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 MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _________ TO __________
Commission file number - 0-21809
HOME CITY FINANCIAL CORPORATION
-------------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 34-1839475
------ ----------
(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 April 30, 1999, 859,390 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
March 31, 1999, and December 31, 1998
Condensed consolidated statements of income -- 4
Three months ended March 31, 1999 and 1998
Condensed consolidated statements of changes in 5
shareholders' equity --Three months ended March 31,
1999
Condensed consolidated statements of cash flows -- 6
Three months ended March 31, 1999 and 1998
Notes to condensed consolidated financial 7
statements -- March 31,1999, and December 31, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
At March 31, At December 31,
------------ ---------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 1,147 $ 1,147
Interest-bearing demand deposits in other banks 547 763
Federal funds sold 0 0
--------- ---------
Total cash and cash equivalents 1,694 1,910
Time deposits with original maturities of 90 days or more 24 24
Investment securities available-for-sale, at fair value 2,467 3,091
Mortgage-backed securities available-for-sale, at fair value 536 559
Loans, net 81,029 76,986
Stock in Federal Home Loan Bank 788 601
Accrued interest receivable 457 440
Properties and equipment 584 584
Cash surrender value of life insurance 1,136 1,129
Other assets 99 31
-------- --------
TOTAL ASSETS $ 88,814 $ 85,355
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 62,085 $ 60,499
Federal Home Loan Bank Advances 15,021 11,571
Notes payable 300 1,800
Accrued interest payable 147 115
Advance payments by borrowers for taxes and insurance 53 74
Deferred income 75 112
Other liabilities 219 314
-------- -------
TOTAL LIABILITIES $ 77,900 $ 74,485
Shareholders' equity
Preferred shares, no par value; 1,000,000 shares
authorized; none issued 0 0
Common shares, no par value; 5,000,000 shares
authorized; 952,200 shares issued 0 0
Additional paid-in capital 6,028 6,013
Retained earnings, substantially restricted 6,791 6,658
Treasury shares, at cost (1,304) (1,304)
Accumulated other comprehensive income 455 517
Common shares purchased by:
Employee Stock Ownership Plan (609) (609)
Recognition and Retention Plan (447) (405)
------- --------
TOTAL SHAREHOLDERS' EQUITY 10,914 10,870
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 88,814 $ 85,355
======= ========
</TABLE>
See accompanying notes
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 3 Months Ended
March 31, March 31,
--------- ---------
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans $ 1,773 $ 1,502
Mortgage-backed securities 8 10
Federal funds sold 0 1
Investment securities 45 60
Interest-bearing deposits 0 7
-------- --------
TOTAL INTEREST INCOME 1,826 1,580
INTEREST EXPENSE
Deposits 769 697
Borrowed funds 199 95
-------- --------
TOTAL INTEREST EXPENSE 968 792
-------- --------
NET INTEREST INCOME 858 788
Provision for loan losses 17 12
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 841 776
NONINTEREST INCOME
Service charges on deposits 3 3
Life insurance 13 13
Other income 5 2
-------- --------
TOTAL NONINTEREST INCOME 21 18
-------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 286 251
Supplies, telephone and postage 18 11
Occupancy and equipment 43 25
FDIC deposit insurance 9 8
Data processing 36 23
Legal, accounting and examination 54 71
Franchise taxes 45 45
Other expenses 48 48
-------- --------
TOTAL NONINTEREST EXPENSE 539 482
-------- --------
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 323 312
Federal income tax expense 104 100
-------- --------
NET INCOME $ 219 $ 212
======== ========
Earnings per common share - basic $0.28 $0.26
Earnings per common share - diluted $0.25 $0.23
</TABLE>
See accompanying notes
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands)
Number of shares Amounts
---------------- -------
Common Commmon
shares shares Additional
Common Treasury purchased purchased paid-in Retained
Stock Stock by ESOP by RRP capital earnings
----- ----- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 952,200 (47,610) (68,558) (6,800) $9,150 $6,037
Net income 951
Other comprehensive income
Change in
unrealized
gain (loss) on
securities
available-for-sale, net of
deferred income
tax of $97
Comprehensive income
Purchase of treasury stock (45,200)
Purchase of common shares
by recognition and
retention plan (17,002)
Shares earned under
employee stock
ownership plan 7,618 36
Shares earned on recognition
and retention plan 4,761 (7)
Return of capital
($3.50 per share) (3,166)
Dividends declared
($.37 per share) (330)
------- ------- ------- ------- ------ -----
December 31, 1998 952,200 (92,810) (60,940) (19,041) 6,013 6,658
Accumu-
ulated
other Common Common
compre- shares shares Compre-
Treasury hensive purchased purchased hensive
stock income by ESOP by RRP income
----- ------ ------- ------ ------
December 31, 1997 ($711) $332 ($686) ($118)
Net income $ 951
