notes to consolidated financial statements.
|-----------------------------------------------

-41-



---



##### 



Home City Financial Corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERSEQUITY

|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |      |     | 
|------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ---------------------- |  | ------- | ----- | ---------- |  | -------- | ----- | ------- |  | -------- | ---- | -------- |  | -------- | ---- | - |  | - | --- | ------- | - | - | ------ | - |  | - | ------ | ---- | --- | 
|                                                                         |                                                                                                                      |                            |         | (Dollars in thousands)
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     | Accum-  |   |   |        |   |  |   |        |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     | ulated  |   |   |        |   |  |   |        |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     | Other   |   |   |        |   |  |   |        |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     | Compre- |   |   |        |   |  |   |        |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       | Additional |  |          |       |         |  | Unearned |      | Unearned |  | hensive  |      |   |  |   |     |         |   |  
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       | Paid-in    |  | Retained |       | Compen- |  | ESOP     |      | Income   |  | Treasury |      |   |  |  
|                                                                         |                                                                                                                      |                            |         | Shares                 |  | Capital |       | Earnings   |  | sation   |       | Shares  |  | (Loss)   |      | Shares   |  | Total   
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |         
|Balance, January 1, 2002                                                 |                                                                                                                      |                            | 952,200 |                        |  | $       | 6,023 |            |  | $        | 8,134 |         |  | $        | (178 | )        |  | $        | (381 | ) |  | $ | 112 |         |   | $ | (2,266 | ) |  | $ | 11,444 |     
|Comprehensive income                                                     |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|                                                                         | Net income                                                                                                           |                            |         |                        |  |         |       |            |  |          |       | 457     |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        | 457  |    
|                                                                         | Change in unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustment and tax effect |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     | (130    | ) |   |        |   |  |   |        | (130 | )  
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|                                                                         |                                                                                                                      | Total comprehensive income |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |      | 327 | 
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|Dividends on common shares,
$.44 per share                               |                                                                                                                      |                            |         |                        |  |         |       |            |  |          | (345  | )       |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   | (345   | )   
|Amortization of unearned
compensation expense                            |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          | 67   |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   | 67     |     
|ESOP shares earned                                                       |                                                                                                                      |                            |         |                        |  |         | (10   | )          |  |          |       |         |  |          |      |          |  |          | 76   |   |  |   |     |         |   |   |        |   |  |   | 66     |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|Balance, December 31, 2002                                               |                                                                                                                      |                            | 952,200 |                        |  |         | 6,013 |            |  |          | 8,246 |         |  |          | (111 | )        |  |          | (305 | ) |  |   | (18 | )       |   |   | (2,266 | ) |  |   | 11,559 |     
|Comprehensive income                                                     |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|                                                                         | Net income                                                                                                           |                            |         |                        |  |         |       |            |  |          |       | 649     |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        | 649  |    
|                                                                         | Change in unrealized gain
(loss) on securities available
for sale, net of reclassification
adjustment and tax effect |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     | (74     | ) |   |        |   |  |   |        | (74  | )  
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|                                                                         |                                                                                                                      | Total comprehensive income |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |      | 575 | 
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|Stock options exercised                                                  |                                                                                                                      |                            | 10,000  |                        |  |         | 117   |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   | 117    |     
|Dividends on common shares,
$.44 per share                               |                                                                                                                      |                            |         |                        |  |         |       |            |  |          | (346  | )       |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   | (346   | )   
|Purchase of new shares and
amortization of unearned
compensation expense |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          | (74  | )        |  |          |      |   |  |   |     |         |   |   |        |   |  |   | (74    | )   
|ESOP shares earned                                                       |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          | 76   |   |  |   |     |         |   |   |        |   |  |   | 76     |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     
|Balance, December 31, 2003                                               |                                                                                                                      |                            | 962,200 |                        |  | $       | 6,130 |            |  | $        | 8,549 |         |  | $        | (185 | )        |  | $        | (229 | ) |  | $ | (92 | )       |   | $ | (2,266 | ) |  | $ | 11,907 |     
|                                                                         |                                                                                                                      |                            |         |                        |  |         |       |            |  |          |       |         |  |          |      |          |  |          |      |   |  |   |     |         |   |   |        |   |  |   |        |     



---

|See notes to consolidated financial statements.
|-----------------------------------------------

-42-



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##### 



Home City Financial Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                             |                                                                         |                                                     |        |                         |       |      |       |         |        |  
|-------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------- | ------ | ----------------------- | ----- | ---- | ----- | ------- | ------ | -
|                                             |                                                                         |                                                     |        | (Dollars in thousands) 
|                                             |                                                                         |                                                     |        | Year
ended December 31,
|                                             |                                                                         |                                                     |        |                        
|                                             |                                                                         |                                                     |        | 2003                    |       | 2002
|                                             |                                                                         |                                                     |        |                         |       |     
|OPERATING ACTIVITIES                         |                                                                         |                                                     |        |                         |       |      |       |        
|Net income                                   |                                                                         | $                                                   | 649    |                         |       | $    | 457   |        
|Items not requiring (providing) cash         |                                                                         |                                                     |        |                         |       |      |       |        
|                                             | Depreciation and amortization                                           |                                                     |        | 231                     |       |      |       | 231     |       
|                                             | Provision for loan losses                                               |                                                     |        | 500                     |       |      |       | 376     |       
|                                             | Amortization of premiums and discounts on securities                    |                                                     |        | 99                      |       |      |       | 147     |       
|                                             | Deferred income taxes                                                   |                                                     |        | (141                    | )     |      |       | 53      |       
|                                             | Increase in cash surrender value of life insurance                      |                                                     |        | (123                    | )     |      |       | (134    | )     
|                                             | Employee Stock Ownership Plan compensation expense                      |                                                     |        | 76                      |       |      |       | 66      |       
|                                             | Recognition and Retention Plan compensation expense                     |                                                     |        | (74                     | )     |      |       | 67      |       
|                                             | Net realized gains on available-for-sale securities                     |                                                     |        | (17                     | )     |      |       | (332    | )     
|                                             | Loss on disposal of fixed assets                                        |                                                     |        | 0                       |       |      |       | 18      |       
|                                             | FHLB stock dividends                                                    |                                                     |        | (88                     | )     |      |       | (98     | )     
|Changes in                                   |                                                                         |                                                     |        |                         |       |      |       |        
|                                             | Interest receivable                                                     |                                                     |        | 22                      |       |      |       | 71      |       
|                                             | Other assets                                                            |                                                     |        | 228                     |       |      |       | 217     |       
|                                             | Interest payable and other liabilities                                  |                                                     |        | 509                     |       |      |       | 149     |       
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|                                             |                                                                         | Net cash provided by operating activities           |        |                         | 1,871 |      |       |         | 1,288  |  
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|INVESTING ACTIVITIES                         |                                                                         |                                                     |        |                         |       |      |       |        
|                                             | Net change in interest-bearing deposits                                 |                                                     |        | 24                      |       |      |       | 0       |       
|                                             | Purchases of available-for-sale securities                              |                                                     |        | (3,152                  | )     |      |       | (18,077 | )     
|                                             | Proceeds from maturities of available-for-sale securities               |                                                     |        | 2,275                   |       |      |       | 2,362   |       
|                                             | Proceeds from the sales of available-for-sale securities                |                                                     |        | 1,956                   |       |      |       | 22,923  |       
|                                             | Net change in loans                                                     |                                                     |        | 403                     |       |      |       | (12,418 | )     
|                                             | Purchase of premises and equipment                                      |                                                     |        | (107                    | )     |      |       | (14     | )     
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|                                             |                                                                         | Net cash provided by (used in) investing activities |        |                         | 1,399 |      |       |         | (5,224 | )
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|FINANCING ACTIVITIES                         |                                                                         |                                                     |        |                         |       |      |       |        
|                                             | Net increase in demand deposits, money market,
NOW and savings accounts |                                                     |        | 17,613                  |       |      |       | 11,856  |       
|                                             | Net decrease in certificates of deposit                                 |                                                     |        | (12,810                 | )     |      |       | (9,140  | )     
|                                             | Proceeds from Federal Home Loan Bank advances                           |                                                     |        | 9,750                   |       |      |       | 8,800   |       
|                                             | Repayment of Federal Home Loan Bank advances                            |                                                     |        | (13,185                 | )     |      |       | (5,916  | )     
|                                             | Repayment of long-term debt                                             |                                                     |        | 0                       |       |      |       | (307    | )     
|                                             | Proceeds from stock options exercised                                   |                                                     |        | 117                     |       |      |       | 0       |       
|                                             | Dividends paid                                                          |                                                     |        | (346                    | )     |      |       | (345    | )     
|                                             | Net increase in advances from borrowers for taxes and insurance         |                                                     |        | 3                       |       |      |       | 39      |       
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|                                             |                                                                         | Net cash provided by financing activities           |        |                         | 1,142 |      |       |         | 4,987  |  
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|Increase in Cash and Cash Equivalents        |                                                                         |                                                     | 4,412  |                         |       |      | 1,051 |        
|Cash and Cash Equivalents, Beginning of Year |                                                                         |                                                     | 6,061  |                         |       |      | 5,010 |        
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|Cash and Cash Equivalents, End of Year       |                                                                         | $                                                   | 10,473 |                         |       | $    | 6,061 |        
|                                             |                                                                         |                                                     |        |                         |       |      |       |        
|Supplemental Cash Flows Information          |                                                                         |                                                     |        |                         |       |      |       |        
|                                             | Interest paid                                                           |                                                     | $      | 4,712                   |       |      | $     | 5,564   |       
|                                             | Income taxes paid (net of refunds)                                      |                                                     |        | 0                       |       |      |       | 152     |       



