U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004. |
| ¨ | 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 | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
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. Yesx No¨
As of April 30, 2004, 578,867 shares of Common Stock of the Registrant were outstanding. There were no preferred shares outstanding.
Transitional Small Business Disclosure Format (Check One)
Yes¨ Nox
FC BANC CORP.
FORM 10-QSB
2
FC BANC CORP, INC.
CONSOLIDATED BALANCE SHEET (Unaudited)
| (Dollars in thousands, except per share amounts) | ||||||||
At March 31, 2004 | At December 31, 2003 | |||||||
ASSETS | ||||||||
Cash and cash equivalents: | ||||||||
Cash and amounts due from banks | $ | 10,052 | $ | 3,936 | ||||
Federal funds sold | 6,000 | 0 | ||||||
Total cash and cash equivalents | 16,052 | 3,936 | ||||||
Investment securities, available-for-sale | 47,706 | 47,668 | ||||||
Loans | 77,158 | 87,022 | ||||||
Allowance for loan losses | (1,197 | ) | (1,194 | ) | ||||
Net loans | 75,961 | 85,828 | ||||||
Premises and equipment | 6,743 | 6,746 | ||||||
Bank owned life insurance | 2,913 | 2,874 | ||||||
Accrued interest and other assets | 2,206 | 2,012 | ||||||
TOTAL ASSETS | $ | 151,581 | $ | 149,064 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Deposits | ||||||||
Noninterest-bearing | 13,091 | 13,116 | ||||||
Interest-bearing | 89,782 | 89,352 | ||||||
Total deposits | 102,873 | 102,468 | ||||||
Short-term borrowings | 11,388 | 8,472 | ||||||
Other borrowings | 22,287 | 23,728 | ||||||
Accrued interest and other liabilities | 1,147 | 1,109 | ||||||
TOTAL LIABILITIES | 137,695 | 135,777 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common shares, no par value; 4,000,000 shares authorized; 665,632 shares issued | 832 | 832 | ||||||
Additional paid-in capital | 1,358 | 1,361 | ||||||
Retained earnings | 13,408 | 13,248 | ||||||
Treasury shares, at cost | (2,187 | ) | (2,270 | ) | ||||
Accumulated other comprehensive income | 475 | 116 | ||||||
TOTAL SHAREHOLDERS’ EQUITY | 13,886 | 13,287 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 151,581 | $ | 149,064 | ||||
See accompanying notes to unaudited consolidated financial statements
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FC BANC CORP, INC.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
| (Dollars in thousands except earnings per share amounts) | ||||||
Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||
INTEREST INCOME | ||||||
Interest and fees on loans | $ | 1,291 | $ | 1,298 | ||
Interest and dividends on investment securities | 485 | 532 | ||||
Interest on federal funds sold | 3 | 3 | ||||
TOTAL INTEREST INCOME | 1,779 | 1,833 | ||||
INTEREST EXPENSE | ||||||
Interest on deposits | 419 | 452 | ||||
Interest on borrowed funds | 236 | 221 | ||||
TOTAL INTEREST EXPENSE | 655 | 673 | ||||
NET INTEREST INCOME | 1,124 | 1,160 | ||||
Provision for loan losses | — | — | ||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,124 | 1,160 | ||||
OTHER INCOME | ||||||
Service charges | 150 | 174 | ||||
Investment securities gains,net | — | 79 | ||||
Bank owned life insurance earnings | 42 | 32 | ||||
Other income | 83 | 37 | ||||
TOTAL OTHER INCOME | 275 | 322 | ||||
OTHER EXPENSES | ||||||
Salaries and employee benefits | 517 | 581 | ||||
Net occupancy and equipment | 199 | 198 | ||||
Legal and professional fees | 55 | 82 | ||||
Data processing | 103 | 69 | ||||
State taxes | 43 | 38 | ||||
Other expenses | 192 | 180 | ||||
TOTAL OTHER EXPENSES | 1,109 | 1,148 | ||||
NET INCOME BEFORE FEDERAL INCOME TAX EXPENSE | 290 | 334 | ||||
Federal income tax expense | 21 | 54 | ||||
NET INCOME | $ | 269 | $ | 280 | ||
EARNINGS PER SHARE: | ||||||
Earnings per common share – basic | $ | 0.47 | $ | 0.49 | ||
Earnings per common share – diluted | $ | 0.46 | $ | 0.49 | ||
See accompanying notes to unaudited consolidated financial statements
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FC BANC CORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months March 31 | |||||||
| 2004 | 2003 | ||||||
| (dollars in thousands) | |||||||
Net income | $ | 269 | $ | 280 | |||
Other comprehensive income (loss): | |||||||
Unrealized gain (losses) on available for sale securities | $ | 544 | $ | (59 | ) | ||
Less: Reclassification adjustment for gain included in net income | — | 79 | |||||
Other comprehensive gain (loss) before tax | 544 | (138 | ) | ||||
Income tax expense (benefit) related to other comprehensive income | 185 | (47 | ) | ||||
