UNITED STATES
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, 2003.
| ¨ | 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)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
As of October 31, 2003, 574,067 shares of Common Stock of the Registrant were outstanding. There were no preferred shares outstanding.
Transitional Small Business Disclosure Format (Check One) Yes ¨ No x
FC BANC CORP.
FORM 10-QSB
2
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
| September 30, 2003 | December 31, 2002 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 3,687 | $ | 4,825 | ||||
Federal funds sold | — | — | ||||||
Cash and cash equivalents | 3,687 | 4,825 | ||||||
Investment securities available for sale | 49,236 | 45,164 | ||||||
Loans | 85,416 | 71,555 | ||||||
Less allowance for loan losses | 1,240 | 1,213 | ||||||
Net loans | 84,176 | 70,342 | ||||||
Premises and equipment | 6,806 | 7,023 | ||||||
Bank owned life insurance | 2,845 | 2,757 | ||||||
Accrued interest and other assets | 2,118 | 2,279 | ||||||
TOTAL ASSETS | $ | 148,868 | $ | 132,390 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 13,601 | $ | 13,403 | ||||
Interest-bearing | 89,161 | 83,609 | ||||||
Total deposits | 102,762 | 97,012 | ||||||
Short-term borrowings | 7,657 | 4,477 | ||||||
Other borrowings | 24,412 | 16,769 | ||||||
Accrued interest and other liabilities | 1,021 | 1,224 | ||||||
TOTAL LIABILITIES | 135,852 | 119,482 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock of $25 par value; 750 shares authorized, no shares issued and outstanding | — | — | ||||||
Common stock, no par value; 4,000,000 shares authorized, 665,632 shares issued, 574,067 and 574,427 outstanding | 832 | 832 | ||||||
Additional paid-in capital | 1,360 | 1,364 | ||||||
Retained earnings | 12,985 | 12,463 | ||||||
Accumulated other comprehensive income | 143 | 536 | ||||||
Treasury stock, at cost (91,565 and 91,205 shares) | (2,304 | ) | (2,287 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 13,016 | 12,908 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 148,868 | $ | 132,390 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
| Three-months ended Sept 30, | Nine months ended Sept 30, | ||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| (unaudited) | (unaudited) | ||||||||||||
INTEREST INCOME | |||||||||||||
Interest and fees on loans | $ | 1,325 | $ | 1,104 | $ | 3,878 | $ | 3,600 | |||||
Federal funds sold | 3 | 2 | 6 | 19 | |||||||||
Investment securities: | |||||||||||||
Taxable | 217 | 396 | 948 | 1,061 | |||||||||
Exempt from federal income tax | 164 | 135 | 488 | 340 | |||||||||
Total interest income | 1,709 | 1,637 | 5,320 | 5,020 | |||||||||
INTEREST EXPENSE | |||||||||||||
Deposits | 431 | 570 | 1,337 | 1,350 | |||||||||
Borrowings | 250 | 187 | 725 | 411 | |||||||||
Total interest expense | 681 | 757 | 2,062 | 1,761 | |||||||||
NET INTEREST INCOME | 1,028 | 880 | 3,258 | 3,259 | |||||||||
Provision for loan losses | — | — | 50 | (275 | ) | ||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,028 | 880 | 3,208 | 3,534 | |||||||||
NONINTEREST INCOME | |||||||||||||
Service charges on deposit accounts | 164 | 164 | 482 | 379 | |||||||||
Investment securities gains, net | 151 | 2 | 314 | 18 | |||||||||
Bank owned life insurance earnings | 32 | 32 | 96 | 96 | |||||||||
Fixed asset gains, net | — | — | 97 | — | |||||||||
Other income | 69 | 210 | 193 | 299 | |||||||||
Total noninterest income | 416 | 408 | 1,182 | 792 | |||||||||
NONINTEREST EXPENSE | |||||||||||||
Salaries and employee benefits | 573 | 557 | 1,611 | 1,901 | |||||||||
Net occupancy and equipment expenses | 192 | 179 | 581 | 465 | |||||||||
Professional fees | 62 | 37 | 247 | 134 | |||||||||
State franchise tax | 42 | 40 | 120 | 115 | |||||||||
Data processing | 61 | 72 | 185 | 169 | |||||||||
Other expense | 214 | 64 | 686 | 550 | |||||||||
