U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003. |
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ |
Commission file number - 33-53596
| FC BANC CORP. | ||
| (Exact name of small business issuer as specified in its charter) |
| OHIO | 34-1718070 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| Farmers Citizens Bank Building, 105 Washington Square Box 567, Bucyrus, Ohio | 44820-0567 | |
| (Address of principal executive offices) | (Zip Code) |
(419) 562-7040 | ||
| (Issuer’s telephone number) |
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report) |
As of July 31, 2003, 575,727 shares of Common Stock of the Registrant were outstanding. There were no preferred shares outstanding.
FC BANC CORP.
FORM 10-QSB
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FC BANC CORP.
CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except per share amounts)
| At June 30, | At December 31, | |||||||
| 2003 | 2002 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents: | ||||||||
| Cash and due from banks | 5,467 | 4,825 | ||||||
| Federal funds sold | 0 | 0 | ||||||
| Total cash and cash equivalents | 5,467 | 4,825 | ||||||
| Investment securities, available-for-sale | 53,730 | 45,164 | ||||||
| Loans | 77,102 | 71,555 | ||||||
| Allowance for loan losses | (1,252 | ) | (1,213 | ) | ||||
| Net loans | 75,850 | 70,342 | ||||||
| Premises and equipment | 6,887 | 7,023 | ||||||
| Accrued interest and other assets | 4,848 | 5,036 | ||||||
| TOTAL ASSETS | 146,782 | $ | 132,390 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Deposits | ||||||||
| Noninterest-bearing | 12,419 | 13,403 | ||||||
| Interest-bearing | 89,756 | 83,609 | ||||||
| Total deposits | 102,175 | 97,012 | ||||||
| Short-term borrowings | 4,922 | 4,477 | ||||||
| Other borrowings | 25,239 | 16,769 | ||||||
| Accrued interest and other liabilities | 1,028 | 1,224 | ||||||
| TOTAL LIABILITIES | 133,364 | 119,482 | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common shares, no par value; 4,000,000 shares authorized; 665,632 shares issued | 832 | 832 | ||||||
| Additional paid-in capital | 1,360 | 1,364 | ||||||
| Retained earnings | 12,809 | 12,463 | ||||||
| Treasury shares, at cost; 89,905 and 91,205 respectively | (2,254 | ) | (2,287 | ) | ||||
| Accumulated other comprehensive income | 671 | 536 | ||||||
| TOTAL SHAREHOLDERS’ EQUITY | 13,418 | 12,908 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 146,782 | $ | 132,390 | |||||
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FC BANC CORP.
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(Dollars in thousands, except per share)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| INTEREST INCOME | ||||||||||||||
| Interest and fees on loans | $ | 1,255 | $ | 1,263 | $ | 2,553 | $ | 2,496 | ||||||
| Interest and dividends on investment securities | 525 | 471 | 1,057 | 870 | ||||||||||
| Interest on federal funds sold | 0 | 2 | 3 | 17 | ||||||||||
| TOTAL INTEREST INCOME | 1,780 | 1,736 | 3,613 | 3,383 | ||||||||||
| INTEREST EXPENSE | ||||||||||||||
| Interest on deposits | 454 | 330 | 906 | 780 | ||||||||||
| Interest on borrowed funds | 254 | 136 | 475 | 224 | ||||||||||
| TOTAL INTEREST EXPENSE | 708 | 466 | 1,381 | 1,004 | ||||||||||
| NET INTEREST INCOME | 1,072 | 1,270 | 2,232 | 2,379 | ||||||||||
| Provision for loan losses | 50 | (275 | ) | 50 | (275 | ) | ||||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS | 1,022 | 1,545 | 2,182 | 2,654 | ||||||||||
| OTHER INCOME | ||||||||||||||
| Service charges and other income | 231 | 152 | 442 | 291 | ||||||||||
| Bank owned life insurance earnings | 32 | 32 | 64 | 64 | ||||||||||
| Investment securities gains, net | 84 | 14 | 163 | 16 | ||||||||||
| TOTAL OTHER INCOME | 347 | 198 | 669 | 371 | ||||||||||