---

|See notes to consolidated financial statements.
|-----------------------------------------------

-43-



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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Home City Financial Corporation (Company) is a thrift holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, Home City Federal Savings Bank of Springfield (Bank). The Bank is
primarily engaged in providing a full range of banking and financial services
to individual and corporate customers in Clark County, Ohio. The Bank is
subject to competition from other financial institutions. The Bank is subject
to the regulation of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities. The Banks wholly-owned
subsidiary, Homciti Service Corporation (Service Corp.), holds stock of the
Banks data service provider in which it has a minority interest.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the
Bank, and the Service Corp. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection
with the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.

Cash Equivalents

The Company considers all liquid investments with original maturities of three
months or less to be cash equivalents.

Securities

All securities are classified as available for sale. Available-for-sale
securities, which include any security for which the Company has no immediate
plan to sell but which may be sold in the future, are carried at fair value.
Unrealized gains and losses are recorded, net of related income tax effects, in
other comprehensive income. Amortization of premiums and accretion of discounts
are recorded as interest income from securities. Realized gains and losses are
recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.

Loans

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoffs are reported at their outstanding principal
balances adjusted for any charge-offs, the allowance for loan losses, any
deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans. Interest income is reported on the interest
method and includes amortization of net deferred loan fees and costs over the
loan term. Generally, loans are placed on non-accrual status at ninety days
past due and interest is considered a loss, unless the loan is well-secured and
in the process of collection.

-44-



---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan losses are
charged against the allowance when management believes the uncollectibility of
a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
 The allowance for loan losses is evaluated on a regular basis by
management and is based upon managements periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrowers ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.

A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the
loan and the borrower, including the length of the delay, the reasons for the
delay, the borrowers prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on a
loan-by-loan basis for commercial and construction loans by either the present
value of expected future cash flows discounted at the loans effective interest
rate, the loans obtainable market price or the fair value of the collateral if
the loan is collateral dependent.

Large groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment measurements.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank system. The required investment in the
common stock is based on a predetermined formula.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in net income or expense
from foreclosed assets.

Goodwill

Goodwill is annually tested for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is indicated
and goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the financial statements.

-45-



---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

Intangible assets are being amortized on the straight-line basis over periods
ranging from 5 to 12.5 years. Such assets are periodically evaluated as to the
recoverability of their carrying value.

Treasury Stock

Treasury stock is stated at cost. Cost is determined by the first-in, first-out
method.

Stock Options

Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Bank accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.

|                                                                                                                     |                       |   |                         |      |      |   |     |      | 
|-------------------------------------------------------------------------------------------------------------------- | --------------------- | - | ----------------------- | ---- | ---- | - | --- | ---- | 
|                                                                                                                     |                       |   | (Dollars in thousands) 
|                                                                                                                     |                       |   | Year ended December 31,
|                                                                                                                     |                       |   |                        
|                                                                                                                     |                       |   | 2003                    |      | 2002
|                                                                                                                     |                       |   |                         |      |     
|Net income, as reported                                                                                              |                       | $ | 649                     |      |      | $ | 457 |     
|Less: Total stock-based employee compensation cost determined
under the fair value based method, net of income taxes |                       |   | 6                       |      |      |   | 58  |     
|                                                                                                                     |                       |   |                         |      |      |   |     |     
|Pro forma net income                                                                                                 |                       | $ | 643                     |      |      | $ | 399 |     
|                                                                                                                     |                       |   |                         |      |      |   |     |     
|Earnings per share:                                                                                                  |                       |   |                         |      |      |   |     |     
|                                                                                                                     | Basic  as reported   |   | $                       | 0.87 |      |   | $   | 0.62 | 
|                                                                                                                     |                       |   |                         |      |      |   |     |     
|                                                                                                                     | Basic  pro forma     |   | $                       | 0.86 |      |   | $   | 0.54 | 
|                                                                                                                     |                       |   |                         |      |      |   |     |     
|                                                                                                                     | Diluted  as reported |   | $                       | 0.85 |      |   | $   | 0.62 | 
|                                                                                                                     |                       |   |                         |      |      |   |     |     
|                                                                                                                     | Diluted  pro forma   |   | $                       | 0.84 |      |   | $   | 0.54 | 
|                                                                                                                     |                       |   |                         |      |      |   |     |     

Income Taxes

Deferred tax assets and liabilities are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
The Company files consolidated income tax returns with its subsidiaries.

Earnings Per Share

Earnings per share have been computed based upon the weighted-average common
shares outstanding during each year. Unearned ESOP shares and RRP shares which
have not vested have been excluded from the computation of average shares
outstanding.