Other comprehensive gain (loss) before tax | 359 | (91 | ) | ||||
Comprehensive income | 628 | 189 | |||||
See accompanying notes to the unaudited consolidated financial statements
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FC BANC CORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
| Common Shares | Additional paid-in | Retained Earnings | Accumulated Comprehensive | Treasury Shares | Total Shareholders Equity | |||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||
Balances at December 31, 2003 | 832 | 1,361 | 13,248 | 116 | (2,270 | ) | 13,287 | |||||||||||||||
Net income | 269 | 269 | ||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||
Unrealized loss on available for sale Securities, net of reclassification Adjustment, net of taxes of $185 | 359 | 359 | ||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||
Cash dividends ($.19 per share) | (109 | ) | (109 | ) | ||||||||||||||||||
Purchase of treasury stock | (12 | ) | (12 | ) | ||||||||||||||||||
Exercise of Stock Options (3,800 share) | (3 | ) | 95 | 92 | ||||||||||||||||||
Balances at March 31, 2004 | $ | 832 | $ | 1,358 | $ | 13,408 | $ | 475 | $ | (2,187 | ) | $ | 13,886 | |||||||||
See accompanying notes to unaudited consolidated financial statements
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FC BANC CORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
| (Dollars in thousands) | ||||||
| Three Months Ended March 31 2004 | Three Months Ended March 31 2003 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income | 269 | 280 | ||||
Adjustments to reconcile net income to net cash Provided by operating activities: | ||||||
Investments gains, net | — | (79 | ) | |||
Gain from disposal of premises and equipment | — | 3 | ||||
Originations from sale of loans | (11,864 | ) | — | |||
Proceeds from sale of loans | 11,881 | — | ||||
Gain from sale of loans | (17 | ) | — | |||
Depreciation, amortization, accretion, and deferred loan fees | 274 | 222 | ||||
Deferred income taxes | 222 | (252 | ) | |||
Net change in: | ||||||
Accrued interest receivable | (5 | ) | (90 | ) | ||
Accrued interest payable | (11 | ) | (5 | ) | ||
Other assets | (325 | ) | 644 | |||
Other liabilities | 50 | 183 | ||||
Net cash provided by operating activities | 474 | 906 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Purchases of securities available-for-sale | (2,549 | ) | (19,315 | ) | ||
Proceeds from sales of securities | — | 1,525 | ||||
Proceeds from maturities and repayments of securities available-for-sale | 2,587 | 4,987 | ||||
Purchases of regulatory stock | (9 | ) | (9 | ) | ||
Net increase in loans | 9,867 | (970 | ) | |||
Purchase of premises and equipment | (105 | ) | (11 | ) | ||
Net cash used in investing activities | 9,791 | (13,793 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Net increase in deposits | 405 | 4,971 | ||||
Net increase in short-term borrowed funds | 2,915 | 620 | ||||
Proceeds from long-term FHLB advances | — | 9,000 | ||||
Repayments on borrowings | (1,440 | ) | (162 | ) | ||
Purchase of treasury stock | (12 | ) | — | |||
Exercise of stock options | 92 | — | ||||
Cash dividends paid | (109 | ) | (103 | ) | ||
Net cash provided by financing activities | 1,851 | 14,326 | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 12,116 | 1,439 | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 3,936 | 4,825 | ||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | 16,052 | 6,264 | ||||
SUPPLEMENTAL DISCLOSURES | ||||||
Cash paid during the period for interest | 665 | 673 | ||||
Cash paid during the period for income taxes | 235 | 0 | ||||
7
FC BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
March 31, 2004
(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 March 31, 2004, and December 31, 2003, and the results of operations for the three months ended March 31, 2004 and 2003, and the cash flows for the three months ended March 31, 2004 and 2003. 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 months ended March 31, 2004, are not necessarily indicative of the results which may be expected for the entire fiscal year.
The Company maintains a stock option plan for key officers, employees, and non-employee directors. The Company accounts for the plan under provisions of APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations. Under this opinion, no compensation expense has been recognized with respect to the plan because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the grant date.
Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of FAS No. 123,Accounting for Stock-Based Compensation, net income applicable to common stock and basic and diluted net income per common share for the three months ended March 31, 2004 would have been as follows:
| Three Months Ended March 31, | ||||||
| 2004 | 2003 | |||||
Net income, as reported: | $ | 269 | $ | 280 | ||
Less proforma expense related to stock options | 9 | 9 | ||||
Proforma net income | 260 | 271 | ||||
Basic net income per common share: | ||||||
As reported | $ | 0.47 | $ | 0.49 | ||
Pro forma | 0.45 | 0.47 | ||||
Diluted net income per common share: | ||||||
As reported | $ | 0.46 | $ | 0.49 | ||
Pro forma | 0.45 | 0.47 | ||||
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For purposes of computing pro forma results, the Company estimated the fair values of stock options using the Black-Scholes option pricing model. The model requires the use of subjective assumptions which can materially affect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans.
The fair value of each stock option granted was estimated using the following weighted-average assumptions:
Grant Year | Expected Dividend Yield | Risk-Free Interest Rate | Expected Volatility | Remaining Expected Life (in years) | ||||
1997 | 1.10% | 6.89% | 6.41% | 9.32 | ||||
1998 | 1.05% | 5.77% | 27.00% | 9.18 | ||||
1999 | 1.02% | 5.17% | 15.25% | 9.24 | ||||
2000 | 1.02% | 6.75% | 5.56% | 9.05 | ||||
2001 | 1.03% | 5.37% | 3.59% | 9.51 | ||||
2002 | 1.03% | 4.05% | 16.50% | 9.89 |
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 March 31, | ||||
| 2004 | 2003 | |||
Weighted-average common shares outstanding used to calculate basic earnings per share | 576,692 | 574,427 | ||
Additional common stock equivalents (stock options) used to calculate diluted earnings per share. | 3,716 | 2,505 | ||
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share | 580,409 | 576,932 | ||
There were no options that were antidilutive as of March 31, 2004. Options to purchase 14,500 shares of common stock outstanding as of the three months ended March 31, 2003 at prices from $28.00 to $28.50 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 December 2003, the FASB issued a revision to Interpretation 46, Consolidation of Variable Interest Entities, which established standards for identifying a variable interest entity (VIE) and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004. 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.
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. The capital position of the Bank does not differ significantly from the Company’s.
| 2004 | 2003 | |||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||
Total Capital (to Risk-weighted Assets) | ||||||||||||
Actual | $ | 14,413 | 15.67 | % | $ | 13,533 | 15.61 | % | ||||
For Capital Adequacy Purposes | 7,358 | 8.00 | 6,936 | 8.00 | ||||||||
To Be Well Capitalized | 9,198 | 10.00 | 8,669 | 10.00 | ||||||||
Tier I Capital (to Risk-weighted Assets) | ||||||||||||
Actual | $ | 13,263 | 14.42 | % | $ | 12,448 | 14.36 | % | ||||
For Capital Adequacy Purposes | 3,679 | 4.00 | 3,467 | 4.00 | ||||||||
To Be Well Capitalized | 5,519 | 6.00 | 5,201 | 6.00 | ||||||||
Tier I Capital (to Average Assets) | ||||||||||||
Actual | $ | 13,263 | 8.89 | % | $ | 12,448 | 9.00 | % | ||||
For Capital Adequacy Purposes | 5,968 | 4.00 | 5,532 | 4.00 | ||||||||
To Be Well Capitalized | 7,460 | 5.00 | 6,916 | 5.00 | ||||||||
10
FC BANC CORP.
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. 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-month periods ended March 31, 2004 and 2003.
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
11
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates.
The 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 mortgage companies in each and every market we serve. In our direct markets, the Bank has approximately a 24% 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. Overall, the general outlook for the national economy has shown positive signs. Real GDP has increased 4.8% in the past four quarters, the fastest growth rate since 1984. New orders, inventories, and employment indicators all increased during the month of April. The local economy also reflects that of the national economic trends.
12
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 March 31, 2004, the consolidated assets of the Company totaled $151.6 million, an increase of $2.5 million, or 1.69%, from $149.1 million at December 31, 2003. The increase in total assets resulted from growth in cash and cash equivalents of $12.1 million, and a decrease in loans of $9.8 million.
