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 June 30, 2005
| ¨ | 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.) |
105 Washington Square P.O. Box 567 Bucyrus, Ohio 44820
(Address of principal executive offices)
(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 12,13 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 ¨
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 1, 2005, 579,040 shares of Common Stock of the Registrant were outstanding
Transitional Small Business Disclosure Format (Check one): Yes ¨ No x
FORM 10-QSB
INDEX
Page Number | ||||
PART I | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (Unaudited) | |||
| Consolidated Balance Sheet June 30, 2005 and December 31, 2004 | 3 | |||
| Consolidated Statement of Income Three- and six- months ended June 30, 2005 and 2004 | 4 | |||
| Consolidated Statement of Comprehensive Income (Loss) Three- and six- months ended June 30, 2005 and 2004 | 5 | |||
| Consolidated Statement of Changes in Stockholders’ Equity — Six months ended June 30, 2005 and year ended December 31, 2004 | 6 | |||
Consolidated Statement of Cash Flows Six months ended June 30, 2005 and 2004 | 7 | |||
| 8-11 | ||||
Item 2. | 12-18 | |||
Item 3. | 18 | |||
PART II | OTHER INFORMATION | |||
Item 1. | 19 | |||
Item 2. | 19 | |||
Item 3. | 19 | |||
Item 4. | 19 | |||
Item 5. | 19 | |||
Item 6. | 19 | |||
| 20 | ||||
2
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
June 30, 2005 | December 31, 2004 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 3,310 | $ | 3,584 | ||||
Federal funds sold | — | — | ||||||
Cash and cash equivalents | 3,310 | 3,584 | ||||||
Investment securities available for sale | 68,703 | 53,749 | ||||||
Loans | 82,738 | 79,655 | ||||||
Less allowance for loan losses | 1,026 | 966 | ||||||
Net loans | 81,712 | 78,689 | ||||||
Premises and equipment | 6,495 | 6,698 | ||||||
Bank owned life insurance | 3,052 | 3,001 | ||||||
Accrued interest and other assets | 3,827 | 2,570 | ||||||
TOTAL ASSETS | $ | 167,099 | $ | 148,291 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 13,511 | $ | 14,259 | ||||
Interest-bearing | 87,877 | 86,951 | ||||||
Total deposits | 101,388 | 101,210 | ||||||
Short-term borrowings | 15,232 | 11,621 | ||||||
Other borrowings | 34,988 | 20,887 | ||||||
Accrued interest and other liabilities | 2,320 | 1,305 | ||||||
TOTAL LIABILITIES | 153,928 | 135,023 | ||||||
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 | 832 | 832 | ||||||
Additional paid-in capital | 1,358 | 1,358 | ||||||
Retained earnings | 13,367 | 13,269 | ||||||
Accumulated other comprehensive income (loss) | (195 | ) | 5 | |||||
Treasury stock, at cost (86,575 and 86,800 shares) | (2,191 | ) | (2,196 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 13,171 | 13,268 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 167,099 | $ | 148,291 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
| Three-months ended June 30, | Six-months ended June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans | $ | 1,268 | $ | 1,191 | $ | 2,490 | $ | 2,482 | ||||||||
Federal funds sold | — | 9 | 4 | 12 | ||||||||||||
Investment securities: | ||||||||||||||||
Taxable | 692 | 314 | 1,184 | 581 | ||||||||||||
Exempt from federal income tax | 40 | 203 | 139 | 421 | ||||||||||||
Total interest income | 2,000 | 1,717 | 3,817 | 3,496 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 442 | 423 | 861 | 842 | ||||||||||||
