U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _________ TO __________
Commission file number - 0-21809
HOME CITY FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
OHIO 34-18394751
- ------------------------------ -----------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
63 West Main Street
Springfield, Ohio 45502
- ------------------------------ -----------------------------------
(Address of principal executive
offices) (Zip Code)
(937) 324-5736
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year, if
changed since last report)
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
- --
As of October 30, 1998, 904,590 shares of common stock of the Registrant were
outstanding. There were no preferred shares outstanding.
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
FORM 10-QSB
INDEX
===============================================================================
Page Number
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
September 30,1998, and December 31, 1997
Condensed consolidated statements of income and 4
comprehensive income -- Three and nine months ended
September 30,1998 and 1997
Condensed consolidated statements of cash flows 5
Nine months ended September 30,1998 and 1997
Notes to condensed consolidated financial 6
statements -- September 30,1998, and December 31, 1997
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED BALANCE SHEETS
================================================================================
(Dollars in thousands)
(Unaudited)
At September 30, At December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 1,343 $ 827
Interest-bearing demand deposits in other banks 372 591
Federal funds sold 0 100
------ -----
Total cash and cash equivalents 1,715 1,518
Time deposits with original maturities of 90 days or more 23 23
Investment securities available-for-sale, at fair value 3,509 5,018
Mortgage-backed and related securities available-for-sale,
at fair value 586 700
Loans, net 72,669 62,535
Accrued interest receivable 461 409
Properties and equipment 508 493
Cash surrender value of life insurance 1,114 1,085
Other assets 181 73
------- -----
TOTAL ASSETS $80,766 $71,854
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $58,181 $51,689
Advances from Federal Home Loan Bank 9,893 5,712
Other borrowings 1,100 0
Accrued interest payable 119 79
Advance payments by borrowers for taxes and insurance 48 71
Deferred income taxes 97 68
Other liabilities 303 231
----- -----
TOTAL LIABILITIES 69,741 57,850
Shareholders' equity:
Preferred shares of no par value; 1,000,000 shares
authorized; no shares issued and outstanding 0 0
Common shares of no par value; 5,000,000
authorized; 952,200 shares issued 0 0
Additional paid-in capital 6,015 9,150
Retained earnings, substantially restricted 6,495 6,037
Treasury stock, 47,610 common shares; at cost (711) (711)
Accumulated other comprehensive income 400 332
Common shares purchased by:
Employee Stock Ownership Plan (686) (686)
Recognition and Retention Plan (488) (118)
------ -----
TOTAL SHAREHOLDERS' EQUITY 11,025 14,004
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $80,766 $71,854
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
================================================================================
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 9 Months Ended
September 30 September 30 September 30 September 30
------------- ------------ ------------ -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $1,714 $1,370 $ 4,820 $ 3,837
Mortgage-backed securities 8 12 27 49
Investment securities 42 111 149 306
Federal funds sold 1 6 4 23
Time deposits 0 4 0 66
Interest-bearing demand
deposits in other banks 5 9 19 34
----- ----- ------ ------
TOTAL INTEREST INCOME 1,770 1,512 5,019 4,315
INTEREST EXPENSE:
Deposits 754 705 2,177 2,055
Advances from Federal Home Loan Bank
and other borrowings 159 66 367 197
------ ----- ------ ------
TOTAL INTEREST EXPENSE 913 771 2,544 2,252
------ ----- ----- ------
NET INTEREST INCOME 857 741 2,475 2,063
Provision for loan losses 21 8 53 28
------ ----- ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 836 733 2,422 2,035
NON-INTEREST INCOME:
Service charges on deposits 0 2 6 6
Life insurance 20 13 46 43
Gain (loss) on sale of securities, net 0 0 1 (19)
Other income 7 3 11 10
------ ------ ------ ------
TOTAL NON-INTEREST INCOME 27 18 64 40
------ ------ ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 230 171 712 513
Supplies, telephone and postage 12 10 36 35
Occupancy and equipment 40 29 93 81
FDIC deposit insurance 8 8 25 25
Data processing 25 24 74 59
Legal, accounting and examination 66 53 198 163
Franchise taxes 46 43 136 131
Other expenses 66 46 175 147
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE 493 384 1,449 1,154
------ ------ ------ ------
