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, 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 offic (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 November 5, 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
September 30, 1999, and December 31, 1998
Condensed consolidated statements of income -- 4
Three and nine months ended September 30, 1999 and 1998
Condensed consolidated statements of changes in 5
shareholders' equity --Nine months ended September 30,
1999
Condensed consolidated statements of cash flows -- 6
Nine months ended September 30, 1999 and 1998
Notes to condensed consolidated financial 7
statements -- September 30, 1999, and December 31, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED BALANCE SHEETS
==============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
at September 30, At December 31,
---------------- ---------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,108 $ 1,147
Interest-bearing demand deposits in other banks 263 763
Federal funds sold 0 0
-------- -------
Total cash and cash equivalents 2,371 1,910
Time deposits with original maturities of 90 days or more 24 24
Investment securities available-for-sale, at fair value 2,844 3,091
Mortgage-backed securities available-for-sale, at fair value 464 559
Loans, net 89,975 76,986
Stock in Federal Home Loan Bank 1,094 601
Accrued interest receivable 539 440
Properties and equipment 1,016 584
Cash surrender value of life insurance 1,167 1,129
Other assets 216 31
------- ------
TOTAL ASSETS $ 99,710 $ 85,355
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 66,438 $ 60,499
Federal Home Loan Bank Advances 21,519 11,571
Notes payable 0 1,800
Accrued interest payable 153 115
Advance payments by borrowers for taxes and insurance 71 74
Deferred income 12 112
Other liabilities 326 314
------- -------
TOTAL LIABILITIES 88,519 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 6,036 6,013
Retained earnings, substantially restricted 7,128 6,658
Treasury shares, at cost (1,304) (1,304)
Accumulated other comprehensive income 387 517
Common shares purchased by:
Employee Stock Ownership Plan (609) (609)
Recognition and Retention Plan (447) (405)
------- -------
TOTAL SHAREHOLDERS' EQUITY 11,191 10,870
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $99,710 $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 9 Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,932 $1,714 $5,569 $4,820
Mortgage-backed securities 7 8 23 27
Federal funds sold 0 1 0 4
Investment securities 61 42 154 149
Interest-bearing deposits 0 5 0 19
----- ----- ----- -----
TOTAL INTEREST INCOME 2,000 1,770 5,746 5,019
INTEREST EXPENSE
Deposits 815 754 2,364 2,177
Borrowed funds 266 159 694 367
----- ----- ----- -----
TOTAL INTEREST EXPENSE 1,081 913 3,058 2,544
NET INTEREST INCOME 919 857 2,688 2,475
Provision for loan losses 5 21 34 53
----- ----- ----- -----
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 914 836 2,654 2,422
NON-INTEREST INCOME
Service charges on deposits 4 0 11 6
Life insurance 17 20 54 46
Gain on sale of securities 0 0 0 1
Other income 10 7 25 11
----- ----- ----- -----
TOTAL NON-INTEREST INCOME 31 27 90 64
----- ----- ----- -----
NON-INTEREST EXPENSE
Salaries and employee benefits 273 230 842 712
Supplies, telephone and postage 22 12 62 36
Occupancy and equipment 57 40 146 93
FDIC deposit insurance 9 8 27 25
Data processing 37 25 103 74
Legal, accounting and examination 74 66 220 198
Franchise taxes 40 46 124 136
Other expenses 64 66 173 175
----- ----- ----- -----
TOTAL NON-INTEREST EXPENSE 576 493 1,697 1,449
----- ----- ----- -----
NET INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 369 370 1,047 1,037
Federal income tax expense 110 120 319 335
----- ----- ----- -----
NET INCOME $ 259 $ 250 $ 728 $ 702
===== ===== ===== =====
Earnings per common share - basic $0.33 $0.31 $0.93 $0.86
Earnings per common share - diluted $0.30 $0.27 $0.83 $0.76
</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
---------------- -------
Accum-
ulated
Common Common Addi- other Common Common
shares shares tional Trea- compre- shares Shares Compre-
Common Treasury purchased purchased paid-in Retained sury hensive purchased purchased hensive
Stock Stock by ESOP by RRP capital earnings stock income by ESOP by RRP income
----- ----- ------- ------ ------- -------- ----- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 952,200 (47,610) (68,558) (6,800) $9,150 $6,037 ($711) $332 ($686) ($118)
Net income 951 $951
Other comprehensive income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income tax of $97 185 185
------
Comprehensive income $1,136
======
Purchase of treasury stock (45,200) (593)
Purchase of common shares by
recognition and retention plan (17,002) (370)
Shares earned under
employee stock
ownership plan 7,618 36 77
Shares earned on recognition
and retention plan 4,761 (7) 83
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 (1,304) 517 (609) (405)
Net income 728 $ 728
Other comprehensive
income
Change in unrealized
gain (loss) on securities
available-for-sale, net of
deferred income tax of $67 (130) (130)
-----
Comprehensive income $ 598
=====
Purchase of common shares by
recognition and retention plan (2,500) (42)
Shares earned under
employee stock
ownership plan 23
Dividends declared
($.30 per share) (258)