Borrowings | 437 | 233 | 732 | 469 | ||||||||||||
Total interest expense | 879 | 656 | 1,593 | 1,311 | ||||||||||||
NET INTEREST INCOME | 1,121 | 1,061 | 2,224 | 2,185 | ||||||||||||
Provision for loan losses | 30 | 50 | 65 | 50 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,091 | 1,011 | 2,159 | 2,135 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service charges on deposit accounts | 164 | 199 | 309 | 332 | ||||||||||||
Investment securities gains (losses), net | 95 | — | 216 | — | ||||||||||||
Bank owned life insurance earnings | 29 | 32 | 57 | 74 | ||||||||||||
Gain on Sale of Loans | — | 25 | 42 | |||||||||||||
Fixed asset losses, net | (8 | ) | — | (8 | ) | — | ||||||||||
Other income | 56 | 40 | 154 | 123 | ||||||||||||
Total noninterest income | 336 | 296 | 728 | 571 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Salaries and employee benefits | 616 | 566 | 1,187 | 1,053 | ||||||||||||
Net occupancy and equipment expenses | 193 | 186 | 377 | 385 | ||||||||||||
Professional fees | 76 | 89 | 145 | 144 | ||||||||||||
State franchise tax | 42 | 46 | 83 | 89 | ||||||||||||
Data Processing | 106 | 106 | 212 | 209 | ||||||||||||
Other expense | 258 | 205 | 504 | 427 | ||||||||||||
Total noninterest expense | 1,291 | 1,198 | 2,508 | 2,307 | ||||||||||||
Income before income taxes | 136 | 109 | 379 | 399 | ||||||||||||
Income taxes | 21 | (23 | ) | 61 | (2 | ) | ||||||||||
NET INCOME | $ | 115 | $ | 132 | $ | 318 | $ | 401 | ||||||||
DIVIDENDS PER SHARE | $ | 0.19 | $ | 0.19 | $ | 0.38 | $ | 0.38 | ||||||||
EARNINGS PER SHARE | ||||||||||||||||
Basic | $ | 0.20 | $ | 0.23 | $ | 0.55 | $ | 0.69 | ||||||||
Diluted | 0.20 | 0.23 | 0.55 | 0.69 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
Net income | $ | 115 | $ | 132 | $ | 318 | $ | 401 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (losses) on available for sale securities | 321 | (1,610 | ) | (518 | ) | (1,066 | ) | |||||||||
Less: Reclassification adjustment for gain included in net income | (95 | ) | — | 216 | — | |||||||||||
Other comprehensive gain (loss) before taxes | 416 | (1,610 | ) | (302 | ) | (1,066 | ) | |||||||||
Income tax expense (benefit) due to other comprehensive income (loss) | 141 | (548 | ) | (102 | ) | (363 | ) | |||||||||
Other comprehensive gain (loss) | 275 | (1,062 | ) | (200 | ) | (703 | ) | |||||||||
Comprehensive income (loss) | $ | 390 | $ | (930 | ) | $ | 118 | $ | (302 | ) | ||||||
See accompanying notes to the 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(Loss) | Treasury Stock | Total Stockholders’ Equity | Comprehensive Income | ||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||
Balance, December 31, 2004 | $ | 832 | $ | 1,358 | $ | 13,269 | $ | 5 | $ | (2,196 | ) | $ | 13,268 | |||||||||||||
Net income | 318 | 318 | $ | 318 | ||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||
Unrealized loss on available for sale securities net of reclassification adjustment, net of tax benefit of $102 | (200 | ) | (200 | ) | (200 | ) | ||||||||||||||||||||
Comprehensive income | $ | 118 | ||||||||||||||||||||||||
Cash dividends ($.38 per share) | (220 | ) | (220 | ) | ||||||||||||||||||||||
Exercise of stock options (225 shares) | — | 5 | 5 | |||||||||||||||||||||||
Balance, June 30, 2005 | $ | 832 | $ | 1,358 | $ | 13,367 | $ | (195 | ) | (2,191 | ) | $ | 13,171 | |||||||||||||
See accompanying notes to unaudited consolidated financial statements.