-46-



---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: SECURITIES

The amortized cost and approximate fair values of securities are as follows:

|                              |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |       | 
|----------------------------- | -------------------------------- |  | ---------------------- | ----- | ---------- |  | ---------- | -- | ----------- |  | - | ---- | - |  | - | ----- | 
|                              |                                  |  | (Dollars in thousands)
|                              |                                  |  |                        |       |            |  | Gross      |    | Gross       |  |   |      |  
|                              |                                  |  | Amortized              |       | Unrealized |  | Unrealized |    | Approximate
|                              |                                  |  | Cost                   |       | Gains      |  | Losses     |    | Fair Value 
|                              |                                  |  |                        |       |            |  |            |    |            
|Available-for-Sale Securities |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |      
|December 31, 2003             |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |      
|                              | U.S. government agencies         |  | $                      | 210   |            |  | $          | 1  |             |  | $ | 0    |   |  | $ | 211   | 
|                              | Mortgage-backed securities       |  |                        | 3,034 |            |  |            | 15 |             |  |   | (14  | ) |  |   | 3,035 | 
|                              | Other asset-backed securities    |  |                        | 687   |            |  |            | 0  |             |  |   | (5   | ) |  |   | 682   | 
|                              | State and political subdivisions |  |                        | 388   |            |  |            | 16 |             |  |   | 0    |   |  |   | 404   | 
|                              | Equity securities                |  |                        | 909   |            |  |            | 0  |             |  |   | (152 | ) |  |   | 757   | 
|                              |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |      
|                              | Total                            |  | $                      | 5,228 |            |  | $          | 32 |             |  | $ | (171 | ) |  | $ | 5,089 | 
|                              |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |       | 
|December 31, 2002             |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |      
|                              | U.S. government agencies         |  | $                      | 1,280 |            |  | $          | 10 |             |  | $ | 0    |   |  | $ | 1,290 | 
|                              | Mortgage-backed securities       |  |                        | 3,409 |            |  |            | 25 |             |  |   | (2   | ) |  |   | 3,432 | 
|                              | Other asset-backed securities    |  |                        | 301   |            |  |            | 0  |             |  |   | (2   | ) |  |   | 299   | 
|                              | State and political subdivisions |  |                        | 489   |            |  |            | 10 |             |  |   | 0    |   |  |   | 499   | 
|                              | Equity securities                |  |                        | 910   |            |  |            | 0  |             |  |   | (67  | ) |  |   | 843   | 
|                              |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |       | 
|                              | Total                            |  | $                      | 6,389 |            |  | $          | 45 |             |  | $ | (71  | ) |  | $ | 6,363 | 
|                              |                                  |  |                        |       |            |  |            |    |             |  |   |      |   |  |   |       | 

The amortized cost and fair value of securities available for sale at December
31, 2003, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.

|                              |        |   |                        |       |       |   |       |       | 
|----------------------------- | ------ | - | ---------------------- | ----- | ----- | - | ----- | ----- | 
|                              |        |   | (Dollars in thousands)
|                              |        |   | Amortized              |       | Fair 
|                              |        |   | Cost                   |       | Value
|                              |        |   |                        |       |      
|Within one year               |        | $ | 103                    |       |       | $ | 102   |      
|One to five years             |        |   | 107                    |       |       |   | 109   |      
|Five to ten years             |        |   | 388                    |       |       |   | 404   |      
|                              |        |   |                        |       |       |   |       |      
|                              |        |   | 598                    |       |       |   | 615   |      
|Mortgage-backed securities    |        |   | 3,034                  |       |       |   | 3,035 |      
|Other asset-backed securities |        |   | 687                    |       |       |   | 682   |      
|Equity securities             |        |   | 909                    |       |       |   | 757   |      
|                              |        |   |                        |       |       |   |       |      
|                              | Totals |   | $                      | 5,228 |       |   | $     | 5,089 | 
|                              |        |   |                        |       |       |   |       |      

The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $375,000 at December 31, 2003, and
$399,000 at December 31, 2002.

Gross gains of $17,000 and $393,000 and gross losses of $0 and $61,000
resulting from sales of available-for-sale securities were realized for 2003
and 2002, respectively. The tax expense for net gains on security transactions
for 2003 and 2002 was $6,000 and $113,000, respectively.

Certain investments in debt and equity securities are reported in the financial
statements at an amount less than their historical cost. Total fair value of
these investments at December 31, 2003, was $2,963,000 which is

-47-



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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

approximately 58% of the Companys available-for-sale investment portfolio.
These declines primarily resulted from recent increases in market interest
rates and failure of certain investments to maintain consistent credit quality
ratings.

Equity securities consist of two issues of Fannie Mae preferred stock.
Management believes the declines in fair value for these securities are
temporary based on accounting controversies surrounding a similar Government
Sponsored Entity (GSE). To Managements knowledge, no such accounting
controversies have been attributed to Fannie Mae. Managements conclusion
regarding the declines in fair value for these securities is based on its
evaluation of Fannie Mae stock performance and projections. Management believes
that mortgage-backed and other asset-backed security declines in fair value are
temporary based on available evidence of recent changes in market interest
rates.

Should the impairment of any of these securities become other than temporary,
the cost basis of the investment will be reduced and the resulting loss
recognized in net income in the period the other-than-temporary impairment is
identified.

The following table shows our investments gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2003:

|                               |                                  |  |                        |       |                     |  |            |    |        |  |            |     |            |  |   |     |  |  |            |       |  |  |   |     | 
|------------------------------ | -------------------------------- |  | ---------------------- | ----- | ------------------- |  | ---------- | -- | ------ |  | ---------- | --- | ---------- |  | - | --- |  |  | ---------- | ----- |  |  | - | --- | 
|                               |                                  |  | (Dollars in thousands)
|                               |                                  |  | Less than 12 Months    |       | 12 Months or Longer |  | Total     
|                               |                                  |  |                        |       |                     |  |           
|                               |                                  |  |                        |       |                     |  | Unrealized |    |        |  |            |     | Unrealized |  |   |     |  |  | Unrealized
|                               |                                  |  | Fair Value             |       | Losses              |  | Fair Value |    | Losses |  | Fair Value |     | Losses    
|                               |                                  |  |                        |       |                     |  |            |    |        |  |            |     |           
|Available-for-Sale Securities: |                                  |  |                        |       |                     |  |            |    |        |  |            |     |            |  |   |     |  |  |            |       |  |  |   |    
|                               | U.S. government agencies         |  | $                      | 0     |                     |  | $          | 0  |        |  | $          | 0   |            |  | $ | 0   |  |  | $          | 0     |  |  | $ | 0   | 
|                               | Mortgaged-backed securities      |  |                        | 1,446 |                     |  |            | 12 |        |  |            | 77  |            |  |   | 2   |  |  |            | 1,523 |  |  |   | 14  | 
|                               | Other asset-backed securities    |  |                        | 682   |                     |  |            | 5  |        |  |            | 0   |            |  |   | 0   |  |  |            | 682   |  |  |   | 5   | 
|                               | State and political subdivisions |  |                        | 0     |                     |  |            | 0  |        |  |            | 0   |            |  |   | 0   |  |  |            | 0     |  |  |   | 0   | 
|                               | Equity securities                |  |                        | 0     |                     |  |            | 0  |        |  |            | 758 |            |  |   | 152 |  |  |            | 758   |  |  |   | 152 | 
|                               |                                  |  |                        |       |                     |  |            |    |        |  |            |     |            |  |   |     |  |  |            |       |  |  |   |    
|                               | Total                            |  | $                      | 2,128 |                     |  | $          | 17 |        |  | $          | 835 |            |  | $ | 154 |  |  | $          | 2,963 |  |  | $ | 171 | 
|                               |                                  |  |                        |       |                     |  |            |    |        |  |            |     |            |  |   |     |  |  |            |       |  |  |   |     | 