| OTHER EXPENSES | ||||||||||||||
| Salaries and benefits | 457 | 542 | 1,038 | 1,344 | ||||||||||
| Net occupancy and equipment expenses | 192 | 148 | 390 | 286 | ||||||||||
| Legal and professional | 102 | 49 | 184 | 97 | ||||||||||
| State taxes | 40 | 37 | 78 | 75 | ||||||||||
| Other expenses | 252 | 358 | 501 | 570 | ||||||||||
| TOTAL OTHER EXPENSES | 1,043 | 1,134 | 2,191 | 2,372 | ||||||||||
| INCOME BEFORE FEDERAL INCOME TAX | 326 | 609 | 660 | 653 | ||||||||||
| Federal income tax expense | 53 | 163 | 107 | 142 | ||||||||||
| NET INCOME | $ | 273 | $ | 446 | 553 | $ | 511 | |||||||
| DIVIDENDS PER SHARE | $ | 0.18 | $ | 0.16 | $ | 0.36 | $ | 0.32 | ||||||
| EARNINGS PER SHARE: | ||||||||||||||
| Earnings per common share – basic | $ | 0.47 | $ | 0.77 | $ | 0.96 | $ | 0.88 | ||||||
| Earnings per common share – diluted | $ | 0.47 | $ | 0.77 | $ | 0.96 | $ | 0.88 | ||||||
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited, dollars in thousands)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Net Income | $ | 273 | $ | 446 | $ | 553 | $ | 511 | ||||||
| Other comprehensive income: | ||||||||||||||
| Unrealized gains(losses) on available for sale securities | 426 | 424 | 367 | 282 | ||||||||||
| Less: Reclassification adjustment for gain included in net income | 84 | 14 | 163 | 16 | ||||||||||
| Other comprehensive income before tax | 342 | 410 | 204 | 266 | ||||||||||
| Income tax expense related to other comprehensive income | 116 | 139 | 69 | 90 | ||||||||||
| Other comprehensive income, net of tax | 226 | 271 | 135 | 176 | ||||||||||
| Comprehensive income | $ | 499 | $ | 717 | $ | 688 | $ | 687 | ||||||
See accompanying notes to the unaudited consolidated financial statements
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FC BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY(Unaudited)
Common Shares | Additional paid-in capital | Retained Earnings | Accumulated Other Compre- hensive Income | Treausry Shares | Total Shareholders Equity | |||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
| Balances at December 31, 2001 | $ | 832 | $ | 1,366 | $ | 11,793 | $ | 109 | $ | (1,921 | ) | $ | 12,179 | |||||||
| Net income | 1,052 | 1,052 | ||||||||||||||||||
| Unrealized gain on available for sale Securities, net of reclassification Adjustment, net of taxes of $220 | 427 | 427 | ||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||
| Cash dividends ($.66 per share) | (382 | ) | (382 | ) | ||||||||||||||||
| Purchase of treasury stock | (406 | ) | (406 | ) | ||||||||||||||||
| Exercise of stock options(1,600 shares) | (2 | ) | 40 | 38 | ||||||||||||||||
| Balances at December 31, 2002 | 832 | 1,364 | 12,463 | 536 | (2,287 | ) | 12,908 | |||||||||||||
| Net income | 553 | 553 | ||||||||||||||||||
| Unrealized gain on available for sale Securities, net of reclassification Adjustment, net of taxes of $69 | 135 | 135 | ||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||
| Cash dividends ($.36 per share) | (207 | ) | (207 | ) | ||||||||||||||||
| Exercise of stock options(1,300 shares) | (4 | ) | 33 | 29 | ||||||||||||||||
| Balances at June 30, 2003 | $ | 832 | $ | 1,360 | $ | 12,809 | $ | 671 | $ | (2,254 | ) | $ | 13,418 | |||||||
See accompanying notes to unaudited consolidated financial statements
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FC BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
| �� | ||||||||
(Dollars in thousands) | ||||||||
| Six Months Ended June 30 2003 | Six Months Ended June 30 2002 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 553 | $ | 511 | ||||
| Adjustments to reconcile net income to net cash Provided by operating activities: | ||||||||
| Investments gains, net | (163 | ) | (16 | ) | ||||
| Provision for loan losses | 50 | (275 | ) | |||||