6
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
| Six-months ended June 30, | ||||||||
| 2005 | 2004 | |||||||
| (unaudited) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 318 | $ | 401 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 65 | 50 | ||||||
Investment securities gain, net | (216 | ) | — | |||||
Loss from disposal of premises and equipment | 8 | — | ||||||
Depreciation, amortization and accretion | 438 | 433 | ||||||
Deferred income taxes | 23 | (11 | ) | |||||
Increase in accrued interest receivable | (91 | ) | (52 | ) | ||||
Increase (decrease) in accrued interest payable | (10 | ) | 18 | |||||
Other, net | 152 | (80 | ) | |||||
Net cash provided by operating activities | 687 | 759 | ||||||
INVESTING ACTIVITIES | ||||||||
Investment securities available for sale: | ||||||||
Proceeds from repayments and maturities | 5,322 | 15,770 | ||||||
Purchases | (33,728 | ) | (27,209 | ) | ||||
Proceeds from sales | 12,905 | — | ||||||
Purchase of Federal Home Loan Bank Stock | (22 | ) | (44 | ) | ||||
Decrease (increase) in loans, net | (3,100 | ) | 8,463 | |||||
Purchases of premises and equipment | (13 | ) | (350 | ) | ||||
Net cash used for investing activities | (18,636 | ) | (3,370 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Increase (decrease) in deposits, net | 178 | (1,757 | ) | |||||
Increase in short-term borrowings, net | 3,611 | 6,002 | ||||||
Proceeds from other borrowings | 15,000 | — | ||||||
Repayments of other borrowings | (899 | ) | (1882 | ) | ||||
Purchases of treasury stock | — | (28 | ) | |||||
Sale of treasury stock Proceeds from stock option exercises | 5 | 103 | ||||||
Cash dividends | (220 | ) | (219 | ) | ||||
Net cash provided by financing activities | 17,675 | 2,219 | ||||||
Increase (decrease) in cash and cash equivalents | (274 | ) | (392 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 3,584 | 3,936 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 3,310 | $ | 3,544 | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash paid during the year for: | ||||||||
Interest on deposits and borrowings | $ | 1,608 | $ | 1,311 | ||||
Income taxes | — | 50 | ||||||
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
June 30, 2005
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 June 30, 2005, and December 31, 2004, and the results of operations for the six months ended June 30, 2005 and 2004, and the cash flows for the six months ended June 30, 2005 and 2004. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles 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 six months ended June 30, 2005, 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 six months ended June 30, 2005 and 2004 would have been as follows:
| Three Months Ended | Six Months Ended | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
Net income, as reported | $ | 116 | $ | 132 | $ | 318 | $ | 401 | ||||
Less proforma expense related to stock options | — | 5 | 1 | 10 | ||||||||
Proforma net income | $ | 116 | $ | 127 | $ | 317 | $ | 391 | ||||
Basic net income per common share: | ||||||||||||
As reported | $ | 0.17 | $ | 0.23 | $ | 0.55 | $ | 0.69 | ||||
Pro forma | 0.17 | 0.22 | 0.55 | 0.68 | ||||||||
Diluted net income per common share: | ||||||||||||
As reported | $ | 0.17 | $ | 0.23 | $ | 0.55 | $ | 0.69 | ||||
Pro forma | 0.17 | 0.22 | 0.55 | 0.67 | ||||||||
8
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 | Expected Volatility | Expected Life (in | |||||||
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 | ||||
2004 | 1.03 | % | 4.08 | % | 26.53 | % | 9.13 |
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 June 30, | Six Months Ended June 30, | |||||||
| 2005 | 2004 | 2005 | 2004 | |||||
Weighted-average common shares outstanding used to calculate basic earnings per share | 579,057 | 579,016 | 579,013 | 577,852 | ||||
Additional common stock equivalents(stock options) used to calculate diluted earnings per share | 1,019 | 2,743 | 1,498 | 3,245 | ||||
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share | 580,076 | 581,758 | 580,511 | 581,098 | ||||
There were no options that were antidilutive as of June 30, 2005 and 2004.
9
NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(FAS No. 123R). FAS No. 123R revised FAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementation guidance. FAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award.
In April, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for FAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions are recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.
In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB No. 107”),Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of FAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s financial condition, results of operations, and cash flows.
In December 2004, FASB issued FAS No. 153,Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In June 2005, the FASB issued FAS No. 154,Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS No.154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods.
10
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.
| 2005 | 2004 | |||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||
Total Capital | ||||||||||||
(to Risk-weighted Assets) | ||||||||||||
Actual | $ | 14,386 | 14.57 | % | $ | 13,844 | 14.35 | % | ||||
For Capital Adequacy Purposes | 7,899 | 8.00 | 7,718 | 8.00 | ||||||||
To Be Well Capitalized | 9,874 | 10.00 | 9,647 | 10.00 | ||||||||
Tier I Capital | ||||||||||||
(to Risk-weighted Assets) | ||||||||||||
Actual | $ | 13,360 | 13.53 | % | $ | 12,646 | 13.10 | % | ||||
For Capital Adequacy Purposes | 3,950 | 4.00 | 3,861 | 4.00 | ||||||||
To Be Well Capitalized | 5,925 | 6.00 | 5,792 | 6.00 | ||||||||
Tier I Capital | ||||||||||||
(to Average Assets) | ||||||||||||
Actual | $ | 13,360 | 8.06 | % | $ | 12,646 | 8.39 | % | ||||
For Capital Adequacy Purposes | 6,630 | 4.00 | 6,029 | 4.00 | ||||||||
To Be Well Capitalized | 8,288 | 5.00 | 7,536 | 5.00 | ||||||||
11
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN 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.