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 370 367 1,037 921
Federal income tax expense 120 124 335 284
------ ------ ------ ------
NET INCOME 250 243 702 637
Other comprehensive income 30 11 68 55
------ ------ ------ ------
TOTAL COMPREHENSIVE INCOME $ 280 $ 254 $ 770 $ 692
====== ====== ====== ======
Earnings per common share based on net income figures:
Basic earnings per common share $0.31 $0.29 $0.86 $0.74
Diluted earnings per common share $0.27 $0.27 $0.76 $0.69
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
(Dollars in thousands)
(Unaudited) (Unaudited)
9 Months Ended 9 Months Ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $702 $637
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 10 (12)
Provision for loan losses 53 28
Net loss on sale of available-for-sale securities 0 20
Depreciation 36 31
Deferred income taxes 20 (37)
Life insurance income, net of expenses (29) (7)
Employee Stock Ownership Plan compensation expense 31 0
FHLB stock dividend (26) (22)
Changes in operating assets and liabilities:
Increase in accrued interest receivable (52) (88)
Increase in other assets (108) (24)
Increase (decrease) in accrued interest payable 40 (1)
Increase (decrease) in other liabilities 72 (96)
--- ---
Net cash provided by operating activities 749 429
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (70) (6,983)
Proceeds from sales of available-for-sale securities 600 400
Proceeds from maturities of available-for-sale securities 1,134 4,136
Proceeds from sales of mortgage-backed securities,
available-for-sale 0 1,891
Principal collections on mortgage-backed securities,
available-for-sale 110 151
Net increase in loans (10,187) (9,281)
Purchases of properties and equipment (51) (45)
------ ------
Net cash used in investing activities (8,464) (9,731)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,492 2,073
Net increase in short-term FHLB advances 200 500
Proceeds from new long-term FHLB advances 4,375 0
Payments on long-term FHLB advances (394) (279)
Net decrease in advance payments by borrowers
for taxes and insurance (23) (19)
Purchase of common shares by RRP (370) 0
Purchase of FHLB stock (58) 0
Increase in other borrowings 1,100 0
Dividends paid (244) (224)
Special cash distribution (3,166) 0
Purchase of treasury shares 0 (711)
----- -----
Net cash provided by financing activities 7,912 1,340
----- -----
Net increase (decrease) in cash and cash equivalents 197 (7,962)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,518 9,839
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$1,715 $1,877
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
HOME CITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,1998, and December 31, 1997
(Unaudited)
================================================================================
NOTE 1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair presentation
of Home City Financial Corporation's ("Company" or "HCFC") financial condition
as of September 30,1998, and December 31, 1997, and the results of operations
for the three and nine months ended September 30,1998 and 1997, and the cash
flows for the nine months ended September 30,1998 and 1997. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB. The
results of operations for the nine months ended September 30,1998, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
(Dollars in thousands)
Nine months ended Six months ended
September 30, December 31,
1998 1997
---- ----
Balance, beginning of period $452 $445
Provision for loan losses 53 23
Charge-offs (40) (16)
Recoveries 13 0
---- ----
Balance, end of period $478 $452
==== ====
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at September 30,1998, consisted of eight short-term advances
totaling $ 4.2 million and ten long-term advances totaling $5.7 million from
the Federal Home Loan Bank of Cincinnati ("FHLB"). The advances are
collateralized by all shares of FHLB stock owned by the Home City Federal
Savings Bank of Springfield ("Bank") and by the Bank's qualified mortgage loan
portfolio.
<PAGE>
Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At September 30, 1998 At December 31, 1997
Range of Weighted- Range of Weighted
interest average interest average
Amount rates interest rate Amount rates interest rates
------ ----- ------------- ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Due within
one year
$4,200 5.27%-5.65% 5.47% $2,000 5.87% 5.87%
After one but
within five
years $2,738 5.43%-6.30% 5.54% $ 538 5.85%-6.30% 6.10%
After five years $2,955 3.30%-8.35% 6.46% $3,174 3.30%-8.35% 6.51%
</TABLE>
NOTE 4. OTHER BORROWINGS
Other borrowerings at September 30, 1998, consisted of a short-term variable
rate commercial note which HCFC obtained from a local bank. The interest rate
is indexed to prime and interest payments are to be made monthly. The
principal balance is due at maturity.