------- -------- ------- ------- ------ ------ ------- ---- ------ ------
September 30, 1999 952,200 (92,810) (60,940) (21,541) $6,036 $7,128 ($1,304) $387 ($609) ($447)
</TABLE>
<PAGE>
HOME CITY FINANCIAL CORPORATION
SPRINGFIELD, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
9 Months Ended 9 Months Ended
September 30, September 30,
------------- -------------
1999 1998
---- ----
<C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 728 $ 702
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization, net of discount accretion 9 10
Provision for loan losses 34 53
Depreciation 50 36
Deferred income taxes (54) (46)
Life insurance income, net of expenses (38) (29)
Employee Stock Ownership Plan compensation expense 23 31
Recognition and Retention Plan compensation expense 52 66
FHLB stock dividends (45) (26)
Net change in:
Accrued interest receivable (99) (52)
Accrued interest payable 38 40
Other assets (185) (108)
Other liabilities 12 72
------- -------
Net cash provided by operating activities 525 749
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (1,486) (70)
Proceeds from sales of securities available-for-sale 236 600
Proceeds from maturities of securities available-for-sale 1,270 1,134
Collections on mortgage-backed securities available-for-sale 85 110
Net increase in loans (13,023) (10,187)
Purchase of properties and equipment (482) (51)
Purchase of FHLB stock (448) (58)
-------- -------
Net cash used in investing activities (13,848) (8,522)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,939 6,492
Net increase in short-term FHLB advances 1,800 200
Proceeds from new long-term FHLB advances 8,600 4,375
Payments on long-term FHLB advances (452) (394)
Net decrease in advance payments by borrowers
for taxes and insurance (3) (23)
Proceeds from notes payable 0 1,100
Payments on notes payable (1,800) 0
Purchase of common shares by Recognition and Retention Plan (42) (370)
Special cash distribution 0 (3,166)
Cash dividends paid (258) (244)
------ ------
Net cash provided by financing activities 13,784 7,970
Net increase in cash and cash equivalents 461 197
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 1,910 1,518
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,371 $1,715
====== ======
</TABLE>
- ---------------------------------------------------------------------------
See accompanying notes.
<PAGE>
HOME CITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 1999, and December 31, 1998, and the consolidated results
of operations for the three and nine months ended September 30, 1999 and 1998
and the cash flows for the nine months ended September 30, 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 and nine months ended
September 30, 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)
Nine
months ended Year ended
September 30, December 31,
1999 1998
---- ----
Balance, beginning of period $ 486 $ 452
Provision for loan losses 34 61
Charge-offs (29) (40)
Recoveries 0 13
----- ------
Balance, end of period $ 491 $ 486
====== =======
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at September 30, 1999, consisted of eleven short-term advances
totaling $4.8 million and sixteen long-term advances totaling $16.7 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, 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 $4,826 5.41% 5.41% $1,526 5.02% 5.02%
After one but
within five
years $2,252 4.64%-8.35% 5.41% $2,524 4.64%-8.35% 5.49%
After five
years $14,441 3.30%-8.35% 5.46% $7,521 3.30%-8.35% 5.58%
</TABLE>
<PAGE>
NOTE 4. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at September 30, 1999.
<TABLE>
<CAPTION>
(Dollars in thousands)
To be
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) $10,959 16.3% $5,377 8.0% $6,722 10.0%
Tier I Capital
(To Risk-Weighted Assets) 10,468 15.6% N/A N/A 4,033 6.0%
Tier I Capital
(To Adjusted Total Assets) 10,468 10.5% 3,990 4.0% 4,987 5.0%
Tangible Capital
(To Adjusted Total Assets) 10,468 10.5% 1,496 1.5% N/A N/A
</TABLE>
<PAGE>
NOTE 5. 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
--------------------------
September 30, 1999
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $258,713 776,909 $0.33
Effect of dilutive securities
RRP shares 0 21,541
ESOP shares 0 60,940
Stock options 0 14,695
-------- -------
Diluted EPS
Income available to common shareholders +
assumed conversions $258,713 874,085 $0.30
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
September 30, 1998
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
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
======== ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
September 30, 1999
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $727,582 777,427 $0.93
Effect of dilutive securities
RRP shares 0 21,022
ESOP shares 0 60,940
Stock options 0 21,007
------- -------
Diluted EPS
Income available to common shareholders +
assumed conversions $727,582 880,396 $0.83
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
September 30, 1998
------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
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
======== ======= =====
</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 attached hereto,
"Safe Harbor Under the 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- and nine-month
periods ended September 30,1999 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.