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at December 31, include:

|                           |                                 |             |        |                        |         |      |        |        |         | 
|-------------------------- | ------------------------------- | ----------- | ------ | ---------------------- | ------- | ---- | ------ | ------ | ------- | 
|                           |                                 |             |        | (Dollars in thousands)
|                           |                                 |             |        | 2003                   |         | 2002
|                           |                                 |             |        |                        |         |     
|Residential real estate    |                                 |             |        |                        |         |      |        |       
|                           | One- to four-family residential |             | $      | 65,269                 |         |      | $      | 63,429 |        
|                           | Multi-family residential        |             |        | 6,700                  |         |      |        | 7,359  |        
|                           | Construction                    |             |        | 5,681                  |         |      |        | 4,137  |        
|Nonresidential real estate |                                 |             | 31,510 |                        |         |      | 33,132 |       
|Commercial                 |                                 |             | 13,733 |                        |         |      | 14,051 |       
|Consumer and other         |                                 |             | 6,338  |                        |         |      | 7,398  |       
|                           |                                 |             |        |                        |         |      |        |       
|                           |                                 | Total loans |        |                        | 129,231 |      |        |        | 129,506 | 
|Less                       |                                 |             |        |                        |         |      |        |       
|                           | Deferred loan fees              |             |        | (393                   | )       |      |        | (453   | )      
|                           | Undisbursed portion of loans    |             |        | (1,331                 | )       |      |        | (1,135 | )      
|                           | Allowance for loan losses       |             |        | (995                   | )       |      |        | (503   | )      
|                           |                                 |             |        |                        |         |      |        |       
|                           |                                 | Net loans   |        | $                      | 126,512 |      |        | $      | 127,415 | 
|                           |                                 |             |        |                        |         |      |        |        |        

-48-



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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Activity in the allowance for loan losses was as follows:

|                                                                                |  |                        |     |      |  |   |      |  
|------------------------------------------------------------------------------- |  | ---------------------- | --- | ---- |  | - | ---- | -
|                                                                                |  | (Dollars in thousands)
|                                                                                |  | 2003                   |     | 2002
|                                                                                |  |                        |     |     
|Balance, beginning of year                                                      |  | $                      | 503 |      |  | $ | 592  |  
|Provision charged to expense                                                    |  |                        | 500 |      |  |   | 376  |  
|Losses charged off, net of recoveries of $15,000 for 2003, and $25,000 for 2002 |  |                        | (8  | )    |  |   | (465 | )
|                                                                                |  |                        |     |      |  |   |      |  
|Balance, end of year                                                            |  | $                      | 995 |      |  | $ | 503  |  
|                                                                                |  |                        |     |      |  |   |      |  

Impaired loans totaled $1,267,000 and $944,000 at December 31, 2003 and 2002.
An allowance for loan losses of $167,000 and $37,000 relates to impaired loans
of $589,000 and $177,000 at December 31, 2003 and 2002. At December 31, 2003
and 2002 impaired loans of $678,000 and $767,000 had no related allowance for
loan losses.

Interest of $87,000 and $96,000 was recognized on average impaired loans of
$1,276,000 and $976,000 for 2003 and 2002. Interest of $85,000 and $74,000 was
recognized on impaired loans on a cash basis during 2003 and 2002.

At December 31, 2003 and 2002, accruing loans delinquent 90 days or more
totaled $346,000 and $250,000, respectively. Non-accruing loans at December 31,
2003 and 2002 were $197,000 and $173,000, respectively.

NOTE 4: PREMISES AND EQUIPMENT

Major classifications of premises and equipment, stated at cost, are as
follows:

|                              |                            |   |                        |       |      |  |        |       | 
|----------------------------- | -------------------------- | - | ---------------------- | ----- | ---- |  | ------ | ----- | 
|                              |                            |   | (Dollars in thousands)
|                              |                            |   | 2003                   |       | 2002
|                              |                            |   |                        |       |     
|Land                          |                            | $ | 806                    |       |      |  | 830    |      
|Buildings and improvements    |                            |   | 2,619                  |       |      |  | 2,608  |      
|Equipment                     |                            |   | 1,629                  |       |      |  | 1,560  |      
|                              |                            |   |                        |       |      |  |        |      
|                              |                            |   | 5,054                  |       |      |  | 4,998  |      
|Less accumulated depreciation |                            |   | (1,242                 | )     |      |  | (1,063 | )    
|                              |                            |   |                        |       |      |  |        |      
|                              | Net premises and equipment |   | $                      | 3,812 |      |  | $      | 3,935 | 
|                              |                            |   |                        |       |      |  |        |      

NOTE 5: GOODWILL, OTHER INTANGIBLE ASSETS AND DISCONTINUED OPERATIONS

During 2002, the Company changed its method of accounting and financial
reporting for goodwill and other intangible assets by adopting the provisions
of Statement of Financial Accounting Standards No. 142. There was no material
impact of the adoption on the financial statements.

On December 1, 2000, the Companys new, wholly-owned subsidiary, Home City
Insurance Agency, Inc. (HCIA), acquired the book of business and certain other
assets of Rice Insurance Agency, Inc. (Rice Agency). The transaction was a
business combination accounted for as a purchase.

As a result of the acquisition, the Company recorded identifiable intangible
assets including a covenant not to compete valued at $313,000, trademark rights
valued at $15,000, and computer software contracts valued at $15,000. The
remaining value of the excess of the cost of the assets acquired over the fair
value of its net assets was $70,000 and was recorded as goodwill.

Amortization expense for the years ended December 31, 2003 and 2002, was $0 and
$31,000, respectively.

-49-



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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 27, 2002, the Company sold the insurance agency business and
recognized a loss of $23,000. The purchaser assumed the note payable of
$301,000. All goodwill and
other intangibles have been written-off. Revenues of $0 and $442,000 are
included in loss from discontinued operations in 2003 and 2002, respectively. NOTE 6: INTEREST-BEARING DEPOSITS Interest-bearing deposits in denominations of $100,000 or more were $12,806,000
on December 31, 2003, and $15,774,000 on December 31, 2002. At December 31, 2003, the scheduled maturities of time deposits are as follows: (Dollars in thousands)2004
    
    $
    20,3382005
    
    
    13,0782006
    
    
    14,1402007
    
    
    2,7512008
    
    
    908Total
    
    $
    51,215
 NOTE 7: FEDERAL HOME LOAN BANK ADVANCES Aggregate annual maturities of Federal Home Loan Bank advances at December 31,
2003, are: (Dollars in thousands)2004
    
    $
    4122005
    
    
    3932006
    
    
    9462007
    
    
    1,9182008
    
    
    2,234Thereafter
    
    
    28,861$
    34,764
 The Federal Home Loan Bank advances are secured by mortgage loans totaling
$48,701,000 at December 31, 2003. Advances, at interest rates from 3.05 percent
to 8.35 percent are subject to restrictions or penalties in the event of
prepayment. The Bank has unused letters of credit with the Federal Home Loan Bank
aggregating $1,310,000 expiring at various dates from March 9, 2004, through
December 7, 2004. -50-




