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, 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 ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of October 23, 2005, 651,473 shares of Common Stock of the Registrant were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ¨ No x
FORM 10-QSB
INDEX
2
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data)
| September 30, 2005 | December 31, 2004 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 3,350 | $ | 3,584 | ||||
Federal funds sold | 4,100 | — | ||||||
Cash and cash equivalents | 7,450 | 3,584 | ||||||
Investment securities available for sale | 74,552 | 53,749 | ||||||
Loans | 85,307 | 79,655 | ||||||
Less allowance for loan losses | 1,052 | 966 | ||||||
Net loans | 84,255 | 78,689 | ||||||
Premises and equipment | 6,422 | 6,698 | ||||||
Bank owned life insurance | 3,078 | 3,001 | ||||||
Accrued interest and other assets | 2,998 | 2,570 | ||||||
TOTAL ASSETS | $ | 178,755 | $ | 148,291 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 16,001 | $ | 14,259 | ||||
Interest-bearing | 93,034 | 86,951 | ||||||
Total deposits | 109,035 | 101,210 | ||||||
Short-term borrowings | 13,822 | 11,621 | ||||||
Other borrowings | 39,533 | 20,887 | ||||||
Accrued interest and other liabilities | 1,294 | 1,305 | ||||||
TOTAL LIABILITIES | 163,684 | 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, 738,032 shares issued | 2,940 | 832 | ||||||
Additional paid-in capital | 1,359 | 1,358 | ||||||
Retained earnings | 13,328 | 13,269 | ||||||
Accumulated other comprehensive income (loss) | (366 | ) | 5 | |||||
Treasury stock, at cost (86,559 and 86,800 shares) | (2,190 | ) | (2,196 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 15,071 | 13,268 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 178,755 | $ | 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 Sept30, | Nine-months ended Sept 30, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
| (unaudited) | (unaudited) | |||||||||||||
INTEREST INCOME | ||||||||||||||
Interest and fees on loans | $ | 1,345 | $ | 1,228 | $ | 3,835 | 3,710 | |||||||
Federal funds sold | 12 | — | 16 | 12 | ||||||||||
Investment securities: | ||||||||||||||
Taxable | 726 | 367 | 1,910 | 948 | ||||||||||
Exempt from federal income tax | 66 | 213 | 205 | 634 | ||||||||||
Total interest income | 2,149 | 1,808 | 5,966 | 5,304 | ||||||||||
INTEREST EXPENSE | ||||||||||||||
Deposits | 479 | 493 | 1,340 | 1,335 | ||||||||||
Borrowings | 494 | 236 | 1,226 | 705 | ||||||||||
Total interest expense | 973 | 729 | 2,566 | 2,040 | ||||||||||
NET INTEREST INCOME | 1,176 | 1,079 | 3,400 | 3,264 | ||||||||||
Provision for loan losses | 30 | 25 | 95 | 75 | ||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,146 | 1,054 | 3,305 | 3,189 | ||||||||||
NONINTEREST INCOME | ||||||||||||||
Service charges on deposit accounts | 166 | 188 | 475 | 508 | ||||||||||
Investment securities gains, net | — | 56 | 216 | 56 | ||||||||||
Bank owned life insurance earnings | 29 | 32 | 86 | 106 | ||||||||||
Gain on sale of loans | — | 1 | — | 43 | ||||||||||
Fixed asset losses, net | (17 | ) | — | (25 | ) | — | ||||||||
Other income | 94 | 94 | 248 | 229 | ||||||||||
Total noninterest income | 272 | 371 | 1,000 | 942 | ||||||||||
NONINTEREST EXPENSE | ||||||||||||||
Salaries and employee benefits | 640 | 581 | 1,827 | 1,634 | ||||||||||
Net occupancy and equipment expenses | 185 | 203 | 562 | 588 | ||||||||||
Professional fees | 98 | 71 | 243 | 215 | ||||||||||
State franchise tax | 41 | 41 | 124 | 130 | ||||||||||
Data processing | 104 | 103 | 316 | 312 | ||||||||||
Other expense | 291 | 226 | 795 | 653 | ||||||||||
Total noninterest expense | 1,359 | 1,225 | 3,867 | 3,532 | ||||||||||
Income before income taxes | 59 | 200 | 438 | 599 | ||||||||||
Income taxes(benefit) | (11 | ) | 8 | 49 | 6 | |||||||||
NET INCOME | $ | 70 | $ | 192 | $ | 389 | 593 | |||||||
DIVIDENDS PER SHARE | $ | 0.19 | $ | 0.19 | $ | 0.57 | $ | 0.57 | ||||||
EARNINGS PER SHARE | ||||||||||||||
Basic | $ | 0.12 | $ | 0.34 | $ | 0.66 | $ | 1.03 | ||||||
Diluted | 0.12 | 0.33 | 0.66 | 1.02 | ||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three Months Ended Sept 30 | Nine Months Ended Sept 30 | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
Net income | $ | 70 | $ | 192 | $ | 389 | $ | 593 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (losses) on available for sale securities | (259 | ) | 1,203 | (346 | ) | 137 | ||||||||||
Less: Reclassification adjustment for gain included in net income | 0 | (56 | ) | (216 | ) | (56 | ) | |||||||||
Other comprehensive gain (loss) before taxes | (259 | ) | 1,147 | (562 | ) | 81 | ||||||||||
Income tax expense (benefit) due to other comprehensive income (loss) | (88 | ) | 390 | (191 | ) | 27 | ||||||||||
Other comprehensive gain (loss) | (171 | ) | 757 | (371 | ) | 54 | ||||||||||
Comprehensive income (loss) | $ | (101 | ) | $ | 949 | $ | 18 | $ | 647 | |||||||