Other
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $97
Comprehensive income 185 185
------
$1,136
======
Purchase of tresury stock 593
Purchse of common shares
by recognition and
retention plan (370)
Shares earned under
employee stock
ownership plan 77
Shares earned on recognition
and retention plan 83
Return of capital
($3.50 per share)
Dividends declared
($.37 per share)
------ --- ----- -----
December 31, 1998 (1,304) 517 (609) (405)
Common Common
shares shares Additional
Common Treasury purchased purchase paid-in Retained
stock stock by ESOP by RRP capital earnings
----- ----- ------- ------ ------- --------
Net income
Other comrpehensive income 219
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $33
Comprehensive income
Purchase of common shares
by recognition and
retention plan 2,500 15
Shares earned under
employee stock
ownership plan
Dividends declared
($.10 per share) 86
------- -------- ------- -------- -------- ------
March 31, 1999 952,200 (92,810) (60,940) (21,541) ($6,028) $6,791
======= ======== ======== ======== ======== ======
Accum-
ulated
other Common Common
compre- shares shares Compre-
Treasury hensive purchased purchased hensive
Stock income by ESOP by RRP income
----- ------ ------- ------ ------
Net income (1,304) 517 (609) (405)
Other comprehensive income $219
Change inunrealized
gain (loss) on securities
available-for-sale, net of
deferred income
tax of $33 (62) 62
----
Comprehensive income $157
====
Purchase of common shares
by recognition and
retention plan (42)
Shares earned under
employee stock
ownership plan
Dividends declared
($.10 per share)
------- ---- ----- -----
March 31, 1999 ($1,304) $455 ($609) ($447)
======= ==== ===== ======
</TABLE>
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 3 Months Ended
March 31, March 31,
--------- ---------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 219 $ 212
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 1 3
Provision for loan losses 17 12
Depreciation 16 14
Deferred income taxes 7 1
Life insurance income, net of expenses (7) (7)
Employee Stock Ownership Plan compensation expense 15 15
Recognition and Retention Plan compensation expense 18 30
FHLB stock dividends (12) (8)
Net change in:
Accrued interest receivable (17) 4
Accrued interest payable 32 21
Other assets (68) (38)
Other liabilities (95) (25)
-------- --------
Net cash provided by operating activities 126 234
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale 0 (70)
Proceeds from maturities of securities available-for-sale 500 1,000
Collections on mortgage-backed securities available-for-sale 22 41
Net increase in loans (4,060) (5,199)
Purchases of properties and equipment (16) (8)
Purchase of FHLB stock (175) 0
--------- ---------
Net cash used in investing activities (3,729) (4,236)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,586 3,856
Net increase (decrease) in short-term FHLB advances (400) 200
Proceeds from new long-term FHLB advances 4,000 375
Payments on long-term FHLB advances (150) (99)
Net decrease in advance payments by borrowers
for taxes and insurance (21) (20)
Payments on notes payable (1,500) 0
Purchase of common shares by Recognition and Retention Plan (42) 0
Cash dividends paid (86) (81)
-------- --------
Net cash provided by financing activities 3,387 4,231
Net increase (decrease) in cash and cash equivalents (216) 229
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,910 1,518
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,694 $ 1,747
======== ========
</TABLE>
See accompanying notes
<PAGE>
HOME CITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND DECEMBER 31, 1998
(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 position
as of March 31, 1999 and 1998, and the consolidated results of operations and
the cash flows for the three months ended March 31, 1999 and 1998. 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 three months ended March 31, 1999, 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)
Three
months ended Year ended
March 31, December 31,
--------- ------------
1999 1998
---- ----
Balance, beginning of period $ 486 $ 452
Provision for loan losses 17 61
Charge-offs (10) (40)
Recoveries 0 13
------ ------
Balance, end of period $ 493 $ 486
====== ======
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 1999, consisted of five short-term advances totaling
$2.6 million and fourteen long-term advances totaling $12.4 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 March 31, 1999 At December 31, 1998
Range of Weighted- Range of Weighted-
interest average interest average
Amount rates interest rate Amount rates interest rate
------ ----- ------------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
Due within
one year $2,626 4.99% 4.99% $1,526 5.02% 5.02%
After one but
within five
years $2,433 4.64% - 8.35% 5.47% $2,524 4.64% - 8.35% 5.49%
After five
years $9,961 3.30% - 8.35% 5.40% $7,521 3.30% - 8.35% 5.58%
</TABLE>
NOTE 4. NOTES PAYABLE
Notes payable at March 31, 1999, 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 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 March 31, 1999.