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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: INCOME TAXES The provision for income taxes includes these components at December 31: (Dollars in thousands)2003
    
    2002Taxes currently payable
    
    $
    405
    
    
    $
    100Deferred income taxes
    
    
    (141
    )
    
    
    53Income tax expense from continuing operations
    
    $
    264
    
    
    $
    153
 A reconciliation of income tax expense from continuing operations at the
statutory rate to the Companys actual income tax expense from continuing
operations is shown below: (Dollars in thousands)2003
    
    2002Computed at the statutory rate (34%)
    
    $
    310
    
    
    $
    224Increase (decrease) resulting fromTax exempt interest
    
    
    (6
    )
    
    
    (12
    )Cash surrender value of life insurance
    
    
    (42
    )
    
    
    (44
    )Nondeductible expenses
    
    
    3
    
    
    
    1Other
    
    
    (1
    )
    
    
    (16
    )Actual tax expense from continuing operations
    
    $
    264
    
    
    $
    153
 The tax effects of temporary differences related to deferred taxes shown on the
balance sheets were: 2003
    
    2002Deferred tax assetsAllowance for loan losses
    
    $
    338
    
    
    $
    171Employee benefits
    
    
    140
    
    
    
    127Nonaccrual loan interest
    
    
    1
    
    
    
    1Other
    
    
    41
    
    
    
    42Unrealized losses on available-for-sale securities
    
    
    48
    
    
    
    9568
    
    
    
    350Deferred tax liabilitiesDepreciation
    
    
    (87
    )
    
    
    (62
    )Federal Home Loan Bank stock dividend
    
    
    (238
    )
    
    
    (208
    )Deferred loan fees
    
    
    (53
    )
    
    
    (72
    )(378
    )
    
    
    (342
    )Net deferred tax asset
    
    $
    190
    
    
    $
    8
 Retained earnings at December 31, 2003 and 2002, include approximately
$1,084,000, for
which no deferred federal income tax liability has been recognized. These
amounts represent an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax
bad debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the
then-current corporate income tax rate. The deferred income tax liabilities on
the preceding amounts that would have been recorded if they were expected to
reverse into taxable income in the foreseeable future were approximately
$368,000 at December 31, 2003 and 2002. -51-




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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows: (Dollars in thousands)2003
    
    2002Unrealized gains (losses) on securities available for sale
    
    $
    (95
    )
    
    $
    135Reclassification for realized amount included in income
    
    
    17
    
    
    
    332Other comprehensive loss, before tax effect
    
    
    (112
    )
    
    
    (197
    )Tax benefit
    
    
    38
    
    
    
    67Other comprehensive loss
    
    $
    (74
    )
    
    $
    (130
    )
 NOTE 10: REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. 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
Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Banks assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below). Management believes, as of December 31, 2003 and 2002, that the Bank
meets all capital adequacy requirements to which it is subject. As of December 31, 2003, the most recent notification from Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Banks category. -52-




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##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Banks actual capital amounts and ratios are also presented in the table. (Dollars in thousands) To Be Well CapitalizedFor Capital
    
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2003Total risk-based capital
(to risk-weighted assets)
    
    $
    12,644
    
    
    
    12.0
    %
    
    $
    8,414
    
    
    
    8.0
    %
    
    $
    10,518
    
    
    
    10.0
    %Tier I capital
(to risk-weighted assets)
    
    
    11,649
    
    
    
    11.1
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    6,311
    
    
    
    6.0Tier I capital
(to adjusted total assets)
    
    
    11,649
    
    
    
    7.7
    
    
    
    6,077
    
    
    
    4.0
    
    
    
    7,596
    
    
    
    5.0Tangible capital
(to adjusted tangible assets)
    
    
    11,649
    
    
    
    7.7
    
    
    
    2,279
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/AAs of December 31, 2002Total risk-based capital
(to risk-weighted assets)
    
    $
    11,166
    
    
    
    10.4
    %
    
    $
    8,950
    
    
    
    8.0
    %
    
    $
    11.188
    
    
    
    10.0
    %Tier I capital
(to risk-weighted assets)
    
    
    11,163
    
    
    
    10.0
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    6,713
    
    
    
    6.0Tier I capital
(to adjusted total assets)
    
    
    11,163
    
    
    
    7.4
    
    
    
    6,001
    
    
    
    4.0
    
    
    
    7,501
    
    
    
    5.0Tangible capital
(to adjusted tangible assets)
    
    
    11,163
    
    
    
    7.4
    
    
    
    2,250
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/A
 The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 2003,
approximately $715,000 of retained earnings were available for dividend
declaration without prior regulatory approval. NOTE 11: RELATED PARTY TRANSACTIONS The Bank has entered into transactions with certain directors, executive
officers, significant shareholders and their affiliates or associates (related
parties). In managements opinion, such loans and other
extensions of credit and deposits were made in the ordinary course of
business and were made on substantially the same terms (including
interest rates and collateral) as those prevailing at the time for
comparable transactions with other persons. Further, in
managements opinion, these loans did not involve more than
normal risk of collectibility or present other unfavorable features. -53-




---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The aggregate amount of loans, as defined, to such related parties were as
follows: (Dollars in thousands)Balances, January 1, 2003
    
    $
    1,915New loans, including renewals
    
    
    529Payments, etc., including renewals
    
    
    (670
    )Balances, December 31, 2003
    
    $
    1,774
 Deposits from related parties held by the Bank at December 31, 2003 and 2002,
totaled $1,257,000 and $1,116,000, respectively. NOTE 12: EMPLOYEE BENEFITS The Company has a retirement savings 401(k) plan covering substantially all
employees. Employees may contribute up to 15% of their compensation with the
Company matching 75% of the employees contribution on the first 6% of the
employees compensation. Employer contributions charged to expense for 2003 and
2002 were $32,000 and $43,000, respectively. As part of the conversion of the Bank from the mutual form of ownership to the
stock form of ownership in 1996, the Company established an ESOP covering
substantially all employees of the Company and Bank. The ESOP acquired common
shares of the Company at $10 per share in the conversion with funds provided by
a loan from the Company. Accordingly, the common shares acquired by the ESOP
were shown as a reduction of shareholders equity. Shares are released to
participants proportionately as the loan is repaid. Dividends on allocated
shares are recorded as dividends and charged to retained earnings. Dividends on
unallocated shares are used to repay the loan and are treated as compensation
expense. Compensation expense is recorded equal to the fair market value of the
shares when contributions, which are determined annually by the Board of
Directors of the Company and Bank, are made to the ESOP. ESOP expense for the years ended December 31, 2003 and 2002, was $76,000 and
$66,000. (Dollars in thousands)2003
    
    2002Allocated shares
    
    
    51,914
    
    
    
    42,465Shares released for allocation
    
    
    9,449
    
    
    
    9,449Unearned shares
    
    
    26,510
    
    
    
    35,959Total ESOP shares
    
    
    87,873
    
    
    
    87,873Fair value of unearned shares at December 31
    
    $
    457,000
    
    
    $
    421,000
 The Company also has a Recognition and Retention Plan (RRP) which provides for
the award and issuance of up to 38,088 common shares of the Company to members
of the Board of Directors and management. At December 31, 2003, 37,706 shares
had been awarded, of which 914 had been forfeited. Common shares awarded under
the RRP vest ratably over a five-year period, commencing with the date of the
award. Expense recognized under the RRP plan totaled approximately $20,000 and
$67,000 for 2003 and 2002, respectively. -54-