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 | 389 | 389 | $ | 389 | ||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||
Unrealized loss on available for sale securities net of reclassification adjustment, net of tax benefit of $191 | (371 | ) | (371 | ) | (371 | ) | ||||||||||||||||||||
Comprehensive income | $ | 18 | ||||||||||||||||||||||||
Cash dividends ($.57 per share) | (330 | ) | (330 | ) | ||||||||||||||||||||||
Common stock issued (72,400 shares) | 2,108 | 2,108 | ||||||||||||||||||||||||
Exercise of stock options (225 shares) | 1 | 6 | 7 | |||||||||||||||||||||||
Balance, September 30, 2005 | $ | 2,940 | $ | 1,359 | $ | 13,328 | $ | (366 | ) | (2,190 | ) | $ | 15,071 | |||||||||||||
See accompanying notes to the unaudited consolidated financial statements
6
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
| Nine-months ended Sept 30, | ||||||||
| 2005 | 2004 | |||||||
| (unaudited) | ||||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 389 | $ | 593 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 95 | 75 | ||||||
Investment securities (gain) losses, net | (216 | ) | (56 | ) | ||||
Depreciation, amortization and accretion | 684 | 1,214 | ||||||
Deferred income taxes | (147 | ) | (38 | ) | ||||
Increase in accrued interest receivable | (192 | ) | (79 | ) | ||||
Decrease in accrued interest payable | (286 | ) | (25 | ) | ||||
Other, net | 281 | (507 | ) | |||||
Net cash provided by operating activities | 608 | 1,177 | ||||||
INVESTING ACTIVITIES | ||||||||
Investment securities available for sale: | ||||||||
Proceeds from repayments and maturities | 9,261 | 21,426 | ||||||
Purchases | (44,440 | ) | (37,616 | ) | ||||
Proceeds from sales | 13,952 | 6,860 | ||||||
Purchase of Federal Home Loan Bank Stock | (191 | ) | (54 | ) | ||||
Proceeds from sale of other real estate owned | 82 | — | ||||||
Decrease (increase) in loans, net | (5,788 | ) | 9,410 | |||||
Purchases of premises and equipment | (75 | ) | (381 | ) | ||||
Net cash used for investing activities | (27,199 | ) | (355 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Increase (decrease) in deposits, net | 7,825 | (1,934 | ) | |||||
Increase in short-term borrowings, net | 2,201 | 5,097 | ||||||
Proceeds from other borrowings | 20,000 | — | ||||||
Repayments of other borrowings | (1,354 | ) | (2326 | ) | ||||
Issuance of Common Stock | 2,108 | — | ||||||
Purchases of treasury stock | — | (28 | ) | |||||
Sale of treasury stock Proceeds from stock option exercises | 7 | 93 | ||||||
Cash dividends | (330 | ) | (329 | ) | ||||
Net cash provided by financing activities | 30,457 | 573 | ||||||
Increase in cash and cash equivalents | 3,866 | 1,395 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 3,584 | 3,936 | ||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 7,450 | $ | 5,331 | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Cash paid during the year for: | ||||||||
Interest on deposits and borrowings | $ | 2,852 | $ | 2,065 | ||||
Income taxes | — | 50 | ||||||
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share amounts)
September 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 September 30, 2005, and December 31, 2004, and the results of operations for the nine months ended September 30, 2005 and 2004, and the cash flows for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2005 and 2004 would have been as follows:
| Three Months Ended | Nine Months Ended | |||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||
Net income, as reported | $ | 70 | $ | 192 | $ | 389 | $ | 593 | ||||
Less proforma expense related to stock options | — | 5 | 1 | 15 | ||||||||
Proforma net income | $ | 70 | $ | 187 | $ | 388 | $ | 578 | ||||
Basic net income per common share: | ||||||||||||
As reported | $ | 0.12 | $ | 0.34 | $ | 0.66 | $ | 1.03 | ||||
Pro forma | 0.12 | 0.32 | 0.66 | 1.00 | ||||||||
Diluted net income per common share: | ||||||||||||
As reported | $ | 0.12 | $ | 0.33 | $ | 0.66 | $ | 1.02 | ||||
Pro forma | 0.12 | 0.32 | 0.66 | 1.00 | ||||||||
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 Rate | Expected Volatility | 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 | ||||
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 September 30, | Nine Months Ended September 30, | |||||||
| 2005 | 2004 | 2005 | 2004 | |||||
Weighted-average common shares outstanding used to calculate basic earnings per share | 597,160 | 578,899 | 585,131 | 578,221 | ||||
Additional common stock equivalents (stock options) used to calculate diluted earnings per share | 684 | 2,026 | 1,228 | 2,794 | ||||
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share | 597,843 | 580,925 | 586,358 | 581,016 | ||||
There were no options that were antidilutive as of September 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. The provisions of FAS No. 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