NOTE 5. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at September 30,1998.
<TABLE>
<CAPTION>
(Dollars in thousands)
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Total Risk-Based Capital
(To Risk-Weighted Assets) $11,461 21.8% $4,212 8.0% $5,265 10.0%
Tier I Capital
(To RisK-Weighted Assets) 11,578 22.0% N/A N/A 3,159 6.0%
Tier I Capital (1)
(To Total Assets) 11,578 14.4% 2,418 3.0% 4,031 5.0%
Tangible Capital
(To Total Assets) 11,578 14.4% 1,209 1.5% N/A N/A
(1) Under the Prompt Corrective Action Provisions of the Office of Thrift
Supervision, the required ratio could be 4% based upon the examination rating
of each financial institution.
</TABLE>
<PAGE>
NOTE 6. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was adopted by HCFC as of December 31, 1997. Common stock equivalents include
shares held by the Company's Employee Stock Ownership Plan ("ESOP") that are
committed for release, shares awarded but not released under the Company's
Recognition and Retention Plan ("RRP"), and stock options granted under the
Stock Option Plan ("SOP"). Following is a reconciliation of the numerators
and denominators of the basic and diluted EPS calculations.
For the Three Months Ended
September 30, 1998
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to
common shareholders $250,128 812,230 $0.31
Effect of dilutive securities:
RRP shares 0 23,802
ESOP shares 0 68,558
Stock options 0 6,434
------- -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $250,128 911,024 $0.27
======== ======= =====
For the Three Months Ended
September 30, 1997
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to
common shareholders $243,054 839,507 $0.29
Effect of dilutive securities:
RRP shares 0 0
ESOP shares 0 76,176
Stock options 0 0
-------- --------
Diluted EPS
Income available to
common shareholders +
assumed conversions $243,054 915,683 $0.27
======= ======= ====
<PAGE>
For the Nine Months Ended
September 30, 1998
Income Shares
(Numerator) (Denominator) Amount
Basic EPS
Income available to
common shareholders $701,926 819,641 $0.86
Effect of dilutive securities:
RRP shares 0 23,802
ESOP shares 0 68,558
Stock options 0 10,435
------ -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $701,926 922,436 $0.76
======= ======= =====
For the Nine Months Ended
September 30, 1997
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to
common shareholders $637,585 854,552 $0.74
Effect of dilutive securities:
RRP shares 0 0
ESOP shares 0 76,176
Stock options 0 0
------- ------ -----
Diluted EPS
Income available to
common shareholders +
assumed conversions $637,585 930,728 $0.69
======== ======= =====
NOTE 7. COMPREHENSIVE INCOME
HCFC adopted SFAS No. 130, "Reporting Comprehensive Income", effective January
1, 1998, which establishes standards for reporting comprehensive income and
its components (revenues, expenses, gains and losses). Components of
comprehensive income are net income and all other non-owner changes in
equity. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
HCFC has chosen to disclose comprehensive income. Components of comprehensive
income are displayed net of income taxes. The following table sets forth the
related tax effects allocated to each element of comprehensive income for the
three and nine months ended September 30,1998 AND 1997:
<PAGE>
(Dollars in thousands)
Three months ended September 30, 1998
-------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $45 $(15) $30
Less: reclassification adjustment
for (gains) losses realized in
net income 0 0 0
-- -- --
Net unrealized gains (losses) 45 (15) 30
-- -- --
Other comprehensive income $45 $(15) $30
== ===== ===
(Dollars in thousands)
Three months ended September 30, 1997
-------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $18 $(7) $11
Less: reclassification adjustment
for (gains) losses realized in
net income 0 0 0
--- --- ---
Net unrealized gains (losses) 18 (7) 11
--- --- ---
Other comprehensive income $18 $(7) $11
==== ==== ====
(Dollars in thousands)
Nine months ended September 30, 1998
------------------------------------
Tax
Before Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $108 $(39) $69
Less: reclassification adjustment
for (gains) losses realized in
net income (2) 1 (1)
--- --- ---
106 (38) 68
--- --- ---
Net unrealized gains (losses) $106 $(38) $68
==== ==== ====
<PAGE>
(Dollars in thousands)
Nine months ended September 30, 1997
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $65 $(23) $42
Less: reclassification adjustment
for (gains) losses realized in
net income 19 (6) 13
Net unrealized gains (losses) 84 (29) 55
--- --- --
Other comprehensive income $84 $(29) $55
=== ===== ===
The following table sets forth the components of accumulated other
comprehensive income for the three and nine months ended September 30, 1998
and 1997:
(Dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Beginning balance $370 $260 $332 $216
Unrealized gains (losses) on securities, net 30 11 68 55
--- ---- ---- ----
Ending balance $400 $271 $400 $271
==== ==== ==== ====
NOTE 8. RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period's presentation. The
reclassifications have no effect on net income.