<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> <C>
Total Risk-Based Capital
(To Risk-Weighted Assets) $10,805 17.8% $4,850 8.0% $6,063 10.0%
Tier I Capital
(To Risk-Weighted Assets) 10,312 17.0% N/A N/A 3,638 6.0%
Tier I Capital
(To Total Assets) 10,312 11.6% 2,670 4.0% 4,451 5.0%
Tangible Capital
(To Total Assets) 10,312 11.6% 1,335 1.5% N/A N/A
</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.
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, 1999
--------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
---------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $219,344 778,465 $0.28
Effective of dilutive securities
RRP shares 0 19,985
ESOP shares 0 60,940
Stock options 0 24,164
------- -------
Diluted EPS
Income available to common shareholders +
assumed conversions $219,344 883,554 $0.25
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, 1998
--------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
---------- ------------ ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $211,864 829,232 $0.26
Effective of dilutive securities
RRP shares 0 23,802
ESOP shares 0 68,558
Stock options 0 9,586
------- -------
Diluted EPS
Income available to common shareholders +
assumed conversions $211,864 931,178 $0.23
======== ======= =====
</TABLE>
<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. See Exhibit 99.2 attached hereto,
"Safe Harbor Under Private Securities Litigation Reform Act of 1995," which is
incorporated by reference.
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--month periods
ended March 31,1999 and 1998. ESOP shares subject to a loan pledge agreement
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.
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.
<PAGE>
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 its 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 have been substantially
completed and tested.
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 total cost for new hardware, software and related expenses will be
approximately $50,000. As of March 31, 1999, $42,000 of expenses has been
incurred.
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 has been developing contingency plans for
continued operations in the event of system failure. The final review of
contingency plan(s) is scheduled to occur in late May, 1999.
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.
The Bank has joined a nationwide "Ask Us About Y2K" program aimed at
repairing a component of the nation's Year 2000 computer problem that
programmers alone can't fix -- consumer confidence. The program is part of an
ongoing educational effort launched by America's Community Bankers ("ACB"), a
national trade association, to help explain the Y2K date change problem and
steps the thrift industry is taking to cure it. The "Ask Us About Y2K"
program is to encourage Bank customers to bring their Year 2000 financial
questions and concerns into the Bank.
Changes in Financial Condition
At March 31, 1999, the consolidated assets of the Company totaled $88.8
million, an increase of $3.5 million, or 4.05%, from $85.3 million at December
31, 1998. The increase in total assets was primarily the result of a $4.0
million increase in loans receivable funded primarily by a $3.5 million
increase in advances from the FHLB and a $1.6 million increase in deposits.
Net loans receivable increased by $4.0 million, or 5.25%, to $81.0
million at March 31,1999, compared to $77.0 million at December 31, 1998. The
increase was primarily in the non-residential real estate and commercial loan
portfolio.
Investment securities decreased $624,000, or 20.19%, from $3.1 million at
December 31, 1998, to $2.5 million at March 31,1999. 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 three months ended March 31,1999, $22,000 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 $1.6 million, or 2.62%, from $60.5 million
at December 31, 1998, to $62.1 million at March 31,1999. 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.
<PAGE>
Advances from the FHLB increased $3.5 million, or 29.82%, from $11.6
million at December 31, 1998, to $15.0 million at March 31,1999. The funds
obtained were utilized to support the increased loan demand.