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
12
other commercial banks. In both Cardington and Fredericktown, there are 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 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 date 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 economy is cautiously optimistic. Moderate growth to stable conditions is seen, but in general the economy has not shown positive signs of a robust economy. The financial services industry is highly competitive. The Bank competes with financial services providers, such as banks, savings associations, credit unions, finance companies, mortgage banking companies, insurance companies, and money market and mutual fund companies. The Bank also faces increased competition from non-banking institutions such as brokerage houses and insurance companies, as well as from financial service subsidiaries of commercial and manufacturing companies. Many of these competitors enjoy the benefits of advanced technology, fewer regulatory constraints and lower cost structures.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) and follow general practices within the financial services industry. The application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Pursuant to SEC guidance, management of public companies is encouraged to evaluate and disclose those accounting policies that are judged to be “critical accounting policies.” Critical accounting policies are those which are most critical to the accurate portrayal of the Company’s financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments. Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy.
The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluation of credit risk after careful consideration of all information available to us. In developing this assessment, we must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses. The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes: (1) specific loss estimates on certain individually reviewed loans; (2) statistical loss estimates for loan pools that are based on historical loss experience; (3) general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios; (4) adverse situations that may affect a borrower’s ability to repay; and (5) current economic and industry conditions. Also considered as part of that judgment is a review of the Bank’s trends in delinquencies and loan losses, as well as trends in delinquencies and losses for the region and nationally, and economic factors. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on management’s current judgment about the credit quality of the loan portfolio. While the Corporation strives to reflect all known risk factors in its evaluations, judgment errors may occur.
13
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(numbers in thousands except per share amounts)
Changes in Financial Condition
At June 30, 2005, the consolidated assets of the Company totaled $167.1 million, an increase of $18.8 million, or 12.68%, from $148.3 million at December 31, 2004. The increase in total assets resulted from growth in investment securities available for sale of $15.0 million, net loans of $3.0 million and other assets of $1.3 million.
Total cash and cash equivalents decreased by $0.3 million to $3.3 million at June 30, 2005, compared to $3.6 million at December 31, 2004.
Investment securities at June 30, 2005 increased by $15.0 million or 27.82% when compared to December 31, 2004. The increase was due to a return on equity enhancement strategy implemented in the first quarter. This strategy was implemented in order to take advantage of market opportunities. Investment securities and federal funds sold are consistently maintained at levels that will cover the short-term liquidity needs of the Bank. The Bank utilizes a number of outside sources to analyze, evaluate, and obtain advice relative to the management of its investment portfolio. The Bank does not invest in any one type of security over another. Funds allocated to the investment portfolio are constantly monitored by management to ensure that a proper ratio of liquidity and earnings is maintained.
Net loans receivable increased by $3.0 million, or 3.84%, to $81.7 million at June 30, 2005, compared to $78.7 million at December 31, 2004. The allowance for loan losses has increased $60,000 due mostly to year to date provision expense of $65,000 in 2005. The quality of our loan portfolio continues to be strong, as delinquencies continue to be below peer group.
Accrued interest and other assets increased by $1.3 million, or 48.91%, to $3.8 million as of June 30, 2005. This increase was due to a security purchased but not yet settled.
Deposit liabilities increased by $0.2 million, or 0.20%, to $101.4 million at June 30, 2005, from $101.2 million at December 31, 2004. Non interest bearing checking accounts has decreased by $0.8 million and interest bearing deposits have increased by $1.0 million. Growth in 2005 has not been very strong, but our sales teams are working diligently to gain increased market share.
Short term borrowings increased by $3.6 million in the first six months of 2005. This includes federal funds purchased and securities sold under agreements to repurchase. This increase was due to an increase in repurchase agreements.
Other borrowings increased by $14.1 million due to an increase in FHLB borrowings. This is the result of a return on equity enhancement strategy through the use of alternative sources of funds, typically borrowings. In using this strategy, the bank borrows funds and invests that money in mortgage backed securities with a similar average life. In the first half of 2005, the bank borrowed $15.0 million which was put into investments. Other purchases for this year have been offset by sales, maturities, and principle pay downs on mortgage back securities.