Total noninterest expense | 1,144 | 949 | 3,430 | 3,334 | |||||||||
Income before income taxes | 300 | 339 | 960 | 992 | |||||||||
Income taxes | 21 | 61 | 128 | 203 | |||||||||
NET INCOME | $ | 279 | $ | 278 | $ | 832 | $ | 789 | |||||
DIVIDENDS PER SHARE | $ | 0.18 | $ | 0.16 | $ | 0.54 | $ | 0.48 | |||||
EARNINGS PER SHARE | |||||||||||||
Basic | $ | 0.48 | $ | 0.48 | $ | 1.45 | $ | 1.36 | |||||
Diluted | $ | 0.48 | $ | 0.48 | $ | 1.44 | $ | 1.36 | |||||
See accompanying notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
| Three-months ended Sept 30, | Nine months ended Sept 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| (unaudited) | ||||||||||||||||
Net income | $ | 279 | $ | 278 | $ | 832 | $ | 789 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Change in net unrealized gains (losses) on investment securities, available for sale | (650 | ) | 542 | (281 | ) | 822 | ||||||||||
Less: realized gains included in net income | (151 | ) | (4 | ) | (314 | ) | (18 | ) | ||||||||
Other comprehensive income (loss), before tax | (801 | ) | 538 | (595 | ) | 804 | ||||||||||
Income tax expense benefit related to other comprehensive income (loss) | (272 | ) | 183 | (202 | ) | 273 | ||||||||||
Other comprehensive income (loss), net of tax | (529 | ) | 355 | (393 | ) | 531 | ||||||||||
Comprehensive Income (loss) | $ | (250 | ) | $ | 633 | $ | 439 | $ | 1,320 | |||||||
See accompanying notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
Balance, December 31, 2001 | $ | 832 | $ | 1,366 | $ | 11,793 | $ | 109 | $ | (1,921 | ) | $ | 12,179 | ||||||||||
Net income | 1,052 | 1,052 | |||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||
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 | |||||||||||||||||||
Balance, December 31, 2002 | 832 | 1,364 | 12,463 | 536 | (2,287 | ) | 12,908 | ||||||||||||||||
Net income | 832 | 832 | |||||||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||
Unrealized loss on available for sale securities net of reclassification adjustment, net of taxes benefit of $202 | (393 | ) | (393 | ) | |||||||||||||||||||
Comprehensive income | |||||||||||||||||||||||
Cash dividends ($.54 per share) | (310 | ) | (310 | ) | |||||||||||||||||||
Purchase of treasury stock | (63 | ) | (63 | ) | |||||||||||||||||||
Exercise of stock options (1,800 shares) | (4 | ) | 46 | 42 | |||||||||||||||||||
Balance, September 30, 2003 | $ | 832 | $ | 1,360 | $ | 12,985 | $ | 143 | (2,304 | ) | $ | 13,016 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
6
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
| Nine-months ended Sept 30, | ||||||||
| 2003 | 2002 | |||||||
| (unaudited) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 832 | $ | 789 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 50 | (275 | ) | |||||
Investment securities gains, net | (314 | ) | (18 | ) | ||||
Gain from disposal of premises and equipment | (97 | ) | — | |||||
Depreciation, amortization and accretion | 759 | 359 | ||||||
Deferred income taxes | 337 | (445 | ) | |||||
Increase in accrued interest receivable | (37 | ) | (22 | ) | ||||
Decrease in accrued interest payable | (17 | ) | (9 | ) | ||||
Other, net | (185 | ) | 455 | |||||
Net cash provided by operating activities | 1,328 | 834 | ||||||
INVESTING ACTIVITIES | ||||||||
Investment securities available for sale: | ||||||||
Proceeds from repayments and maturities | 21,405 | 10,634 | ||||||
Purchases | (32,251 | ) | (32,099 | ) | ||||
Proceeds from sales | 6,048 | 9,676 | ||||||
Purchase of Federal Home Loan Bank Stock | (26 | ) | — | |||||
Increase in loans, net | (13,896 | ) | (7,734 | ) | ||||
Purchases of premises and equipment | (90 | ) | (2,444 | ) | ||||
Sale of premises and equipment | 102 | — | ||||||
Net cash used for investing activities | (18,708 | ) | (21,967 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Increase in deposits, net | 5,750 | 6,163 | ||||||