<PAGE>
HOME CITY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Safe Harbor Clause
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing itself of the protection of such safe harbor
with respect to all such forward-looking statements. These forward-looking
statements, which are included in Management's Discussion and Analysis,
describe future plans or strategies and include the Company's expectations of
future financial results. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward-looking
statements. The Company's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in
the Company's market area and the country as a whole, loan delinquency rates,
and changes in federal and state regulations. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.
General
In September 1996, the Board of Directors of Home City Federal Savings
Bank of Springfield ("Bank") adopted a Plan of Conversion ("Plan") whereby the
Bank would convert to the stock form of ownership, followed by the issuance of
all the Bank's outstanding stock to a newly formed holding company, Home City
Financial Corporation ("Company"). Pursuant to the Plan, the Company offered
common shares for sale to certain depositors of the Bank and members of the
community. The conversion was completed on December 30, 1996, and resulted in
the issuance of 952,200 common shares of the Company which, after
consideration of offering expenses totaling approximately $447,000 and
$762,000 in shares purchased by the ESOP ("Employee Stock Ownership Plan"),
resulted in net capital proceeds of $8.3 million. Condensed consolidated
financial statements of the Company are presented herein. Future references
are made either to the Company or the Bank as applicable.
The Company is a unitary savings and loan holding company whose
activities are primarily limited to holding the stock of the Bank. The Bank
conducts a general banking business in west central Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and non- residential purposes.
The Bank 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 Bank's profitability is significantly dependent
on net interest income which is the difference between interest income
generated from interest-earning assets (i.e., loans and investments) and the
interest expense paid on interest-bearing liabilities (i.e., customer deposits
and borrowed funds). Net interest income is affected by the relative amount
of interest-earning assets and interest-bearing liabilities and interest
received or paid on these balances. The level of interest rates paid or
received by the Bank can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside
of management control.
Earnings per common share were computed by dividing net income by the
weighted-average number of shares outstanding for the three- and nine-month
periods ended September 30,1998 and 1997. Unreleased ESOP shares are not
considered to be outstanding shares for the purpose of determining the
weighted-average number of shares used in the earnings per common share
calculation.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
<PAGE>
The Bank is regulated by the Office of Thrift Supervision ("OTS") and its
deposits are insured up to applicable limits under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the FHLB, conducting its business through its
office located in Springfield, Ohio. The primary market area of the Bank is
Clark County, Ohio, and contiguous counties.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 redefines how operating segments are determined
and requires disclosure of certain financial and descriptive information about
the Company's operating segments. This statement supercedes SFAS No. 14,
"Financial Reporting for Segments of Business Enterprises." The new standard
becomes effective for years beginning after December 15, 1997, and requires
that comparative information from earlier periods be restated to conform to
the requirements of this standard. The adoption of this statement is not
material to the Company.
Year 2000 Readiness
Because the Bank's operations rely extensively on computer systems, the
Bank is addressing problems associated with the possibility that computer
systems will not recognize the year 2000 ("Y2K") correctly. The Bank has
developed an Action Plan Year 2000, which was presented to the Board of
Directors in the middle of 1997. The Board of Directors appointed a Year 2000
Committee, which reports to the Board of Directors monthly.
The Bank relies primarily on third-party vendors for its computer output
and processing, as well as other significant functions and services, such as
securities safekeeping services, securities pricing information and wire
transfers. The Year 2000 Committee is working with the vendors to assess
their Y2K readiness. Based upon an initial assessment, the Board of Directors
believes that with planned modifications to existing software and hardware and
planned conversions to new software and hardware, the third-party vendors are
taking the appropriate steps to ensure that critical systems will function
properly. The planned modifications and conversions should be completed and
tested by June 30, 1999.