<PAGE>
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.
Year 2000 Readiness
Because the Bank's operations rely extensively on computer systems, the
Bank has addressed the possibility that some computer systems might 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 and subsequently updated and approved in December 1998. 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 this ongoing assessment, the Board of
Directors believes that third-party vendors have taken the appropriate steps to
ensure that critical systems will function properly. The Bank's most
important third-party vendors have reported completion of Y2K readiness both
internally and in their interface with the Bank. Planned modifications and
conversions have been completed and tested.
All personal computers ("PC's") 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 increased its
estimate of the total cost for new hardware, software and other related Y2K
expenditures to approximately $79,000. As of September 30, 1999, $28,000 of
expense has been incurred with another $25,000 expected to be incurred in the
fourth quarter of 1999 and $14,000 and $12,000 to be incurred in the years
2000 and 2001, respectively.
If the modifications and conversions by both third-party vendors and the
Bank fail to function properly, the operations and financial condition of the
Company could be materially adversely affected. The Bank completed
development of its business resumption contingency plan in June, 1999 with
subsequent reviews thereof performed by both the OTS and the Bank's external
auditors. The dynamic nature of the plan calls for continuing testing and
training to ensure continued operations in the event of a computer system
failure. The internal testing of the final components of the business
resumption contingency plan will be tested and validated by no later than
December 8, 1999. Special attention was also placed on customer awareness and
the cash management aspects of the plan. In management's opinion, the
additional liquidity needs and cash planning issues have been reviewed and
procedures have been implemented to adequately address customer needs and to
either minimize or avoid possible customer inconvenience.
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 continues to attempt to assess these risks and is prepared
<PAGE>
to take action to minimize their effect. The Bank is currently in the midst
of its Rollover Event Management Planning with the OTS.
The Bank is a member of 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. The second consumer oriented Y2K
informational mailing to the Bank's entire customer base was completed in late
October, 1999 stressing keeping money in your bank and creating awareness of
fraud possibilities. To date, minimal customer concerns have been expressed
to the Bank's Board members, management or staff. The financial services
industry recently received a five star rating from the Senate Special
Committee on the Year 2000, the highest given any major sector of the
economy.
Changes in Financial Condition
At September 30, 1999, the consolidated assets of the Company totaled
$99.7 million, an increase of $14.4 million, or 16.82%, from $85.4 million at
December 31, 1998. The increase in total assets was primarily the result of a
$13.0 million increase in loans receivable funded primarily by a $9.9 million
increase in advances from the FHLB and a $5.9 million increase in deposits.
The total increase in loans outstanding since December 31, 1998, was $13.0
million, or 16.87%. The increase was primarily in the non-residential real
estate and commercial loan portfolio.
Investment securities decreased $247,000, or 7.99%, from $3.1 million at
December 31, 1998, to $2.8 million at September 30,1999. 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 nine months ended September 30, 1999, $85,000 of principal
payments were received on mortgage- backed and related securities. No other
transactions, purchases or sales occurred during the period.
Deposit liabilities increased $5.9 million, or 9.82%, from $60.5 million
at December 31, 1998, to $66.4 million at September 30,1999. 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.
Advances from the FHLB increased $9.9 million, or 85.97%, from $11.6
million at December 31, 1998, to $21.5 million at September 30,1999. The
funds obtained were utilized to support the increased loan demand.
Notes payable of $1.8 million were repaid during the first six months of
1999. 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
$321,000, or 2.95%, from December 31, 1998, to September 30,1999. This
increase was primarily the result of $728,000 in earnings for the first nine
months of fiscal year 1999 and a $23,000 increase in additional paid-in
capital offset by the $258,000 cash dividend payments together with the
$130,000 of unrealized losses on securities available-for-sale, and the
$42,000 purchase of common shares by the RRP Trust during the nine months
ended September 30,1999.