| Gain from disposal of premises and equipment | (97 | ) | — | |||||
| Depreciation, amortization, and accretion | 657 | 209 | ||||||
| Deferred income taxes | 99 | (60 | ) | |||||
| Net change in: | ||||||||
| Accrued interest receivable | (69 | ) | 3 | |||||
| Accrued interest payable | 1 | (3 | ) | |||||
| Other assets | 205 | (168 | ) | |||||
| Other liabilities | (296 | ) | 203 | |||||
| Net cash provided by operating activities | 940 | 404 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of securities available-for-sale | (23,082 | ) | (18,016 | ) | ||||
| Proceeds from sales of securities | 2,902 | 6,794 | ||||||
| Proceeds from maturities and repayments of securities available-for-sale | 11,542 | 5,870 | ||||||
| Purchases of regulatory stock | (18 | ) | — | |||||
| Net increase in loans | (5,576 | ) | (4,875 | ) | ||||
| Sale of premises and equipment | 102 | — | ||||||
| Purchase of premises and equipment | (68 | ) | (2,317 | ) | ||||
| Net cash used in investing activities | (14,198 | ) | (12,544 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net increase in deposits | 5,163 | 1,366 | ||||||
| Net increase in short-term borrowed funds | 445 | 2,561 | ||||||
| Proceeds from long-term FHLB advances | 9,000 | 5,000 | ||||||
| Repayments on borrowings | (530 | ) | (43 | ) | ||||
| Purchase of treasury stock | — | (216 | ) | |||||
| Exercise of stock options | 29 | — | ||||||
| Cash dividends paid | (207 | ) | (185 | ) | ||||
| Net cash provided by financing activities | 13,900 | 8,483 | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 642 | (3,657 | ) | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 4,825 | 6,659 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 5,467 | $ | 3,002 | ||||
| SUPPLEMENTAL DISCLOSURES | ||||||||
| Cash paid during the period for interest | $ | 1,376 | $ | 1,111 | ||||
| Cash paid during the period for income taxes | — | $ | 174 | |||||
See accompanying notes to unaudited consolidated financial statements
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FC BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
June 30, 2003
(Unaudited)
NOTE 2 EARNINGS PER SHARE
There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2003 | 2002 | 2003 | 2002 | |||||
| Weighted-average common shares outstanding used to calculate basic earnings per share | 574,620 | 579,862 | 574,620 | 581,523 | ||||
| Additional common stock equivalents (stock options) used to calculate diluted earnings per share. | 1,522 | — | 2,013 | — | ||||
| Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share | 576,142 | 579,862 | 576,633 | 581,523 | ||||
Options to purchase 14,500 shares of common stock at prices from $22.00 to $28.50 for the three and six month periods ended June 30, 2003 were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Options to purchase 38,300 shares of common stock at prices from $22.00 to $28.50 for the three and six month periods ended June 30, 2002 were not included in the computation of diluted EPS because to do so would have been anti-dilutive.
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NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which was effective January 1, 2003, did not have a material effect on the Company’s financial position or results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The new statement is effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a “ramp-up” effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results. To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entity’s full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companies—regardless of the accounting method used—by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The transition guidance and annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.