Increase in short-term borrowings, net | 3,180 | 2,487 | ||||||
Proceeds from other borrowings | 9,000 | 10,000 | ||||||
Repayments of other borrowings | (1,357 | ) | (103 | ) | ||||
Purchases of treasury stock | (63 | ) | (216 | ) | ||||
Proceeds from stock option exercises | 42 | — | ||||||
Cash dividends | (310 | ) | (278 | ) | ||||
Net cash provided by financing activities | 16,242 | 18,053 | ||||||
Decrease in cash and cash equivalents | (1,138 | ) | (3,080 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 4,825 | 6,659 | ||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 3,687 | $ | 3,579 | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash paid during the year for: | ||||||||
Interest on deposits and borrowings | $ | 2,079 | $ | 1,770 | ||||
Income taxes | — | 284 | ||||||
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
September 30, 2003
(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 FC Banc Corp.’s (“Company” or “Bancorp”) financial position as of September 30, 2003, and December 31, 2002, and the results of operations for the three and nine months ended September 30, 2003 and 2002, and the cash flows for the nine months ended September 30, 2003 and 2002. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2003, are not necessarily indicative of the results which may be expected for the entire fiscal year.
NOTE 2 EARNINGS PER SHARE
There are no convertible securities which 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 September 30, | Nine Months Ended September 30, | |||||||
| 2003 | 2002 | 2003 | 2002 | |||||
Weighted-average common shares outstanding used to calculate basic earnings per share | 575,682 | 579,862 | 574,948 | 580,963 | ||||
Additional common stock equivalents (stock options) used to calculate diluted earnings per share. | 1,664 | 2,148 | 1,897 | 69 | ||||
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share | 577,346 | 582,010 | 576,845 | 581,032 | ||||
Options to purchase 1,800 shares of common stock at a price of $28.50 were outstanding for the three and nine months ended September 30, 2003. These shares were not included in the computation of diluted EPS because to do so would have been anti-dilutive. Options to purchase 14,500 shares of common stock at prices from $28.00 to $28.50 were outstanding for the three and nine months ended September 30, 2002. These shares were not included in the computation of diluted EPS because to do so would have been anti-dilutive.
8
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.
9
The following table represents the effect on net income and earnings per share had the stock-based employee compensation expense been recognized:
Three Months Ended | Nine Months Ended | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
Net income, as reported: | $ | 279 | $ | 278 | $ | 832 | $ | 789 | ||||
Less proforma expense related to stock options | 8 | 13 | 25 | 39 | ||||||||
Proforma net income | $ | 271 | $ | 265 | $ | 807 | $ | 750 | ||||
Basic net income per common share: | ||||||||||||
As reported | $ | 0.48 | $ | 0.48 | $ | 1.45 | $ | 1.36 | ||||
Pro forma | $ | 0.47 | $ | 0.46 | $ | 1.40 | $ | 1.29 | ||||
Diluted net income per common share: | ||||||||||||
As reported | $ | 0.48 | $ | 0.48 | $ | 1.44 | $ | 1.36 | ||||
Pro forma | $ | 0.47 | $ | 0.46 | $ | 1.40 | $ | 1.29 | ||||
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. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
10
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 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 adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
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. In October, 2003, the FASB decided to defer to the fourth quarter from the third quarter the implementation date for Interpretation No. 46. This deferral only applies to variable interest entities that existed prior to February 1, 2003.