Notes payable of $1.5 million were repaid. These had been initiated to
assist in funding of the special cash distribution to shareholders in June
1998.
Total shareholders' equity remained relatively constant increasing
$44,000, or 0.40%, from December 31, 1998, to March 31,1999. This increase
was primarily the result of $219,000 in earnings for the first three months of
fiscal year 1999 and a $15,000 increase in additional paid-in capital offset
by the $86,000 cash dividend payment together with the unrealized losses on
securities available-for-sale, $62,000, and the $42,000 purchase of common
shares by the RRP Trust during the three months ended March 31,1999.
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 March 31, 1999, the Bank's
regulatory liquidity ratio was 4.99%. At such date, the Bank had commitments
to originate loans totaling $5.3 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 March 31,1999.
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, except for associations that meet certain
requirements, to maintain core capital of at least 4% of the association's
adjusted 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 $493,000 at March 31, 1999.
At March 31,1999, the Bank had no material commitments for capital
expenditures.
On February 18, 1999, the Board of Directors of the Company declared a
quarterly cash dividend in the amount of $0.10 per share to each shareholder
of record on March 1, 1999, paid on March 15, 1999.
<PAGE>
Results of Operations
Comparison of Three Months Ended March 31, 1999 and 1998
General. Net income increased $7,000, or 3.30%, from $212,000 for the
three months ended March 31,1998, to $219,000 for the three months ended March
31,1999. This increase was primarily attributed to an increase in net
interest income and partially offset by increases in non-interest expense.
Interest Income. The $12.5 million increase in average earning assets
contributed to an increase in interest income of $246,000, or 15.57%, for the
three months ended March 31,1999 compared to 1998. The increase was
attributed to the additional loan income of $271,000 resulting from an
increase in loans receivable, which was partially offset by a decrease of
$25,000 in interest income on other earning assets. Of the overall increase
in interest income, $298,000 is attributable to earning asset volume increases
offset by a decrease of $52,000 attributable to rate or yield.
Interest Expense. Interest expense on deposit liabilities increased
$72,000, or 10.33%, for the three months ended March 31,1999, as compared to
the same period in 1998. Although total average deposits increased by $7.4
million comparing the quarter ended March 31, 1999 to 1998, the average
interest rate paid on interest-bearing deposits decreased by 18 basis points
from 5.35% for the three months ended March 31,1998, to 5.17% for the same
period ended March 31,1999. The average balance of FHLB advances increased
from $6.3 million for the three-month period ended March 31,1998, to $13.5
million for the same period ended March 31,1999, resulting in an increase in
interest on FHLB advances of $84,000 for the three months ended March 31,
1999, compared to the same period ended March 31,1998. Notes payable
accounted for a $20,000 increase in interest expense for the three months
ended March 31, 1999. Of the overall increase in interest expense, $202,000
is attributable to interest costing liability volume increases offset by a
decrease of $26,000 attributable to rates paid.
Provision for Loan Losses. The provision for loan losses was $17,000 and
there were net charge-offs of $10,000 during the three months ended March
31,1999, compared to a $12,000 provision and net charge-offs of $9,000 during
the three months ended March 31, 1998. 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 by $3,000 for the
three months ended March 31,1999, compared to the same period in 1998. The
increase was related to income from miscellaneous fees and charges.
Non-Interest Expense. Non-interest expense increased $57,000, or 11.83%,
to $539,000 for the three months ended March 31,1999, from $482,000 in the
comparable period in 1998. Of this increase, $35,000 was attributable to an
increase in compensation and benefit expense in 1999, 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 2.47% and 2.61% for the three months ended
March 31,1999 and 1998, respectively.
Income Taxes. The provision for income taxes increased $4,000 for the
three months ended March 31,1999, compared with the prior year, primarily as a
result of composition of the taxable and non-taxable income for the quarter.
<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
On April 28, 1999, the Corporation held its Annual
Meeting of Shareholders.