All personal computers ("PCs") and related software throughout the Bank
have been inventoried and tested for Y2K capabilities. Those PCs identified
as not being Y2K compatible have been replaced. The Bank has estimated that
the cost for new hardware and software will be approximately $38,000.
If the modifications and conversions by both third-party vendors and the
Bank are not completed on a timely basis or if they fail to function properly,
the operations and financial condition of the Company could be materially
adversely affected. The Bank is developing contingency plans for continued
operations in the event of system failure.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to prepare properly
for Y2K, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. The Bank is assessing such risks
among its customers. The Company could also be materially adversely affected
if other third parties, such as governmental agencies, clearing houses,
telephone companies, utilities and other service providers fail to prepare
properly. The Bank is therefore attempting to assess these risks and take
action to minimize their effect.
Changes in Financial Condition
At September 30, 1998, the consolidated assets of the Company totaled
$80.8 million, an increase of $8.9 million, or 12.40%, from $71.9 million at
December 31, 1997. The increase in total assets was primarily the result of a
$10.1 million increase in loans receivable funded primarily by a $6.5 million
increase in deposits and $4.2 million increase in advances from the FHLB.
<PAGE>
Net loans receivable increased by $10.1 million, or 16.21%, to $72.7
million at September 30,1998, compared to $62.5 million at December 31, 1997.
The increase was primarily in the non-residential real estate and commercial
loan portfolio.
Investment securities decreased $1.5 million, or 30.07%, from $5.0
million at December 31, 1997, to $3.5 million at September 30,1998. The
decrease was primarily the result of scheduled maturities of short-term
investments being rolled into higher earning non-residential real estate and
commercial loan production.
During the nine months ended September 30,1998, $110,000 of principal
payments were received on mortgage- backed and related securities ("MBS"). No
other transactions, purchases or sales, occurred during the period.
Deposit liabilities increased $6.5 million, or 12.56%, from $51.7 million
at December 31, 1997, to $58.2 million at September 30,1998. Management
attributes the increase to the maintenance of competitive rates in the Bank's
market area. Interest credited on accounts also contributed to the
increase.
Advances from the FHLB increased $4.2 million, or 73.20%, from $5.7
million at December 31, 1997, to $9.9 million at September 30,1998. The funds
obtained were utilized to support the increased loan demand.
Other borrowing of $1.1 million was also initiated to assist in funding
of the special cash distribution to shareholders in June 1998.
Total shareholders' equity decreased $3.0 million, or 21.27%, from $14.0
million at December 31, 1997, to $11.0 million at September 30,1998. This
decrease was primarily the result of a special cash distribution to
shareholders of $3.2 million, offset by $770,000 in earnings for the first
nine months of fiscal year 1998 and a $68,000 increase in the unrealized gains
on securities available-for-sale together with the $370,000 purchase of common
shares by the RRP Trust and dividends paid of $244,000 during the nine months
ended September 30,1998.
The Bank's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. Principal
sources of funds are deposits, loan and mortgage-backed securities repayments,
maturities of securities and other funds provided by operations. The Bank
also has the ability to borrow from the FHLB and other local financial
institutions. 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. The Bank 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 investments 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, the Bank monitors
the capital of such institutions to ensure that such deposits do not expose
the Bank to undue risk of loss.
OTS regulations presently require the Bank to maintain an average daily
balance of liquid assets, which may include, but are not limited to,
investments in United States Treasury, federal agency obligations and other
investments having maturities of five years or less in an amount equal to 4%
of the sum of the Bank's average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity
requirement, which may be changed from time to time by the OTS to reflect
changing economic conditions, is intended to provide a source of relatively
liquid funds upon which the Bank may rely if necessary to fund deposit
withdrawals or other short-term funding needs. At September 30,1998, the
Bank's regulatory liquidity ratio was 4.32%. At such date, the Bank had
commitments to originate loans totaling $7.6 million and no commitments to
purchase or sell loans. The Bank 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.
The Bank 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. See "Note 5 - Regulatory Capital." The Bank exceeded
all of its capital requirements at September 30,1998.
<PAGE>
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 stockholders' 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 3% of the
association's total assets.
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 the Bank includes a general
loan loss allowance of $478,000 at September 30,1998.