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The following table represents the effect on net income and earnings per share had the stock-based employee compensation expense been recognized:
| Six Months Ended June 30, | Three Months Ended June 30, | ||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| Net income, as reported: | $ | 553 | $ | 511 | $ | 273 | $ | 446 | |||||
| Less proforma expense related to stock options | 17 | 26 | 9 | 13 | |||||||||
| Proforma net income | 536 | 485 | 264 | 433 | |||||||||
| Basic net income per common share: | |||||||||||||
| As reported | $ | 0.96 | $ | 0.88 | $ | 0.47 | $ | 0.77 | |||||
| Pro forma | 0.93 | 0.83 | 0.46 | 0.75 | |||||||||
| Diluted net income per common share: | |||||||||||||
| As reported | $ | 0.96 | $ | 0.88 | $ | 0.47 | $ | 0.77 | |||||
| Pro forma | 0.93 | 0.83 | 0.46 | 0.75 | |||||||||
In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. The amendments set forth in FAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No. 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to FAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset
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in some circumstances). Such instruments may have been previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not anticipate that adoption of this standard will have a significant effect on its reported equity.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation clarifies that a guarantor is required to disclose (a) the nature of the guarantee, including the approximate term of the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantor’s obligations under the guarantee; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a material effect on the Company’s financial position or results of operations.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of this interpretation has not and is not expected to have a material effect on the Company’s financial position or results of operations.
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NOTE 4 REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently applicable regulatory capital requirements at June 30, 2003.
(Dollars in thousands) | |||||||||||||||
| Actual | For Capital Adequacy Purposes | Categorized as Well Capitalized Under Prompt Corrective Action Provision | |||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
| Total Risk-Based Capital (To Risk-Weighted Assets) | $ | 13,745 | 15.66 | % | $ | 7,022 | 8.00 | % | $ | 8,777 | 10.00 | % | |||
| Tier I Capital (To Risk-Weighted Assets) | 12,646 | 14.41 | % | 3,510 | 4.00 | % | 5,266 | 6.00 | % | ||||||
| Core Capital | 12,646 | 8.54 | % | 5,923 | 4.00 | % | 7,404 | 5.00 | % | ||||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Safe Harbor Clause
This report contains certain “forward-looking statements.” The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with respect to all such forward-looking statements. These forward-looking statements, which are included in Management’s Discussion and Analysis, describe future plans or strategies and include the Company’s expectations of future financial results. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward-looking statements. The Company’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company’s market area and the country as a whole, loan delinquency rates, and changes in federal and state regulations. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.
General
FC Banc Corp was established on February 1, 1994 as a bank holding company whose activities are primarily limited to holding the stock of The Farmers Citizens Bank, Bucyrus, Ohio (“Bank”). Farmers Citizens Bank was chartered on October 1, 1907, and officially opened for business on January 6, 1908. Farmers Citizens Bank has provided continuous customer service to Crawford County for more than 90 years. The Bank conducts a general banking business in north central Ohio that 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’s principal types of lending are in commercial real estate, residential real estate, and consumer. In both the commercial and residential real estate, the bank has minimal risk. The banks lending policies specify loan to value ratios low enough to minimize the risk. Another factor that minimizes the risk is our knowledge of the market area. Farmers Citizens Bank is a community bank and this helps us in knowing our customers and market area. Also, the bank is continuously reviewing its underwriting procedures and policies. In the consumer loan area, the bank specializes in home equity loans and loans for late model cars. Usually, the collateral held is sufficient to minimize risk. The Bank’s profitability is significantly dependent on net interest income. That 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 six-month periods ended June 30, 2003 and 2002.
The consolidated financial information presented herein has been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). 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
13
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 Company is subject to regulation by the Board of Governors of the Federal Reserve System, which limits the activities in which the Company and the Bank may engage. The Bank is supervised by the State of Ohio, Division of Financial Institutions and its deposits are insured up to applicable limits under the Bank Insurance Fund (“BIF”) of the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Reserve System and is subject to its supervision. The Company and the Bank must file with the U.S. Securities and Exchange Commission, the Federal Reserve Board and Ohio Division of Financial Institutions the prescribed periodic reports containing full and accurate statements of its affairs.