Each of the five directors nominated were elected to terms
expiring in 2000 by the following votes:
John D. Conroy For: 668,732 Withheld: 255
------- -----
P. Clark Engelmeier For: 668,732 Withheld: 255
------- -----
James Foreman For: 663,732 Withheld: 5,255
------- -----
Terry A. Hoppes For: 665,032 Withheld: 3,955
------- -----
Douglas L. Ulery For: 668,732 Withheld: 255
------- -----
One other matter was submitted to the shareholders, for which the
following votes were cast:
Ratification of the selection of Robb, Dixon, Francis, Davis,
Oneson & Company as the auditors of Home City Financial Corporation
for the current year:
For: 666,212 Against: 1,000 Abstain: 1,775
------- ----- -----
Broker Non-votes: 0
-----
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule, March 31,1999
b. No report on Form 8-K was filed during the quarter ended
March 31, 1999.
c. Exhibit 99.2, Safe Harbor Under the Private Litigation
----------------------------------------
Reform Act of 1995
------------------
<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: May 14, 1999 /s/ Douglas L. Ulery
_________________________ _________________________________
Douglas L. Ulery
President
Date: May 14, 1999 /s/ Charles A. Mihal
- ------------------------- ---------------------------------
Charles A. Mihal
Treasurer and Chief Financial Officer
<PAGE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Home City Financial
Corporation ("HCFC") desires to take advantage of the "safe harbor" provisions
of the Act. Certain information, particularly information regarding future
economic performance and finances and plans and objectives of management,
contained or incorporated by reference in HCFC's Quarterly Report on Form
10-QSB for the three-months ended March 31, 1999, is forward-looking. In some
cases, information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from
any such forward-looking statement appear together with such statement. In
addition, forward-looking statements are subject to other risks and
uncertainties affecting the financial institutions industry, including, but
not limited to, the following:
Interest Rate Risk
HCFC's operating results are dependent to a significant degree on its net
interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on
deposits, borrowings and other interest-bearing liabilities. The interest
income and interest expense of HCFC change as the interest rates on
interest-earning assets and interest-bearing liabilities change. Interest
rates may change because of general economic conditions, the policies of
various regulatory authorities and other factors beyond HCFC's control. In a
rising interest rate environment, loans tend to prepay slowly and new loans at
higher rates increase slowly, while interest paid on deposits increases
rapidly because the terms to maturity of deposits tend to be shorter than the
terms to maturity or prepayment of loans. Such differences in the adjustment
of interest rates on assets and liabilities may negatively affect HCFC's
income.
Possible Inadequacy of the Allowance for Loan Losses
HCFC maintains an allowance for loan losses based upon a number of relevant
factors, including, but not limited to, trends in the level of nonperforming
assets and classified loans, current and anticipated economic conditions in
the primary lending area, past loss experience, possible losses arising from
specific problem loans and changes in the composition of the loan portfolio.
While the Board of Directors of HCFC 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.
Loans not secured by one- to four-family residential real estate are generally
considered to involve greater risk of loss than loans secured by one- to
four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from the
operation of the property, which may be negatively affected by national and
local economic conditions. Construction loans may also be negatively affected
by such economic conditions, particularly loans made to developers who do not
have a buyer for a property before the loan is made. The risk of default on
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans. In
addition, the collateral securing such loans, if any, may decrease in value
more rapidly than the outstanding balance of the loan.
<PAGE>
Competition
Home City Federal Savings Bank of Springfield ("Home City") competes for
deposits with other savings associations, commercial banks and credit unions
and 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. 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.
Legislation and Regulation that may Adversely Affect HCFC's Earnings
Home City is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan
holding company, HCFC is also subject to regulation and examination by the
OTS. Such supervision and regulation of HCFC and Home City are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company to engage in
various business activities. The assessments, filing fees and other costs
associated with reports, examinations and other regulatory matters are
significant and may have an adverse effect on HCFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such
system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation
of thrifts. As a result, Home City would have to convert to a different
financial institution charter. In addition, Home City would be regulated
under federal law as a bank and would, therefore, become subject to the more
restrictive activity limitations imposed on national banks. Moreover, HCFC
might become subject to more restrictive holding company requirements,
including activity limits and capital requirements similar to those imposed on
Home City. HCFC cannot predict the impact of the conversion of Home City to,
or regulation of Home City as, a bank until the legislation requiring such
change is enacted.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from
the Consolidated Balance Sheets as of March 31, 1999, and December 31,
1998, and the related Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0001022103
<NAME> HOME CITY FINANCIAL CORPORATION
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<PERIOD-START> JAN-01-1999
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0
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