Accrued interest and other liabilities increased by $1.0 million, or 76.92%, to $2.3 million as of June 30, 2005. This increase was due to a security purchased but not yet settled.
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FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(numbers in thousands except per share amounts)
Total stockholders’ equity was $13.2 million at June 30, 2005 as compared to $13.3 million on December 31, 2004. During the first six months of 2005 stockholders equity decreased due to decreases of $0.2 million in accumulated other comprehensive income and stockholders dividends of $0.2 million, which was offset by net income of $0.3 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 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 Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments 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 June 30, 2005, that the Company meets all of the capital adequacy requirements to which it is subject. As of December 31, 2004, the most recent notification from the FDIC, the Company was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Company 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 Company’s prompt corrective action category.
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FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(numbers in thousands except per share amounts)
Results of Operations
Comparison of Six Months Ended June 30, 2005 and 2004
General. Net income decreased by $83, from $401 to $318 during the first six months of 2005 as compared to the same six-month period ended June 30, 2004.
Net Interest Income.Net interest income increased by $39 for the six months ended June 30, 2005 as compared to June 30, 2004. An increase of $321 in interest income was offset by an increase of $282 in interest expense. The increase of $39 was because of a variety of factors. Total loan income increased by only $8 due to the net effect of less average balances of $1.2 million offset by an increase of 15 basis points in yield. The decrease in loans was due to the sale of approximately $12.0 million in loans in March of 2004. Interest and dividends on investment securities increased by $321 due to an increase in average balances of $12.1 million and a 28 basis point increase in average rate earned. The average rate earned on earning assets was 5.24% for the first half of 2005 compared to 5.08% in the first half of 2004.
Interest expense on deposit liabilities increased by $19 for the six months ended June 30, 2005, as compared to the same period in 2004. Average deposits decreased by $2.2 million comparing June 30, 2005 to 2004. The costs of deposits increased by 8 basis points. Interest expense paid on borrowings increased $263 due to a $10.3 million increase in average balances. The Company’s average cost of funds (including borrowings) for the first six months of 2005 was 2.20%, as compared to 1.92% for the same period in 2004.
Provision for Loan Losses. A provision for loan losses of $65 has been provided in 2005 as a result of management’s thorough analysis of the banks portfolio and the factors surrounding the current market conditions. As of June 30, 2005, the reserve for loan losses was $1,026 which represents 1.24% of outstanding loans. The reserve continues to exceed peer groups and based upon both internal and external evaluations indicate that the levels of reserves are adequate given the risk within the loan portfolio. Current analysis indicated that this level of reserve is adequate given the current economic trends, delinquency patterns and loan quality within the various portfolios. The Bank expensed $50 during the first half of 2004. Our reserve for loan loss as of June 30, 2004 stood at $1.0 million or 1.21% of gross loans.
Non-Interest Income. Non-interest income increased by $157, or 27.50%, to $728 for the six months ended June 30, 2005, from $571 for the six months ended June 30, 2004. In 2005, we have recorded a net gain of $216 from the sale of investment securities as compared to $0 in 2004.
Non-Interest Expense. Non-interest expense increased by $201, or 8.01%, to $2,508 for the six months ended June 30, 2005, from $2,307 in the comparable period in 2004. Significant increases were in salaries and employee benefits of $134 and other expense of $77. Salaries and employee benefits increased mostly due to an increase in full time equivalent employees. Other expense variances were increases in FDIC fees ($14), postage ($8), advertising ($9), business development ($15), and ATM fees ($37). The increase in ATM Fees was due to a refund of $30 in 2004.
Income Taxes. The provision for income taxes increased by $63 for the six months ended June 30, 2005, compared with the prior year, primarily as a result of lower tax exempt income in 2005.
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FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(numbers in thousands except per share amounts)
Results of Operations
Comparison of Three Months Ended June 30, 2005 and 2004
General. Net income for the three months ended June 30, 2005 decreased by $17, to $115 from $132 as compared to the same three-month period ended June 30, 2004.