The Bank has four banking offices located in Crawford, Morrow and Knox Counties, Ohio. The primary market area of the Bank is North Central Ohio, which includes Crawford, Morrow, Knox and contiguous counties. The Banks main office is about 60 miles north of the state capital, Columbus, Ohio. Our Bank has various competition in all of the markets we serve. In Bucyrus, there are five other financial institutions. In each of Cardington and Fredericktown, there is one. All of our markets are within a short distance to other markets that present another dozen or so competitors. In addition, there are no less than ten mortgages companies in each market we serve. In our direct markets, the Bank has approximately a 20% market share of deposits. The economy of our markets is driven by several major components: Manufacturing, retail trade, governmental service, general service, and agricultural. Census data indicates a positive trend in our Morrow and Knox counties areas and a steady trend in Crawford County. The general economic conditions of all three of our markets is reflective of the State of Ohio and to a certain extent our national economy. Recent indications for the general outlook for the economy is improving. Second quarter economic activity was above expectations as federal government spending rose 25.1%, and consumer spending was 3.3% above forecast. Consumer spending should be even stronger in the third quarter with the tax cut and rebates driving personal disposable income up. The local economy also reflects that of the national economic trends, including a modest increase in unemployment in the second quarter of 2003.
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FC BANC CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Changes in Financial Condition
At June 30, 2003, the consolidated assets of the Company totaled $146.8 million, an increase of $14.4 million, or 10.87%, from $132.4 million at December 31, 2002. The increase in total assets resulted from growth in investments of $9.5 million and loan growth of $5.5 million.
Net loans have increased by $5.5 million, or 7.83%, to $75.8 million at June 30, 2003, compared to $70.3 million at December 31, 2002. The majority of the loan growth ($4.5 million) occurred in the second quarter as the housing industry continued strong due to low mortgage rates. Loans secured by real estate and commercial/financial/agricultural loans increased $5.8 million and $0.8 million, respectively. Consumer loans have decreased by $0.9 million. The allowance for loan losses has remained consistent in comparison to December 31, 2002. The quality of our loan portfolio continues to be strong, as delinquency continues to be below peer group. As noted above, most growth in the loan portfolio in the second quarter was residential real estate, which is a result of lower rates. There now have been some positive signs in the economy, and our loan demand is continuing, but at a slower pace. As rates go up, we expect a slow down in residential lending because many people have already taken advantage of refinancing opportunities.
Investment securities increased by $8.6 million, or 18.97% to $53.7 million at June 30, 2003, compared to $45.2 million at December 31, 2002. The investment portfolio has grown mostly due to an investment strategy to leverage the bank through the use of alternative sources of funds, typically borrowings. In using this strategy, the bank borrows funds and invests that money in mortgage backed securities with a similar average life. When entering into these transactions the bank earns an initial spread of at least 125 basis points. In the first quarter of 2003, the bank borrowed $9.0 million, which was put into investments. Other purchases for this year have been offset by sales, maturities, and principle paydowns on mortgage back securities.
Deposit liabilities increased by $5.2 million, or 5.32%, to $102.2 million at June 30, 2003, from $97.0 million at December 31, 2002. Interest bearing checking accounts, savings accounts, and certificates of deposits increased by $0.5 million, $0.2 million, and $5.4 million, respectively. Demand deposit accounts and money market accounts declined $0.6 million and $0.4 million, respectively. Certificate of deposits have grown due to increases in the 25-month, 60-month, and public fund categories.
15
FC BANC CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Total shareholders’ equity was $13.4 million at June 30, 2003 as compared to $12.9 million on December 31, 2002. During the first six months of 2003 shareholders equity increased due to net income of $0.6 million and an increase of $0.1 million in accumulated other comprehensive income. which was partially offset by a shareholders dividend of $0.2 million.
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 security repayments, maturities of securities and other funds provided by operations. The Bank also has the ability to borrow from the Federal Home Bank of Cincinnati (“FHLB”) as well as the Federal Reserve Bank of Cleveland (“FRB” or “Fed”). 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 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 and financial condition of such institutions to ensure that such deposits do not expose the Bank to undue risk of loss.