At September 30,1998, the Bank had no material commitments for capital
expenditures.
On February 23, 1998, the Board of Directors of the Company declared a
quarterly cash dividend in the amount of $0.09 per share to each shareholder
of record on March 9, 1998, to be paid on March 16, 1998. On May 27, 1998,
the Board of Directors of the Company declared a quarterly cash dividend in
the amount of $0.09 per share to each shareholder of record on May 29, 1998,
to be paid on June 15, 1998. On July 27, 1998, the Board of Directors of the
Company declared a quarterly cash dividend in the amount of $0.09 per share to
each shareholder of record on August 31, 1998, to be paid on September 15,
1998.
On April 22, 1998, the Board of Directors of the Company declared a
special cash distribution in the amount of $3.50 per share to each shareholder
of record on May 29, 1998, to be paid on June 15, 1998. Management of HCFC
expects that at least part of the distribution will be a non-taxable return of
capital, although the exact amount of the distribution that could be
considered non-taxable cannot be confirmed until the Company's operating
results for the 1998 tax year have been determined.
Results of Operations
Comparison of Three Months Ended September 30, 1998 and 1997
General. Net income increased $7,000, or 2.89%, from $243,000 for the
three months ended September 30,1997, to $250,000 for the three months ended
September 30,1998. This increase was primarily attributed to an increase in
net interest income and partially offset by increases in non-interest expense.
Interest Income. The $8.9 million increase in average earning assets
contributed to an increase in interest income of $258,000, or 17.06%, for the
three months ended September 30,1998 compared to 1997. The increase was
attributed to the additional loan income of $344,000 resulting from an
increase in loans receivable, which was partially offset by a decrease of
$86,000 in interest income on other earning assets. Of the overall increase
in interest income, $213,000 is attributable to earning asset volume increases
and $45,000 is attributable to rate increases.
Interest Expense. Interest expense on deposit liabilities increased
$49,000 for the three months ended September 30,1998, as compared to the same
period in 1997. Although total average deposits increased by $5.0 million
comparing September 30,1998 to 1997, the average interest paid on
interest-bearing deposits decreased by 15 basis points from 5.57% for the
three months ended September 30,1997, to 5.42% for the same period ended
September 30,1998. The average balance of FHLB advances increased from $4.1
million for the three-month period ended September 30,1997, to $9.5 million
for the same period ended September 30,1998, resulting in an increase in
interest on FHLB advances of $73,000 for the three months ended September
30,1998, compared to the same period ended September 30,1997. Of the overall
increase in interest expense, $122,000 is attributable to interest costing
liability volume increases and $20,000 is attributable to rate increases.
Provision for Loan Losses. The provision for loan losses was $21,000 and
there were net recoveries of $10,000 during the three months ended September
30,1998, compared to no provision and charge offs of $11,000 during the three
months ended September 30,1997. The provision was increased based upon the
results of the ongoing loan reviews and composition of the loan portfolio.
<PAGE>
Non-Interest Income. Non-interest income increased by $9,000 for the
three months ended September 30,1998 compared to the same period in 1997. The
majority of the increase, $7,000, was related to income from life insurance
contracts.
Non-Interest Expense. Non-interest expense increased $109,000, or
28.39%, to $493,000 for the three months ended September 30,1998, from
$384,000 in the comparable period in 1997. Of this increase, $59,000 was
attributable to an increase in compensation and benefit expense in 1998,
reflecting the addition of staff related to the non-residential real estate
and commercial lending function and an increase in compensation expense for
the RRP and the ESOP due to increases in the average stock price. The
annualized ratio of non-interest expense to average total assets was 2.48% and
2.20% for the three months ended September 30,1998 and 1997, respectively.
Income Taxes. The provision for income taxes decreased $4,000 for the
three months ended September 30,1998, compared with the prior year, primarily
as a result of composition of taxable and non-taxable income for the quarter.
Comparison of Nine Months Ended September 30,1998 and 1997
General. Net income increased $65,000, or 10.20%, from $637,000 for the
nine months ended September 30,1997, to $702,000 for the nine months ended
September 30,1998. This increase was primarily attributed to an increase in
net interest income and non-interest income partially offset by increases in
non-interest expense.