---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13: STOCK OPTION PLAN The Company has a fixed option plan under which the Company may grant options
that vest over five years to directors and selected employees for up to 131,422
common shares. The exercise price of each option is intended to equal the fair
value of the Companys shares on the date of grant. An options maximum term is
ten years. At December 31, 2003, the weighted average remaining contractual life of all
options was 5.4 years. A summary of the status of the plan at December 31, 2003
and 2002, and changes during the years then ended is presented below: At December 31, 2003
    
    At December 31, 2002Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding, beginning of year
    
    
    95,935
    
    
    $
    11.70
    
    
    
    98,565
    
    
    $
    11.70Granted
    
    
    34,571
    
    
    
    13.51
    
    
    
    0Exercised
    
    
    (10,000
    )
    
    
    11.70
    
    
    
    0Forfeited
    
    
    0
    
    
    
    
    
    
    
    (2,630
    )
    
    
    11.70Expired
    
    
    0
    
    
    
    
    
    
    
    0Outstanding, end of year
    
    
    120,506
    
    
    
    12.22
    
    
    
    95,935
    
    
    
    11.70Options exercisable, end of year
    
    
    85,935
    
    
    
    11.70
    
    
    
    95,935
    
    
    
    11.70
 The fair value of options granted is estimated on the date of grant using an
option-pricing model with weighted-average assumptions of 3.90% dividend yield,
19% volatility factor of expected market price of common stock, 2% risk-free
interest rate, 10 year expected life of options. The weighted-average fair
value of options granted during the year was $1.48. The following table summarizes information about stock options under the plan
outstanding at December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    Number
    
    Average Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$11.70 to $13.175
    
    
    117,506
    
    
    
    5.29
    
    
    $
    12.10
    
    
    
    85,935
    
    
    $
    11.70$17.03
    
    
    3,000
    
    
    
    9.98
    
    
    $
    17.03
    
    
    
    0
    
    
    
    N/A
 -55-




---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14: EARNINGS PER SHARE Earnings per share (EPS) were computed as follows (Dollars in thousands, except
per share data): Year Ended December 31,
2003Income
    
    Weighted-Average Shares
    
    Per Share AmountBasic earnings per shareIncome from continuing operations
available to common shareholders
    
    $
    649
    
    
    
    750,362
    
    
    $
    0.87Effect of dilutive securitiesStock options and awards
    
    
    0
    
    
    
    16,495Diluted earnings per shareIncome from continuing operations
available to common shareholders and
assumed conversions
    
    $
    649
    
    
    
    766,857
    
    
    $
    0.85
 Stock Awards and options to purchase 7,500 shares of common stock between the
prices of $17.03 and $17.25 per share were outstanding at December 31, 2003,
but were not included in the computation of diluted EPS because the options
exercise price was greater than the average market price of the common shares. Year Ended December 31, 2002Income
    
    Weighted-Average Shares
    
    Per Share AmountBasic earnings per shareIncome from continuing operations
available to common shareholders
    
    $
    505
    
    
    
    741,229
    
    
    $
    0.68Effect of dilutive securitiesStock options and awards
    
    
    0
    
    
    
    0Diluted earnings per shareIncome from continuing operations
available to common shareholders
and assumed conversions
    
    $
    505
    
    
    
    741,229
    
    
    $
    .068
 Options to purchase 95,935 shares of common stock at $11.70 per share were
outstanding at December 31, 2002, but were not included in the computation of
diluted EPS because the options exercise price was greater than the average
market price of the common shares. -56-




---



##### 



Home City Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTSENTS NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents estimated fair values of the Companys financial
instruments. The fair values of certain of these instruments were calculated by
discounting expected cash flows, which involves significant judgments by
management and uncertainties. Fair value is the estimated amount at which
financial assets or liabilities could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Because no
market exists for certain of these financial instruments and because management
does not intend to sell these financial instruments, the Company does not know
whether the fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate. (Dollars in thousands) At December 31, 2003
    
    At December 31, 2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial assetsCash and cash equivalents
    
    $
    10,473
    
    
    $
    10,473
    
    
    $
    6,061
    
    
    $
    6,061Interest-bearing deposits
    
    
    0
    
    
    
    0
    
    
    
    24
    
    
    
    24Available-for-sale securities
    
    
    5,089
    
    
    
    5,089
    
    
    
    6,363
    
    
    
    6,363Loans, net
    
    
    126,512
    
    
    
    134,747
    
    
    
    127,415
    
    
    
    133,767Federal Home Loan Bank stock
    
    
    2,265
    
    
    
    2,265
    
    
    
    2,177
    
    
    
    2,177Cash surrender value of life
insurance
    
    
    2,952
    
    
    
    2,952
    
    
    
    2,829
    
    
    
    2,829Interest receivable
    
    
    578
    
    
    
    578
    
    
    
    600
    
    
    
    600Financial liabilitiesDeposits
    
    
    103,922
    
    
    
    105,422
    
    
    
    99,119
    
    
    
    100,746Federal Home Loan Bank
advances
    
    
    34,764
    
    
    
    37,022
    
    
    
    38,199
    
    
    
    40,877Interest payable
    
    
    183
    
    
    
    183
    
    
    
    212
    
    
    
    212
 For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of December 31, 2003 and 2002. The estimated fair
value for cash and cash equivalents, interest-bearing deposits, FHLB stock,
cash surrender value of life insurance, accrued interest receivable, demand
deposits, savings accounts, NOW accounts, certain money market deposits, and
interest payable is considered to approximate cost. The estimated fair value
for securities is based on quoted market values for the individual securities
or for
equivalent securities. The estimated fair value for loans receivable, including
loans held for sale, net, is based on estimates of the rate the Bank would
charge for similar loans at December 31, 2003 and 2002, applied for the time
period until the loans are assumed to reprice or be paid. The estimated fair
value for fixed-maturity time deposits as well as borrowings is based on
estimates of the rate the Bank would pay on such liabilities at December 31,
2003 and 2002, applied for the time period until maturity. The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit and
lines of credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date. -57-




---



##### 



Home City Financial
Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16: COMMITMENTS AND CREDIT RISK 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 a portion of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Each customers creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on managements credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. At December 31, 2003 and 2002, the Bank had outstanding commitments to
originate loans aggregating approximately $1,469,000 and $1,041,000,
respectively. The commitments extended over varying periods of time with the
majority being disbursed within a one-year period. Loan commitments at fixed
rates of interest amounted to $755,000 and $603,000 at December 31, 2003 and
2002, respectively, with the remainder at floating market rates. Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. The Bank had total outstanding letters of credit amounting to $86,000 and
$500,000 at December 31, 2003 and 2002, respectively, with varying terms. Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customers creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on managements credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for
on-balance-sheet instruments. At December 31, 2003, the Bank had granted unused lines of credit to borrowers
aggregating approximately $4,931,000 and $3,252,000 for commercial lines and
open-end consumers lines, respectively. At December 31, 2002, the bank had
granted unused lines of credit to borrowers aggregating approximately
$5,483,000 and $3,757,000 for commercial lines and open-end consumer lines,
respectively. At December 31, 2003, approximately $7,852,000 and $793,000 were on deposit at
Great Lakes Bankers Bank and Fifth Third Bank, respectively. At December 31,
2002, approximately $1,879,000 and $928,000 were on deposit at Great Lakes
Bankers Bank and Fifth Third Bank, respectively. -58-