11
NOTE 4 REGULATORY CAPITAL
The Company’s actual capital ratios are presented in the following table which shows the Company met all regulatory capital requirements at September 30, 2003. The capital position of the Bank does not differ significantly from the Company’s.
| (Dollars in thousands) | ||||||||||||||||||
| Actual | For Capital Adequacy Purposes | Categorized as Well Action Provisions | ||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
Total Risk-Based Capital (To Risk-Weighted Assets) | $ | 14,049 | 14.93 | % | $ | 7,526 | 8.00 | % | $ | 9,408 | 10.00 | % | ||||||
Tier I Capital (To Risk-Weighted Assets) | 12,872 | 13.68 | % | 3,763 | 4.00 | % | 5,645 | 6.00 | % | |||||||||
Tier I Capital (To Total Assets) | 12,872 | 8.72 | % | 5,932 | 4.00 | % | 7,415 | 5.00 | % | |||||||||
12
MANAGEMENT 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. 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 nine-month periods ended September 30, 2003 and 2002.
13
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 and every 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 are improving. Third quarter economic activity was above expectations as nominal GDP grew 9.0% in the third quarter and is up 5.1% in the last year. Non-defense new orders for durable goods jumped 15.7% and new home building permits surged by 18% annual rates in the third quarter. The local economy also generally reflects that of the national economic trends.
14
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Changes in Financial Condition
At September 30, 2003, the consolidated assets of the Company totaled $148.9 million, an increase of $16.5 million, or 12.5%, from $132.4 million at December 31, 2002. The increase in total assets resulted from growth in investments of $4.0 million and loan growth of $13.8 million.
Net loans have increased by $13.8 million, or 19.7%, to $84.2 million at September 30, 2003, compared to $70.3 million at December 31, 2002. The majority of the loan growth ($12.8 million) occurred in the second and third quarters as the housing industry continued strong due to low mortgage rates. Loans secured by real estate and commercial/financial/agricultural loans increased $12.3 million and $1.9 million, respectively. Consumer loans have decreased by $1.4 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 and third quarters was residential real estate which is a result of lower rates. There have been some more positive signs in the economy, but our loan demand is slowing. 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 $4.0 million, or 9.0% to $49.2 million at September 30, 2003, compared to $45.2 million at December 31, 2002. In 2003, the bank has purchased over 32 million in investments in order to replace securities sold, matured, and paid down. The bank has experienced large paydowns on mortgage backed securities in 2003, which has decreased the yield on the portfolio.
Deposit liabilities increased by $5.8 million, or 5.9%, to $102.8 million at September 30, 2003, from $97.0 million at December 31, 2002. Increases have been made in all deposit categories. The largest increases were in certificate of deposits, interest bearing checking accounts, and savings accounts. The net increases were by $2.3 million, $1.7 million, and $0.8 million, respectively. Money market accounts and demand deposits increased by $0.7 million and $0.3 million, respectively. Certificate of deposits have grown due to increases in the 25-month, 60-month, and public fund categories.
Short-term borrowings increased by $3.2 million, to $7.6 million at September 30, 2003, from $4.5 million at December 31, 2002. This increase was due to more repurchase agreement balances.
Other borrowings increased by $7.6 million, or 45.0%, to $24.4 million at September 30, 2003, from $16.8 million at December 31, 2002. Other borrowings have grown due to an investment strategy to leverage the bank through the use of alternative sources of funds. 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.
Total shareholders’ equity was $13.0 million at September 30, 2003 as compared to $12.9 million on December 31, 2002. During the first nine months of 2003 shareholders equity increased due to net income of $0.8 million and decreased due to reductions of $0.4 million in accumulated other comprehensive income and $0.3 million in shareholders dividends.
15
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
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 Company 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 Company must meet specific capital guidelines that involve quantitative measures of the Company’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.
Qualitative measures established by regulation to ensure capital adequacy requires the Company 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 September 30, 2003, that the Company 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 September 30, 2003, FC Banc Corp. has commitments of $250,000 in capital expenditures for renovation of its Bucyrus South Branch Office.