Net loans receivable decreased by $9.8 million, or 11.50%, to $76.0 million at March 31, 2004, compared to $85.8 million at December 31, 2003. Loans secured by real estate and consumer loans decreased $10.1 million and $0.5 million, respectively. Commercial loans increased by $0.8 million. The allowance for loan losses has stayed about the same as compared to December 31, 2003. The quality of our loan portfolio continues to be strong, as delinquency continues to be below peer group. The decrease in loans secured by real estate was due to the sale of approximately $12.0 million in loans. The loans were sold as part of an asset liability strategy to enhance the future of the bank. In order to better position us for the future we sold long term fixed rates loans. The benefit of this will be realized when rates increase. We are projecting approximately 4 percent loan growth in the second quarter, and 12 to 16 percent for the rest of the year. The majority of the growth will be in the commercial/agricultural and real estate categories. As we increase our real estate portfolio we plan to continue our strategy of selling some long term fixed rate real estate loans in the secondary market.
Investment securities at March 31, 2004 stayed about the same when compared to December 31, 2003. The investment portfolio will increase in the second quarter as we invest the monies received from the sale of the loans.
Total cash and cash equivalents increased by $12.2 million to $16.1 million at March 31, 2004, compared to $3.9 million at December 31, 2003. In 2004, the Company began selling loans to third parties causing an increase in cash resulting in the receipt of approximately $12 million.
Accrued interest and other assets increased by $194 due to an increase in prepaid taxes.
Deposit liabilities increased by $0.4 million, or 0.40%, to $102.9 million at March 31, 2004, from $102.5 million at December 31, 2003. Money market accounts, savings accounts, and time deposits increased by $0.8 million, $0.6 million, and $0.1 million, respectively. Interest bearing checking accounts decreased $1.1 million, and non interest bearing checking accounts remained relatively constant. The growth in the money market accounts was due to our new premier money market product. Our strategy for 2004 is to focus on obtaining lower cost deposits.
Other borrowings decreased by $1.44 million due to a decrease in FHLB borrowings. There was a maturity of $1.0 million and paydowns of $0.44 million in amortizing borrowings.
13
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Total shareholders’ equity was $13.9 million at March 31, 2004 as compared to $13.3 million on December 31, 2003. During the first three months of 2004 shareholders equity increased due to an increase of $0.4 million in accumulated other comprehensive income and net income of $0.3 million, which was offset by a shareholders dividend of $0.1 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.
14
FC BANC CORP.
MANAGEMENT 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 March 31, 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 March 31, 2004, the bank was in process of the renovation of the Bucyrus South Branch Office. The budgeted commitment for the project is $0.25 million. As of quarter end $0.04 million has been spent on the project.
15
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 March 31, 2004 and 2003
General. Net income decreased by $11, from $280 to $269 during the first quarter of 2004 as compared to the same three-month period ended March 31, 2003. Decreases of $36 in net interest income and $47 in other income were partially offset by reductions of $39 in non interest expense and $33 in tax expense.
Net Interest Income.Net interest income decreased by $36 for the three months ended March 31, 2004 as compared to March 31, 2003. A decrease of $54 in interest income was offset by a decrease of $18 in interest expense. A decrease in the average rate earned on earning assets was the primary contributing factor to the decrease in interest income of $54 for the three months ended March 31, 2004 compared to 2003. The average rate earned on earning assets was 5.23% for the first quarter of 2004 compared to 5.91% in the first quarter of 2003. The largest contributor was loans which decreased by 118 basis points. This was partially offset by an increase in total earning assets. Average loans for the first quarter of 2004 were $85.1 million compared to $71.9 million in the first quarter of 2003, an increase of 18.4%. The increase was mostly in real estate loans ($11.5 million) with an increase of $4.0 million in commercial loans and a decrease of $2.1 million in installment loans. Interest and dividends on investment securities decreased by $47 due a decrease in average balances of $3.1 million and a 22 basis point decrease in average rate earned. Interest expense on deposit liabilities decreased by $33 for the three months ended March 31, 2004, as compared to the same period in 2003. Average deposits increased by $3.7 million comparing March 31, 2004 to 2003. The expense incurred due to the growth was offset by the 22 basis point decrease in cost of funds. Interest expense paid on borrowings increased due to a $6.4 million increase in average balances. Comparing the first quarter of 2004 to the first quarter of 2003, the Bank’s average cost of funds (including borrowings) for the first three months of 2004 was 1.94%, as compared to 2.18% for the same period in 2003.
Provision for Loan Losses. Based upon continued strong credit quality the Bank did not expense any provision for loan losses during the first quarter of 2004. We also recorded no provision for loan losses in the first quarter of 2003. Our reserve for loan loss as of March 31, 2004 stood at $1.2 million or 1.55% of gross loans. The reserve balance on March 31, 2003 also was $1.2 million. Current analysis indicates that this level of reserve is adequate given the current economic trends, delinquency patterns, and loan quality within the various portfolios.