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
<PAGE>
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, 1999, the
Bank's regulatory liquidity ratio was 4.17%. At such date, the Bank had
commitments to originate loans totaling $6.7 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 4 - Regulatory Capital." The Bank exceeded
all of its capital requirements at September 30, 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 $491,000 at September 30, 1999.
At September 30, 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. On May 24, 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 June 4, 1999, paid
on June 15, 1999. On August 23, 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 September 3, 1999, paid on September 15, 1999.
<PAGE>
Results of Operations
Comparison of Three Months Ended September 30, 1999 and 1998
General. Net income increased $9,000, or 3.60%, from $250,000 for the
three months ended September 30,1998, to $259,000 for the three months ended
September 30, 1999. This increase was primarily attributed to an increase
of $62,000 in net interest income, an increase of $4,000 in non-interest
income and decreases in the provisions for federal income tax expense and
possible loan losses, partially offset by an increase of $83,000 in
non-interest expense.
Interest Income. The $15.5 million increase in average earning assets
contributed to an increase in interest income of $230,000, or 12.99%, for the
three months ended September 30,1999 compared to 1998. The increase was
attributed to the additional loan income of $218,000 resulting from an
increase in loans receivable and additional investment income of $14,000,
which was partially offset by a decrease of $2,000 in interest income on other
earning assets. Of the overall increase in interest income, $346,000 is
attributable to earning asset volume increases offset by a decrease of
$116,000 attributable to rate or yield.
Interest Expense. Interest expense on deposit liabilities increased
$61,000, or 8.09%, for the three months ended September 30, 1999, as compared
to the same period in 1998. Although total average deposits increased by $6.8
million comparing the quarter ended September 30, 1999 to 1998, the average
interest rate paid on interest-bearing deposits decreased by 20 basis points
from 5.42% for the three months ended September 30, 1998, to 5.22% for the
same period ended September 30, 1999. The average balance of FHLB advances
increased from $9.5 million for the three-month period ended September
30,1998, to $19.4 million for the same period ended September 30, 1999,
resulting in an increase in interest on FHLB advances of $127,000 for the
three months ended September 30, 1999, compared to the same period ended
September 30, 1998. Notes payable accounted for slightly more than a $1,000
decrease in interest expense for the three months ended September 30, 1999.
Of the overall increase in interest expense, $220,000 is attributable to
interest costing liability volume increases offset by a decrease of $52,000
attributable to rates paid.
Provision for Loan Losses. The provision for loan losses was $5,000 and
there were net charge-offs of $6,000 during the three months ended September
30, 1999, compared to a $21,000 provision and net charge-offs of $10,000
during the three months ended September 30, 1998. The provision was decreased
based upon the results of the ongoing loan reviews and composition of the loan
portfolio.
Non-Interest Income. Non-interest income increased by $4,000 for the
three months ended September 30, 1999, compared to the same period in 1998.
The increase was related to an increase of $4,000 in service charge income on
deposits and $3,000 in miscellaneous fees and charges being offset by $3,000
decrease in income from life insurance contracts.
Non-Interest Expense. Non-interest expense increased $83,000, or 16.84%,
to $576,000 for the three months ended September 30, 1999, from $493,000 in
the comparable period in 1998. Of this increase, $43,000 was attributable to
an increase in compensation and benefit expense in 1999, reflecting the
expense associated with additional staffing related to the non-residential
real estate and commercial lending function. The annualized ratio of
non-interest expense to average total assets was 2.42% and 2.48% for the three
months ended September 30,1999 and 1998, respectively.
Income Taxes. The provision for income taxes decreased $10,000 for the
three months ended September 30,1999, compared with the prior year, primarily
as a result of composition of the taxable and non-taxable income for the
quarter.
<PAGE>
Comparison of Nine Months Ended September 30, 1999 and 1998
General. Net income increased $26,000, or 3.70%, from $702,000 for the
nine months ended September 30,1998, to $728,000 for the nine months ended
September 30, 1999. This increase was primarily attributed to an increase of
$213,000 in net interest income, an increase of $26,000 in non-interest
income and decreases in the provisions for federal income tax expense and
possible loan losses, partially offset by an increase of $248,000 in
non-interest expense.
Interest Income. The $14.1 million increase in average earning assets
contributed to an increase in interest income of $727,000, or 14.48%, for the
nine months ended September 30,1999, compared to 1998. The increase was
attributed to the additional loan income of $749,000 resulting from an
increase in loans receivable, which was partially offset by a decrease of
$22,000 in interest income on other earning assets. Of the overall increase
in interest income, $1.0 million is attributable to earning asset volume
increases offset by a decrease of $278,000 attributable to rate or yield.