16
FC BANC CORP.
MANAGEMENT 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 September 30, 2003 and 2002
General. Net income increased by $1 from $278 to $279 during the third quarter of 2003 as compared to the same three-month period ended September 30, 2002. Net income was positively impacted by increases in interest income of $72 and total other income of $8. It was also positively impacted by decreases in interest expense of $76 and federal income tax expense of $40. It was negatively impacted by an increase in total other expenses of $195.
Net Interest Income.Net interest income increased by $148 for the three months ended September 30, 2003 as compared to September 30, 2002. The increase was due to an increase of $72 in interest income, and a decrease of $76 in interest expense.
Interest Income.The increase in loans was the primary contributing factor to the increase in interest income of $72, or 4.4%, for the three months ended September 30, 2003 compared to the same period in 2002. Loan demand was strong in the third quarter because borrowers wanted to refinance before mortgage rates rise. Yields were low due to the general market conditions. Net loans at the end of the third quarter of 2003 were $84.2 million compared to $67.2 million at the end of the third quarter of 2002, an increase of 25.3%. Increases were in real estate loans of $16.9 million and commercial loans of $2.3 million. Installment loans decreased by $2.5 million. Interest and dividends on investment securities decreased by $150 due to large paydowns on mortgage backed securities, which reduced the yield.
Interest Expense. Interest expense decreased by $76 or 10.0% for the three months ended September 30, 2003, as compared to the same period in 2002. Interest expense on deposits in the third quarter of 2003 was $139 less than in the same period of 2002. This was the result of lower interest rates paid on deposits. Comparing the third quarter of 2003 to the third quarter of 2002, the Bank’s average cost of funds for deposits was 1.67%, as compared to 2.01% for the same period in 2002. This was partially offset by interest expense on borrowings which increased by $63 for the same time period. This occurred because borrowings in the third quarter of 2002 increased by $5.0 million.
Non-Interest Income. Non-interest income increased by $8, or 2.0%, to $416 for the three months ended September 30, 2003, from $408 for the three months ended September 30, 2002. The Company had net gain on sales of securities of $151 during the three months ending September 30, 2003, compared to $2 for the same time period in 2002. Other income decreased by $141 due to reductions in check cashing fees, other service charges, and title agency fees collected.
Non-Interest Expense. Non-interest expense increased by $195, or 20.5%, to $1,144 for the three months ended September 30, 2003, from $949 in the comparable period in 2002. Salaries and employee benefits have increased by $16 due to rising health insurance costs. Occupancy has increased by $13 mostly due to an increase in equipment maintenance. Legal and professional fees have increased by $25. Other expense increased by $150 for the quarter due to increases in postage and freight, operating insurance, surety bond insurance, advertising, losses on NSF checks, and ATM fees.
Income Taxes. The provision for income taxes decreased by $ 40 for the three months ended September 30, 2003, compared with the prior year, primarily as a result of lower taxable income for the quarter.
17
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Comparison of Nine Months Ended September 30, 2003 and 2002
General. Net income increased by $43 during the nine months ended September 30, 2003 as compared to the same nine-month period ended September 30, 2002. Net income was positively impacted by the increase in total other income of $390 and the decrease in federal income tax expense of $75. It was negatively impacted by an increase in provision for loan losses of $325, an increase of $96 in noninterest expenses, and a decrease of $1 in net interest income.
Net Interest Income.Net interest income decreased by $1 for the nine months ended September 30, 2003 as compared to September 30, 2002. An increase of $300 in interest income was offset by an increase of $301 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 $300 or 6.0% for the nine months ended September 30, 2003 compared to 2002. The average earning assets for 2003 are $129.9 million compared to $104.1 million for the same period in 2002. Interest and fees on loans were the main reason for the increase in interest income. Average loans for 2003 are $76.1 million compared to $64.0 million for 2002, an increase of almost 19%. Increases were in real estate loans of $10.9 million and commercial loans of $2.2 million. Installment loans decreased by $1.0 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 6.6% compared to 7.6% during the same period in 2002. Overall, the yield on earning assets in 2003 is 5.4% compared to 6.5% in 2002.