Non-Interest Income. Non-interest income decreased by $47, or 14.60%, to $275 for the three months ended March 31, 2004, from $322 for the three months ended March 31, 2003. In 2004, we have increased income from investment services by $21 and also earned income of $17 from the sale of loans. 2003 was higher than usual due to first quarter security sale gains of $79.
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FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(numbers in thousands except per share amounts)
Non-Interest Expense. Non-interest expense decreased by $39, or 3.40%, to $1.1 million for the three months ended March 31, 2004, from $1.2 million in the comparable period in 2003. The decrease of $64 in salaries and employee benefits was partially offset by increases of $1 in net occupancy and $24 in other expenses. Net occupancy and equipment expense variances were due to an increase of $10 in depreciation expense, which was offset by a decrease in equipment maintenance. Other expense variances were increases in computer services ($45, due to expansion of products), training ($9, due to increased training of employees). The most significant decrease was in ATM Fees, which decrease by $30 due to a refund.
Income Taxes. The provision for income taxes decreased by $33 for the three months ended March 31, 2004, compared with the prior year, primarily as a result of lower taxable income and higher tax exempt income.
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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).
| March 31, 2004 | December 31, 2003 | |||||||
Non-accruing loans | $ | 410 | $ | 191 | ||||
Impaired loans | 0 | |||||||
Accrual loans - 90 days or more past due | 34 | 8 | ||||||
Total non-performing loans | 444 | 199 | ||||||
Foreclosed assets held for sale | 0 | 0 | ||||||
Total non-performing assets | $ | 444 | 199 | |||||
Non-performing loans as a percent of loans net of unearned income | 0.58 | % | 0.23 | % | ||||
Non-performing assets as a percent of assets | 0.29 | % | 0.13 | % | ||||
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 March 31, 2004, 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 March 31, 2004, 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.
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FC BANC CORP.
PART II - OTHER INFORMATION
Not Applicable
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS, AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The following tabular format provides the information specified in paragraph (b) of this Item with respect to any purchase made by or on behalf of the issuer or any “affiliated purchaser,” as defined in § 240.10b-18(a)(3) of this chapter, of shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to section 12 of the Exchange Act.
ISSUER PURCHASES OF EQUITY SECURITIES
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||
January 1, 2004-January 31, 2004 | 350 | $ | 29 | 0 | 0 | ||||
February 1, 2004-February 29, 2004 | 0 | N/A | N/A | N/A | |||||
March 1, 2004-March 31, 2004 | 80 | $ | 29 | 0 | 0 | ||||
Total | 430 | $ | 29 | 0 | 0 | ||||
All 430 common shares were repurchased pursuant to private transactions with shareholders.
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ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 28, 2004, the Corporation held its Annual Meeting of Shareholders.
The following matters were submitted to the shareholders, for which the following votes were cast:
| 1. | Each of the following three directors nominated were elected to terms of three (3) years expiring in 2007 by the following votes: |
John R. Christman | For: 418,119 | Withheld: 30,210 | ||
Terry L. Gernert | For: 419,312 | Withheld: 29,017 | ||
John O. Spreng Jr. | For: 434,951 | Withheld: 13,378 |
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) Report Form 8-K which announced formation of a special committee of the Board of Directors and the retention of Austin Associates, LLC was filed with the Securities and Exchange Commission on March 31, 2004.
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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 May 14, 2004 | By | /s/ JOHN R. CHRISTMAN | ||||||
| John R. Christman | ||||||||
| President and Principal Executive Officer | ||||||||
| Date May 14, 2004 | By | /s/ JEFFREY A. WISE | ||||||
| Jeffrey A. Wise | ||||||||
| Interim Treasurer and Principal Accounting Officer | ||||||||
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Exhibit Index
| Page Number | Exhibit | |
| N/A | Exhibit 3.1 i Amended and Restated Articles of Incorporation of FC Banc Corp., filed as part of the Form 10KSB for the fiscal year ended December 31, 2002 and incorporated herein by reference. | |
| 23 | Exhibit 3.1 ii Amendment to the Amended and Restated Articles of Incorporation of FC Banc Corp. | |
| N/A | Exhibit 3.2 Code of regulations of FC Banc Corp., filed February 24, 2003 as an exhibit the 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. | |
| 24 | Exhibit 31.1 - CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 25 | Exhibit 31.2 - CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 26 | 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. | |
| 27 | 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. | |
| 28 | Exhibit 99.1 Independent Accountant’s Report | |
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