Net Interest Income.Net interest income increased by $60 for the three months ended June 30, 2005 as compared to June 30, 2004. An increase of $283 in interest income was offset by an increase of $223 in interest expense. The increase of $60 was because of a variety of factors. Total loan income increased by $77 because of the increase in average rate earned increased by 15 basis points. This was partially offset by the fact that average balances were $1.2 million less than last year. Interest and dividends on investment securities increased by $215 due to an increase in average balances of $12.1 million and a 28 basis point increase in average rate earned. The average rate earned on earning assets was 5.22% for the second quarter of 2005 compared to 4.93% in the second quarter of 2004.
Interest expense on deposit liabilities increased by $19 for the three months ended June 30, 2005, as compared to the same period in 2004. Average deposits decreased by $2.2 million comparing year to date June 30, 2005 to 2004. The costs of deposits have increased by 8 basis points. Interest expense paid on borrowings increased $204 due to a $10.3 million year to date increase in average balances. The Company’s average cost of funds (including borrowings) for the second three months of 2005 was 2.32%, as compared to 1.90% for the same period in 2004.
Provision for Loan Losses. A provision for loan losses of $30 has been provided in the second quarter of 2005 as a result of management’s thorough analysis of the Company’s portfolio and the factors surrounding the current market conditions. As of June 30, 2005, the reserve for loan losses was $1,026 which represents 1.24% of outstanding loans. The reserve continues to exceed peer groups and based upon both internal and external evaluations indicate that the levels of reserves are adequate given the risk within the loan portfolio. Current analysis indicated that this level of reserve is adequate given the current economic trends, delinquency patterns and loan quality within the various portfolios. The Company expensed provision for loan losses $50 during the second quarter of 2004.
Non-Interest Income. Non-interest income increased by $40, or 13.51%, to $336 for the three months ended June 30, 2005, from $296 for the three months ended June 30, 2004. This increased due to gains of $95 recorded from the sale of investment securities. Service charges on deposit accounts decreased by $35.
Non-Interest Expense. Non-interest expense increased by $93, or 7.76%, to $1,291 for the three months ended June 30, 2005, from $1,198 in the comparable period in 2004. Significant increases were in salaries and employee benefits of $50 and other expenses of $53. Net occupancy and equipment increased by $7.
Income Taxes. The provision for income taxes increased by $44 for the three months ended June 30, 2005, compared with the prior year. This was due to lower tax exempt income in 2005 plus an increase in income before taxes of $27.
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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).
June 30, 2005 | December 31, 2004 | |||||||
Non-accruing loans | $ | 144 | $ | 278 | ||||
Impaired loans | — | — | ||||||
Accrual loans - 90 days or more past due | 67 | 89 | ||||||
Total non-performing loans | 211 | 367 | ||||||
Foreclosed assets held for sale | — | — | ||||||
Total non-performing assets | $ | 211 | $ | 367 | ||||
Non-performing loans as a percent of loans net of unearned income | 0.26 | % | 0.46 | % | ||||
Non-performing assets as a percent of assets | 0.13 | % | 0.25 | % | ||||
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 Company 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.
Item 3 Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005, 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 quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Not Applicable
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 2005, 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 2008 by the following votes: |
Patrick J. Drouhard | For: 390,947 | Withheld: 47,786 | ||
Samuel J. Harvey | For: 413,431 | Withheld: 25,302 | ||
Charles W. Kimerline | For: 424,601 | Withheld: 14,132 |
Other directors whose service continued following the meeting include: David G. Dostal; Robert D. Hord; Terry L. Gernert; John O. Spreng, Jr.; and Coleman Clougherty.
Not Applicable
(a) All applicable exhibits required by Item 601 of Regulation S-B are furnished with this report.
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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 August 9, 2005 | By | /s/ Coleman J. Clougherty | ||
Coleman J. Clougherty | ||||
President and Principal Executive Officer | ||||
Date August 9, 2005 | By | /s/ Jeffrey A. Wise | ||
Jeffrey A. Wise | ||||
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. | |
| N/A | Exhibit 3.1 ii Amendment to the Amended and Restated Articles of Incorporation of FC Banc Corp. filed as part of the Form 10QSB for the quarter ended March 31, 2004 and incorporated herein by reference. | |
| 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. | |
| 22 | Exhibit 31.1 - CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 23 | Exhibit 31.2 - CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 24 | 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. | |
| 25 | 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. | |
| 26 | Exhibit 99.1 Independent Accountant’s Report | |
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