---



##### 



Home City Financial
Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY ) Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company: Condensed Balance Sheets (Dollars in thousands)2003
    
    2002AssetsCash
    
    $
    259
    
    
    $
    216Investment in common stock of subsidiary Bank
    
    
    11,539
    
    
    
    11,145Investment in insurance agency
    
    
    0
    
    
    
    37Advances to subsidiaries
    
    
    1
    
    
    
    109Other assets
    
    
    108
    
    
    
    52Total assets
    
    $
    11,907
    
    
    $
    11,559Shareholders Equity
    
    $
    11,907
    
    
    $
    11,559
 Condensed Statements of Income (Dollars in thousands)2003
    
    2002IncomeDividends from subsidiary Bank
    
    $
    220
    
    
    $
    330Interest income
    
    
    29
    
    
    
    36Total income
    
    
    249
    
    
    
    366ExpensesOther expenses
    
    
    116
    
    
    
    119Income Before Income Tax and Equity in
Undistributed Income of Subsidiaries
    
    
    133
    
    
    
    247Income Tax Benefit
    
    
    (29
    )
    
    
    (28
    )Income Before Equity in
Undistributed Income of Subsidiaries
    
    
    162
    
    
    
    275Equity in Undistributed Income of Subsidiaries
    
    
    487
    
    
    
    182Net Income
    
    $
    649
    
    
    $
    457
 -59-




---



##### 



Home City Financial
Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Statements of Cash Flows (Dollars in thousands)2003
    
    2002Operating ActivitiesNet income
    
    $
    649
    
    
    $
    457Items not requiring (providing) cash
    
    
    (485
    )
    
    
    38Net cash provided by operating activities
    
    
    164
    
    
    
    495Investing Activities  advances to subsidiaries
    
    
    108
    
    
    
    (74
    )Financing ActivitiesCash dividends paid
    
    
    (346
    )
    
    
    (345
    )Proceeds from stock options exercised
    
    
    117
    
    
    
    0Net cash used in financing activities
    
    
    (229
    )
    
    
    (345
    )Net Change in Cash and Cash Equivalents
    
    
    43
    
    
    
    76Cash and Cash Equivalents at Beginning of Year
    
    
    216
    
    
    
    140Cash and Cash Equivalents at End of Year
    
    $
    259
    
    
    $
    216
 -60-




---



##### 



NOTE 18: QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables summarize selected quarterly results of operations without
adjustment for discontinued operations for 2003 and 2002. (Dollars in thousands, except per share data)December 31, 2003
    
    March
    
    June
    
    September
    
    DecemberInterest and dividend income
    
    $
    2,349
    
    
    $
    2,302
    
    
    $
    2,301
    
    
    $
    2,219Interest expense
    
    
    1,249
    
    
    
    1,156
    
    
    
    1,133
    
    
    
    1,116Net interest income
    
    
    1,100
    
    
    
    1,146
    
    
    
    1,168
    
    
    
    1,103Provision for loan losses
    
    
    90
    
    
    
    110
    
    
    
    200
    
    
    
    100Noninterest income
    
    
    89
    
    
    
    67
    
    
    
    46
    
    
    
    52Noninterest expense
    
    
    842
    
    
    
    867
    
    
    
    798
    
    
    
    851Income tax expense
    
    
    90
    
    
    
    55
    
    
    
    66
    
    
    
    53Net income
    
    
    167
    
    
    
    181
    
    
    
    150
    
    
    
    151Earnings per shareBasic
    
    
    0.22
    
    
    
    0.24
    
    
    
    0.20
    
    
    
    0.20Diluted
    
    
    0.22
    
    
    
    0.24
    
    
    
    0.20
    
    
    
    0.19Dividends per share
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.11
 December 31, 2002
    
    March
    
    June
    
    September
    
    DecemberInterest and dividend income
    
    $
    2,465
    
    
    $
    2,507
    
    
    $
    2,386
    
    
    $
    2,422Interest expense
    
    
    1,570
    
    
    
    1,528
    
    
    
    1,487
    
    
    
    1,408Net interest income
    
    
    895
    
    
    
    979
    
    
    
    899
    
    
    
    1,014Provision for loan losses
    
    
    13
    
    
    
    236
    
    
    
    52
    
    
    
    75Noninterest income
    
    
    169
    
    
    
    435
    
    
    
    236
    
    
    
    276Noninterest expense
    
    
    999
    
    
    
    1,006
    
    
    
    955
    
    
    
    981Income tax expense
    
    
    (13
    )
    
    
    33
    
    
    
    1
    
    
    
    108Net income
    
    
    65
    
    
    
    139
    
    
    
    127
    
    
    
    126Earnings per shareBasic
    
    
    0.09
    
    
    
    0.19
    
    
    
    0.17
    
    
    
    0.17Diluted
    
    
    0.09
    
    
    
    0.19
    
    
    
    0.17
    
    
    
    0.17Dividends per share
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.11
 -61-




---



##### 



ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. On November 14, 2002, HCFC dismissed Dixon, Francis, Davis & Company
(DFD) as its independent certified public accountants retained to audit
HCFCs financial statements and retained BKD as its new independent certified
public accountants. The dismissal of DFD and the retention of BKD were
approved by the Audit Committee and the full Board of Directors of HCFC. The Board of Directors decision to engage BKD was based on the breadth of
experience of BKD serving public companies and the service that BKD can provide
to HCFC. DFDs reports on the consolidated financial statements of HCFC for
the past two years did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. During the last two fiscal years and the interim period
through September 30, 2002, there have not been any disagreements between HCFC
and DFD on any matter of accounting principles or practices, consolidated
financial statement disclosure or audit scope or procedure. ITEM 8A. Controls and Procedures The Chief Executive Officer and the Chief Financial Officer have reviewed,
as of December 31, 2003, the effectiveness of HCFCs disclosure controls and
procedures that ensure that information relating to the Company required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported in a timely and proper manner. Based upon this review, the
Company believes that its disclosure controls and procedures were effective.
There were no significant changes in HCFCs internal controls over financial
reporting that occurred during HCFCs fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, HCFCs internal control
over financial reporting. -62-