Interest Expense. Interest expense on deposit liabilities increased
$187,000, or 8.59%, for the nine months ended September 30, 1999, as compared
to the same period in 1998. Although total average interest-bearing deposits
increased by $7.0 million comparing the nine months ended September 30, 1999
to 1998, the average interest rate paid on interest-bearing deposits decreased
by 21 basis points from 5.39% for the nine-month period ended September 30,
1998, to 5.18% for the same period ended September 30, 1999. The average
balance of FHLB advances increased from $7.7 million for the nine-month period
ended September 30,1998, to $16.6 million for the same period ended September
30, 1999, resulting in an increase in interest on FHLB advances of $326,000
for the nine-month period ended September 30, 1999, compared to the same
period ended September 30, 1998. Interest expense on notes payable remained
relatively constant for the nine months ended September 30, 1999. Of the
overall increase in interest expense, $631,000 is attributable to interest
costing liability volume increases offset by a decrease of $118,000
attributable to rates paid.
Provision for Loan Losses. The provision for loan losses was $34,000 and
there were net charge-offs of $29,000 during the nine months ended September
30, 1999, compared to a $53,000 provision and net charge-offs of $27,000
during the nine months ended September 30, 1998. The provision was decreased
based upon the results of the ongoing loan reviews and composition of the loan
portfolio.
Non-Interest Income. Non-interest income increased by $26,000 for the
nine months ended September 30, 1999, compared to the same period in 1998.
The increase was related to an increase of $8,000 in income from life
insurance contracts and increases of $5,000 and $14,000 in service charges on
deposits and miscellaneous fees and charges, respectively. There were no
security gains or losses recorded in the nine months ended September 30, 1999.
Non-Interest Expense. Non-interest expense increased $248,000, or
17.11%, to $1.7 million for the nine months ended September 30, 1999, from
$1.4 million in the comparable period in 1998. Of this increase, $130,000 was
attributable to an increase in compensation and benefit expense in 1999,
reflecting additional staffing. The annualized ratio of non-interest expense
to average total assets was 2.45% and 2.48% for the nine months ended
September 30,1999 and 1998, respectively.
Income Taxes. The provision for income taxes decreased $16,000 for the
nine months ended September 30,1999, compared with the prior year, primarily
as a result of composition of the taxable and non-taxable 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, 1999
b. No report on Form 8-K was filed during the quarter
ended September 30, 1999.
c. Exhibit 99, Safe Harbor Under the Private Securities
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
November 12, 1999 /s/ Doulas L. Ulery
- ----------------- ------------------------------------------
Date: Douglas L. Ulery
President
November 12, 1999 /s/ Charles A. Mihal
- ----------------- ------------------------------------------
Date: Charles A. Mihal
Treasurer and Chief Financial Officer
<PAGE>
EXHIBIT 99
----------
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 and nine months ended September 30, 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.
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.
On November 4, 1999, both houses of Congress adopted legislation,
expected to be signed into law, making substantial changes to the laws
governing the provision of financial services. The legislation affects, among
other things, the types of services that various types of financial
institutions may provide. Until the legislation is actually signed into law
and HCFC is able to analyze the final version fully, it is uncertain what
effect the legislation will have on HCFC.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of September 30, 1999, and December 31, 1998, and
the related Consolidated Statements of Income for the three months ended
September 30, 1999 and 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0001022103
<NAME> HOME CITY FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,108
<INT-BEARING-DEPOSITS> 287
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,402
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 90,466
<ALLOWANCE> 491
<TOTAL-ASSETS> 99,710
<DEPOSITS> 66,438
<SHORT-TERM> 4,826
<LIABILITIES-OTHER> 562
<LONG-TERM> 16,693
0
0
<COMMON> 0
<OTHER-SE> 11,191
<TOTAL-LIABILITIES-AND-EQUITY> 99,710
<INTEREST-LOAN> 1,932
<INTEREST-INVEST> 68
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,000
<INTEREST-DEPOSIT> 815
<INTEREST-EXPENSE> 1,081
<INTEREST-INCOME-NET> 919
<LOAN-LOSSES> 5
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<EXPENSE-OTHER> 576
<INCOME-PRETAX> 369
<INCOME-PRE-EXTRAORDINARY> 259
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.99
<LOANS-NON> 239
<LOANS-PAST> 0
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<LOANS-PROBLEM> 554
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</TABLE>