The Asset/Liability Management Committee of the Company is responsible for liquidity management. This committee, which is comprised of various managers, has an Asset/Liability Policy that covers all assets and liabilities, as well as off-balance sheet items that are potential sources and uses of liquidity. The Company’s liquidity management objective is to maintain the ability to meet commitments to fund loans and to purchase securities, as well as to repay deposits and other liabilities in accordance with their terms. The Company’s overall approach to liquidity management is to ensure that sources of liquidity are sufficient in amounts and diversity to accommodate changes in loan demand and deposit fluctuations without a material adverse impact on net income. The Committee monitors the Company’s liquidity needs on an ongoing basis. Currently the Company has several sources available for both short- and long-term liquidity needs. These include, but are not restricted to advances from the FHLB, Federal Funds and borrowings from the Fed and other correspondent banks.
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the FRB. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material affect on the Company and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgements by the regulators about components, risk-weighing, and other factors.
16
FC BANC CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Qualitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined by the regulations), and Tier I capital to average assets (as defined). Management believes, as of June 30, 2003, that the Bank meets all of the capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the FDIC, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as specified by the regulators. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.
At June 30, 2003, FC Banc Corp. had no commitments for capital expenditures.
17
FC BANC CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Results of Operations
Comparison of Three Months Ended June 30, 2003 and 2002
General. Net income decreased by $173, from $446 to $273 during the second quarter of 2003 as compared to the same three-month period ended June 30, 2002. Net income was positively affected by the increase in total other income of $149 and the decrease in federal income tax expense of $110. It was negatively impacted by an increase in total other expenses of $91, an increase in provision for loan losses of $325, and a decrease of $198 in net interest income.
Net Interest Income. Net interest income decreased by $198 for the six months ended June 30, 2003 as compared to June 30, 2002. An increase of $44 in interest income was offset by an increase of $242 in interest expense.
Interest Income. The increase in the size of the bank was the primary contributing factor to the increase in interest income of $44, or 2.53%, for the three months ended June 30, 2003 compared to 2002. The average earning assets for the second quarter of 2003 were $133.8 million compared to $102.8 million for the same period in 2002. Average loans for the second quarter of 2003 were $74.8 million compared to $63.6 million in the second quarter of 2002, an increase of 17.6%. Increases were in real estate loans of $10.6 million and commercial loans of $1.9 million. Installment loans decreased by $1.2 million. The increase was mostly due to interest rates. The average rate earned on loans was 6.51% in the second quarter of 2003 compared to 7.54% during the same period in 2002. Interest and dividends on investment securities increased by $52 due to the growth of the investment portfolio. The average balance of the investment portfolio was $58.6 million in the second quarter of 2003 compared to $38.5 million for the same period in 2002. This increase was mostly due to the return on equity enhancement strategy discussed previously in the Changes in Financial Condition area of this report.
Interest Expense. Interest expense on deposit liabilities increased by $124 or 37.6% for the three months ended June 30, 2003, as compared to the same period in 2002. Total average deposits increased by $15.5 million comparing the quarter ending June 30, 2003, to 2002. The expense that was incurred due to the growth was partially offset by the 24 basis point decrease in cost of funds. Interest expense paid on borrowings increased by $118 due to an increase in average borrowings of $15.7 million for the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. Comparing the second quarter of 2003 to the second quarter of 2002, the Bank’s average cost of funds (including borrowings) was 2.10%, as compared to 2.21% for the same period in 2002.
Provision for Loan Losses. The net expense on provision for loan losses increased by $325 when comparing the second quarter of 2003 to 2002. Due to an analysis of the loan loss reserve, we expensed $50 to provision for loan losses in the second quarter of 2003. In the same quarter of 2002, the Bank recorded a negative provision for loan losses of $275. The negative provision was based upon the results of loan reviews and composition of the loan portfolio, primarily loans secured by one- to four-family residential properties and other forms of collateral, which are considered to have less risk. Our review and analysis of the reserve for loan loss indicated that this ratio was adequate.