---



##### 



PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16 (a) of the Exchange Act of the Registrant The information set forth under the caption ELECTION OF DIRECTORS and
SECTION 16 (a)  BENEFICIAL OWNERSHIP REPORTING COMPLIANCE of the Definitive
Proxy Statement of the Corporation dated March 26, 2004, filed with the United
States Securities and Exchange Commission (the Proxy Statement) is
incorporated by reference herein. HCFC has adopted a Code of Ethics that applies to all directors, executive
officers and employees of HCFC and its subsidiaries. The Code of Ethics has
been posted to HCFCs website at www.homecityfederal.com. Any amendment to or
waiver of the Code of Ethics will be posted on such website. The Board of Directors expects all directors to make every effort to
attend meetings of the shareholders of HCFC. All written communications
addressed to an individual director at the address of HCFC or one of the
offices of a subsidiary of HCFC will be forwarded directly to the director.
All written communications addressed to the Board of Directors at the address
of HCFC or one of the offices of a subsidiary of HCFC will be presented to the
full Board of Directors at a meeting of the Board of Directors. The Board of Directors of HCFC has determined that none of its directors
is an audit committee financial expert as defined in 17 C.F.R. Section
228.401(e). The Board of Directors intends to find an individual who would
meet that definition and agree to serve on the HCFC Board of Directors, as well
as satisfy the listing standards of The Nasdaq Stock Market and fulfill other
needs of the Board of Directors, but it has not yet identified a suitable
candidate. ITEM 10. Executive Compensation The information set forth under the caption COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS of the Definitive Proxy Statement is incorporated by
reference herein. ITEM 11. Security Ownership of Certain Beneficial Owners and Management The information set forth under the caption VOTING SECURITIES AND
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT of the Definitive Proxy
Statement is incorporated by reference herein. -63-




---



##### 



Equity Compensation Plan Information Number ofsecuritiesNumber of
    
    
    
    
    
    remaining availablesecurities to be
    
    
    
    
    
    for future issuanceissued upon
    
    Weighted-average
    
    under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding
    
    outstanding
    
    (excludingoptions, warrants
    
    options, warrants
    
    securitiesand rights
    
    and rights
    
    reflected in column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    120,506
    
    
    $
    12.22
    
    
    
    2,212
    (1)Equity compensation
plans not approved
by security holders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    120,506
    
    
    $
    12.22
    
    
    
    2,212
    (1)
   (1)
    
    Of the 2,212 shares, 916 remain available for awards of
options and 1,296 remain available for
awards under the Home City Financial Corporation Recognition and
Retention Plan, which may purchase the shares on the open market
rather than from unissued shares of HCFC. ITEM 12. Certain Relationships and Related Transactions and Related Stockholder Matters The information set forth under the caption COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS - Certain Transactions with Home City of the Definitive
Proxy Statement is incorporated by reference herein. ITEM 13. Exhibits and Reports on Form 8-K (a)
    
    Exhibits3.1
    
    
    Articles of Incorporation (Incorporated by reference)3.2
    
    
    Code of Regulations (Incorporated by reference)10.1
    
    
    Employment Agreement with Mr. Ulery (Incorporated by reference)10.2
    
    
    Employment Agreement with Mr. Stapleton10.3
    
    
    Home City Financial Corporation 1997 Stock Option and
Incentive Plan (Incorporated by reference)10.4
    
    
    Home City Financial Corporation Recognition and Retention Plan
and Trust Agreement (Incorporated by reference)10.5
    
    
    Deferred Compensation Plan10.6
    
    
    Asset Sale And Purchase Agreement (Incorporated by reference)21
    
    
    Subsidiaries31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification: CEO31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification: CFO32
    
    
    Section 1350 Certification99.1
    
    
    Proxy Statement (Incorporated by reference)99.2
    
    
    Safe Harbor Under the Private Securities Litigation Reform Act of 1995
 -64-




---



##### 



(b
    )
    
    Reports on Form 8-KA Form 8-K was filed for the event on October 28, 2003, regarding
the issuance of a News Release announcing financial results for the
third quarter of 2003.
 ITEM 14. Principal Accountant Fees and Services The following table presents fees paid by the Company to DFD and BKD for
the audit of the Companys annual financial statements for the years ended
December 31, 2003 and December 31, 2002, and fees billed for other services
rendered by DFD and BKD during those periods. Year ended
    
    Year endedType of fees
    
    December 31, 2003
    
    December 31, 2002Audit fees (1)
    
    $
    60,600
    
    
    $
    99,346Audit related fees (2)
    
    
    5,785
    
    
    
    9,310Tax fees (3)
    
    
    6,595
    
    
    
    All other fees (4)
    
    
    6,805
    
    
    
    2,714
   (1)
    
    Consists of fees for professional services for the audit of HCFCs annual
financial statements and review of financial statements included in HCFCs
Forms 10-QSB, and services that are normally provided in connection with
statutory or regulatory filings or engagements.(2)
    
    Consists of fees for consultation concerning financial accounting and
reporting standards related to the performance of the audit or review of
HCFCs financial statements.(3)
    
    Consists of fees for professional services with respect to tax compliance
and tax planning.(4)
    
    Consists of fees for organizational assessment in
2003 and design of accounting systems in 2002. The Audit Committee of HCFC pre-approves all services provided to HCFC by
its auditors, and all services provided to HCFC described in this Item 14 were
so pre-approved. -65-




---



##### 



SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. HOME CITY FINANCIAL CORPORATION/s/ J. William StapletonJ. William StapletonChief Executive Officer andChief Operating Officer
 In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities on the
dates indicated. /s/ Glenn W. Collier
    
    /s/ John D. ConroyGlenn W. Collier
    
    John D. ConroyDirector
    
    Chairman of the BoardMarch 24, 2004
    
    March 24, 2004Date
    
    Date/s/ James Foreman
    
    /s/ Terry A. HoppesJames Foreman
    
    Terry A. HoppesDirector
    
    DirectorMarch 24, 2004
    
    March 24, 2004Date
    
    Date/s/ J. William Stapleton
    
    /s/ Charles A. MihalJ. William Stapleton
    
    Charles A. MihalDirector
    
    Treasurer and Chief Financial OfficerChief Executive Officer
    
    (and principal accounting officer)and Chief Operating OfficerMarch 24, 2004
    
    March 24, 2004Date
    
    Date/s/ Douglas L. UleryDouglas L. UleryDirectorPresidentMarch 24, 2004Date
 -66-




---



##### 



INDEX TO EXHIBITS EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Articles of Incorporation
    
    Incorporated by reference to the
Registrants Quarterly Report on Form
10-QSB for the Quarter ended March 31,
1997 (the March 24, 1997, 10-QSB),
Exhibit 3(I).3.2
    
    Code of Regulations of Home City
Financial Corporation
    
    Incorporated by reference to the
definitive proxy statement of the
registrant filed on March 24, 2003,
Exhibit A10.1
    
    Employment Agreement with Mr. Ulery
    
    Incorporated by reference to the
December 31, 2002, 10-KSB, Exhibit
10.110.2
    
    Employment Agreement with
Mr. Stapleton10.3
    
    Home City Financial Corporation
1997 Stock Option and Incentive
Plan
    
    Incorporated by reference to the
Registrants 1997 Definitive Proxy
Statement dated September 19, 1997,
Exhibit A10.4
    
    Home City Financial Corporation
Recognition and Retention Plan and
Trust Agreement
    
    Incorporated by reference to the
Registrants 1997 Definitive Proxy
Statement dated September 19, 1997,
Exhibit B10.5
    
    Deferred Compensation Plan10.6
    
    Asset Sale And Purchase Agreement
    
    Incorporated by reference to Form 8-K
filed by Registrant on December 1,
2000, Exhibit 221
    
    Subsidiaries31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification: CEO31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification: CFO32
    
    Section 1350 Certification91.1
    
    Proxy Statement
    
    Incorporated by reference to the
definitive Proxy Statement of the
Registrant for the 2004 Annual Meeting
of Shareholders of Home City Financial
Corporation, filed with
the Securities and Exchange Commission.99.2
    
    Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995
 -67-