Interest Expense. Interest expense has increased by $301 or 17.1% from last year to date. This was mostly due to the increase in size of the bank. Interest expense on deposit liabilities decreased by $13 or 1.0% for the nine months ended September 30, 2003, as compared to the same period in 2002. Total average deposits have increased by $13.2 million comparing the nine months ending September 30, 2003, to 2002. The expense that was incurred due to the growth was offset by the 28 basis point decrease in cost of funds. Interest expense paid on borrowings increased by $314 due to an increase in average borrowings of $13.8 million for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. Comparing year to date numbers from 2003 to 2002, the Bank’s average cost of funds including borrowings was 2.1%, as compared to 2.2% for the same period in 2002.
Provision for Loan Losses. The net expense on provision for loan losses increased by $325 when comparing the nine months ended September 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. In the same quarter of 2002, based upon continued strong credit quality the Bank recorded a negative provision for loan losses of $275. Our reserve for loan loss as of September 30, 2003 stood at $1.2 million or 1.5% of gross loans. The reserve balance on September 30, 2002 also was $1.2 million.
18
FC BANC CORP.
MANAGEMENT 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 $390, or 49.2%, to $1,182 for the nine months ended September 30, 2003, from $792 for the nine months ended September 30, 2002. The increase was due to increases of $97 for income earned on the sale of property, $103 for service charges on deposit accounts due to the success of the Overdraft Honor program, $33 for debit card activity fee income, and $21 for fees earned from investment services. The Company had net gain on sales of securities of $314 during the nine months ending September 30, 2003, compared to $18 for the same time period in 2002. Other non-interest income decreased by $106. The most significant decreases were in other service charges, check cashing fees, title agency income, and loan servicing fee income.
Non-Interest Expense. Non-interest expense increased by $96, or 2.9%, to $3,334 for the nine months ended September 30,2003, from $3,430 in the comparable period in 2002. Salaries and Benefits decreased by $290 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 $116 due to increases of $102 in depreciation expense, $16 in real estate tax expense, $13 in utilities expense, and $24 in maintenance expense. These expense increases were partially offset by decreases of $12 in property insurance expense, $19 in equipment leasing expense, and $6 in rental property expense. Legal and professional fees increased by $113 due to expenses for loan reviews, professional computer services, and the Overdraft Honor program. Other expenses increased by $136. Significant increases were in postage and freight, losses on NSF checks, operating insurance, internet banking expense, and advertising.
Income Taxes. The provision for income taxes decreased by $75 for the nine months ended September 30, 2003, compared with the prior year, primarily as a result of more municipal income and lower taxable income for the quarter.
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).
| September 30, 2003 | December 31, 2002 | |||||||
Non-accruing loans | $ | 205 | $ | 174 | ||||
Impaired loans | 0 | 0 | ||||||
Accrual loans - 90 days or more past due | 57 | 11 | ||||||
Total non-performing loans | 262 | 185 | ||||||
Foreclosed assets held for sale | 0 | 0 | ||||||
Total non-performing assets | $ | 262 | $ | 185 | ||||
Non-performing loans as a percent of loans net of unearned income | 0.31 | % | 0.26 | % | ||||
Non-performing assets as a percent of assets | 0.18 | % | 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.
19
Item 3Disclosure 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 September 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 September 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 September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
20
FC BANC CORP.
PART II - OTHER INFORMATION
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
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 quarter ended September 30, 2003. |
21
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 November 14, 2003 | /s/ John R. Christman | |
John R. Christman President and Principal Executive Officer | ||
Date November 14, 2003 | /s/ Coleman Clougherty | |
Coleman Clougherty Principal Financial and Accounting Officer and Treasurer | ||
22
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. | |
| 23 | Exhibit 31.1 - CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 24 | Exhibit 31.2 - CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 25 | 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. | |
| 26 | 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. | |
| 27 | Exhibit 99.1Independent Accountant’s Report | |
23