18
FC BANC CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Non-Interest Income. Non-interest income increased by $149, or 75.25%, to $347 for the three months ended June 30, 2003, from $198 for the three months ended June 30, 2002. The increase was due to increases in income earned on NSF checks($82), debit card activity($11), and investment services($5). Also, the bank earned $97 in the second quarter for the sale of property. The Company had net gain on sales of securities of $84 during the second quarter ending June 30, 2003, compared to $14 for the same time period in 2002.
Non-Interest Expense. Non-interest expense decreased by $91, or 8.02%, to $1,043 for the three months ended June 30, 2003, from $1,134 in the comparable period in 2002. Salaries and employee benefits have decreased by $85 due to the lack of expense relating to severance pay paid to the previous CEO. Occupancy has increased by $44 mostly due to an increase of $41 in depreciation expense. This increased because the bank did not start depreciating the new buildings until June 2002, which resulted in less expense in the second quarter of 2002. Legal and professional fees have increased by $53.
Income Taxes. The provision for income taxes decreased by $110 for the three months ended June 30, 2003, compared with the prior year, primarily as a result of lower taxable income for the quarter.
Comparison of Six Months Ended June 30, 2003 and 2002
General. Net income increased by $42 during the six months ended June 30, 2003 as compared to the same six-month period ended June 30, 2002. Net income was positively impacted by the increase in total other income of $298, a decrease in total other expenses of $181, and the decrease in federal income tax expense of $35. It was negatively impacted by an increase in provision for loan losses of $325, and a decrease of $147 in net interest income.
Net Interest Income. Net interest income decreased by $147 for the six months ended June 30, 2003 as compared to June 30, 2002. An increase of $230 in interest income was offset by an increase of $377 in interest expense.
Interest Income. The increase in the size of the bank was the primary contributing factor to the increase in interest income of $230 or 6.80% for the six months ended June 30, 2003 compared to 2002. The average earning assets for 2003 are $128.4 million compared to $100.7 million for the same period in 2002. Average loans for 2003 are $73.4 million compared to $62.2 million for 2002, an increase of 18%. Increases were in real estate loans of $9.1 million and commercial loans of $2.4 million. Installment loans decreased by $0.4 million. The increase was mostly due to low interest rates. The impact of the growth was partially offset by falling interest rates. The average rate earned on loans year to date is 6.82% compared to 7.64% during the same period in 2002. Interest and dividends on
19
FC BANC CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
investment securities increased by $187 due to the growth of the investment portfolio. The average balance of the investment portfolio in 2003 is $54.2 million compared to $36.4 million for the same period in 2002. This increase was mostly due to the return on equity enhancement strategy discussed previously in the Changes in Financial Condition area of this report. Overall, the yield on earning assets in 2003 is 90 basis points less than it was in 2002.
Interest Expense. Interest expense on deposit liabilities increased by $126 or 16.2% for the six months ended June 30, 2003, as compared to the same period in 2002. Total average deposits have increased by $14.1 million comparing the six months ending June 30, 2003, to 2002. The expense that was incurred due to the growth was partially offset by the 25 basis point decrease in cost of funds. Interest expense paid on borrowings increased by $251 due to an increase in average borrowings of $15.3 million for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. Comparing year to date numbers from 2003 to 2002, the Bank’s average cost of funds (including borrowings) was 2.14%, as compared to 2.22% for the same period in 2002.
Provision for Loan Losses. The net expense on provision for loan losses increased by $325 when comparing the six months ended June 30, 2003 to 2002. Due to an analysis of the reserve, we expensed $50 to provision for loan losses in the second quarter of 2003. See above for a discussion of the same quarter of 2002.