Interest Income. The $7.5 million increase in average earning assets
contributed to an increase in interest income of $704,000, or 16.32%, for the
nine months ended September 30,1998 compared to 1997. The increase was
attributed to the additional loan income of $983,000 resulting from an
increase in loans receivable which was offset by a decrease of $279,000 in
interest income on other earning assets. Of the overall increase in interest
income, $501,000 is attributable to earning asset volume increases and
$203,000 is attributable to rate increases.
Interest Expense. Interest expense on deposit liabilities increased
$122,000 for the nine months ended September 30,1998, as compared to the same
period in 1997. Although total average deposits increased by $4.4 million
comparing September 30,1998 to 1997, the average interest paid on
interest-bearing deposits decreased by 15 basis points from 5.54% for the nine
months ended September 30,1997, to 5.39% for the same period ended September
30,1998. The average balance of FHLB advances increased from $4.1 million for
the nine-month period ended September 30,1997, to $7.7 million for the same
period ended September 30,1998, resulting in an increase in interest on FHLB
advances of $145,000 for the nine months ended September 30,1998, compared to
the same period ended September 30,1997. Of the overall increase in interest
expense, $337,000 is attributable to interest costing liability volume
increases and a negative $45,000 is attributable to rate decreases.
Provision for Loan Losses. The provision for loan losses was $53,000 and
there were net charge-offs of $28,000 during the nine months ended September
30,1998, compared to a $28,000 provision and recoveries of $37,000 during the
nine months ended September 30,1997. The provision was increased based upon
the results of the ongoing loan reviews and composition of the loan portfolio.
Non-Interest Income. Non-interest income increased $24,000, or 60.00%,
to $64,000 for the nine months ended September 30,1998. The increase was
primarily attributable to a $19,000 loss recognized on the sale of
mortgage-backed securities realized in the nine months ended September
30,1997.
Non-Interest Expense. Non-interest expense increased $295,000, or
25.56%, to $1.4 million for the nine months ended September 30,1998, from $1.1
million in the comparable period in 1997. Of this increase, $199,000 was
attributable to an increase in compensation and benefit expense in 1998,
reflecting the addition of staff related to the non-residential real estate
and commercial lending function and an increase in compensation expense for
the RRP and the ESOP due to increases in the average stock price. Legal,
accounting and examination expenses increased from $163,000 for the nine
months ended September 30,1997, to $198,000 for the same nine months ended
September 30,1998. The annualized ratio of non-interest expense to average
total assets was 2.48% and 2.23% for the nine months ended September 30,1998
and 1997, respectively.
<PAGE>
Income Taxes. The provision for income taxes increased $51,000 for the
nine months ended September 30,1998, compared with the prior year, primarily
as a result of higher income for the nine-month period.
================================================================================
<PAGE>
HOME CITY FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule, September 30,1998
b. No report on Form 8-K was filed during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1933, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HOME CITY FINANCIAL CORPORATION
Date: November 15, 1998 /s/ Douglas L. Ulery
----------------- -----------------------------------
Douglas L. Ulery
President
Date: November 15, 1998 /s/ Charles A. Mihal
----------------- -----------------------------------
Charles A. Mihal
Treasurer and Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997, and
the related Consolidated Statements of Income and Comprehensive Income for the
three and nine months ended September 30, 1998 and 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001022103
<NAME> HOME CITY FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,343
<INT-BEARING-DEPOSITS> 395
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,095
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 73,147
<ALLOWANCE> 478
<TOTAL-ASSETS> 80,766
<DEPOSITS> 58,181
<SHORT-TERM> 5,300
<LIABILITIES-OTHER> 567
<LONG-TERM> 5,693
0
0
<COMMON> 0
<OTHER-SE> 11,025
<TOTAL-LIABILITIES-AND-EQUITY> 80,766
<INTEREST-LOAN> 1,714
<INTEREST-INVEST> 50
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<INTEREST-TOTAL> 1,770
<INTEREST-DEPOSIT> 754
<INTEREST-EXPENSE> 913
<INTEREST-INCOME-NET> 857
<LOAN-LOSSES> 21
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<EXPENSE-OTHER> 493
<INCOME-PRETAX> 370
<INCOME-PRE-EXTRAORDINARY> 250
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 4.46
<LOANS-NON> 237
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 271
<ALLOWANCE-OPEN> 447
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</TABLE>