Non-Interest Income. Non-interest income increased by $298, or 80.32%, to $669 for the six months ended June 30, 2003, from $371 for the six months ended June 30, 2002. The increase was due to increases in income earned on the sale of property($97), NSF checks($150), debit card activity($23), and investment services($12). The Company had net gain on sales of securities of $163 during the six months ending June 30, 2003, compared to $16 for the same time period in 2002.
Non-Interest Expense. Non-interest expense decreased by $181, or 7.63%, to $2,191 for the six months ended June 30, 2003, from $2,372 in the comparable period in 2002. Salaries and Benefits decreased by $306 because 2002 was inflated due to the expense associated with the termination of the former President and CEO. Net occupancy and equipment expense increased by $104 due to increases in depreciation expense($92), real estate taxes($11), utilities($14), and maintenance($21). These expense increases were partially offset by decreases in property insurance($8), equipment leasing($19), and rental property expense($6). Other expenses decreased by $69.
Income Taxes. The provision for income taxes decreased by $35 for the six months ended June 30, 2003, compared with the prior year.
20
CREDIT QUALITY RISK
The following table identifies amounts of loan losses and non-performing loans. Past due loans are those that were contractually past due 90 days or more as to interest or principal payments (dollars in thousands).
| June 30, 2003 | December 31, 2002 | |||||||
| Non-accruing loans | $ | 174 | $ | 174 | ||||
| Impaired loans | 0 | 0 | ||||||
| Accrual loans - 90 days or more past due | 3 | 11 | ||||||
| Total non-performing loans | 177 | 185 | ||||||
| Foreclosed assets held for sale | 0 | 0 | ||||||
| Total non-performing assets | $ | 177 | $ | 185 | ||||
| Non-performing loans as a percent of loans net of unearned income | 0.23 | % | 0.26 | % | ||||
| Non-performing assets as a percent of assets | 0.12 | % | 0.14 | % | ||||
A loan is placed on non-accrual when payment terms have been seriously violated (principal and/or interest payments are 90 days or more past due, deterioration of the borrower’s ability to repay, or significant decrease in value of the underlying loan collateral) and stays on non-accrual until the loan is brought current as to principal and interest. The classification of a loan or other asset as non-accruing does not indicate that loan principal and interest will not be collectible. The Bank adheres to the policy of the Federal Reserve that banks may not accrue interest on any loan when the principal or interest is past due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection.
Disclosure Control and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2003, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
21
FC BANC CORP.
PART II - OTHER INFORMATION
| ITEM 1 - LEGAL PROCEEDINGS | |
| Not Applicable |
| ITEM 2 - CHANGES IN SECURITIES |
| 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) | All applicable exhibits required by Item 601 of Regulation S-B are furnished with this report. |
| (b) | No report on Form 8-K was filed during the second quarter ended June 30, 2003. |
22
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| FC BANC CORP. |
| Date | /s/ JOHN R. CHRISTMAN | ||
| John R. Christman | |||
| President and Principal Executive Officer | |||
| Date | /s/ COLEMAN CLOUGHERTY | ||
| Coleman Clougherty | |||
| Principal Financial and Accounting Officer and Treasurer |
23
Exhibit Index
| Page Number | Exhibit |
| N/A | Exhibit 3.1 Amended and Restated Articles of Incorporation of FC Banc Corp., filed March 26, 2003 as Schedule 14A, Proxy Statement for the fiscal year ended December 31, 2002 and incorporated herein by reference. |
| N/A | Exhibit 3.2 Code of regulations of FC Banc Corp., filed March 26, 2003 as Schedule 14A, Proxy Statement for the fiscal year ended December 31, 2002 and incorporated herein by reference. |
| N/A | Exhibit 4 For definition of rights of security holders please refer to Schedule 14A, Proxy Statement for the fiscal year ended December 31, 2002 and incorporated herein by reference. |
| 25 | Exhibit 31.1 - CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 26 | Exhibit 31.2 - CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 27 | Exhibit 32.1- CEO Certification Pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 28 | Exhibit 32.2- CFO Certification Pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 29 | Exhibit 99.1 Independent Accountant’s Report |
24