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 | $ | 16,483 | 16.61 | % | $ | 14,295 | 15.21 | % | ||||
For Capital Adequacy Purposes | 7,937 | 8.00 | 7,520 | 8.00 | ||||||||
To Be Well Capitalized | 9,921 | 10.00 | 9,400 | 10.00 | ||||||||
Tier I Capital (to Risk-weighted Assets) | ||||||||||||
Actual | $ | 15,431 | 15.55 | % | $ | 13,273 | 14.12 | % | ||||
For Capital Adequacy Purposes | 3,968 | 4.00 | 3,760 | 4.00 | ||||||||
To Be Well Capitalized | 5,952 | 6.00 | 5,640 | 6.00 | ||||||||
Tier I Capital (to Average Assets) | ||||||||||||
Actual | $ | 15,431 | 8.96 | % | $ | 13,273 | 8.79 | % | ||||
For Capital Adequacy Purposes | 6,892 | 4.00 | 6,042 | 4.00 | ||||||||
To Be Well Capitalized | 8,615 | 5.00 | 7,553 | 5.00 | ||||||||
NOTE 5 PRIVATE PLACEMENT
On September 9, 2005, the Company accepted subscription agreements from a limited number of accredited investors for the purchase of 72,400 of our common shares at a price per share of $29.12, for a total amount of $2,108,288, in a private placement exempt from registration pursuant to Rule 506 of Regulation D of the Securities and Exchange Commission. On September 14, 2005, the Company filed a Current Report on Form 8-K to report this private placement.
NOTE 6 GOING PRIVATE
FC Banc Corp. Board of Directors has approved a going private transaction in which FC Banc Corp. shareholders holding fewer than 500 shares would receive $29.12 in cash for each FC Banc Corp. common share that they held prior to the going private transaction. The purpose of the going private transaction is to reduce the number of holders of record of FC Banc Corp. common shares to less than 300, after which FC Banc Corp. intends to terminate the registration of its common shares with the Securities and Exchange Commission. The proposed going private transaction will be submitted to shareholders of FC Banc Corp. for their consideration. FC Banc Corp. will file a proxy statement and other relevant documents concerning the proposed going private transaction with the Securities and Exchange Commission (the “SEC”).
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 other commercial banks. In both
12
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 September 30, 2005, the consolidated assets of the Company totaled $178.8 million, an increase of $30.5 million, or 20.57%, from $148.3 million at December 31, 2004. The increase in total assets resulted from growth in investment securities available for sale of $20.8 million, net loans of $5.6 million and cash and cash equivalents of $3.9 million.
Total cash and cash equivalents increased by $3.9 million to $7.5 million at September 30, 2005, compared to $3.6 million at December 31, 2004. The change was due to the overnight federal funds sold position of the bank at quarter end.
Investment securities at September 30, 2005 increased by $20.8 million or 38.66% 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. In using this strategy, the bank borrows funds and invests that money in mortgage backed securities with a similar average life. In the nine months of 2005, the bank borrowed $20.0 million which was put into investments. 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. Typical investments would be federal agencies, mortgage backed securities, or municipal bonds. 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 $5.6 million, or 7.12%, to $84.3 million at September 30, 2005, compared to $78.7 million at December 31, 2004. Growth has been in both commercial and mortgage loans. The allowance for loan losses has increased $86,000 due mostly to year to date provision expense of $95,000 in 2005. The quality of our loan portfolio continues to be strong, as delinquencies continue to be below peer group and net charge offs are about $9,000.
Deposit liabilities increased by $7.8 million, or 7.71%, to $109.0 million at September 30, 2005, from $101.2 million at December 31, 2004. Non interest bearing checking accounts has increased by $1.7 million and interest bearing deposits have increased by $6.1 million. The deposit growth in 2005 occurred in the third quarter due to a strong marketing campaign in the certificate of deposit area.
Short term borrowings increased by $2.2 million in the first nine 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 of which a majority is from a building project of a public fund customer.
Other borrowings increased by $18.6 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 nine months of 2005, the bank borrowed $20.0 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.
14
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(numbers in thousands except per share amounts)
Total stockholders’ equity was $15.1 million at September 30, 2005 as compared to $13.3 million on December 31, 2004. The increase was due mostly to the issuance of 72,400 shares of common stock through the private placement program completed September 9, 2005. Decreases of $0.4 million in accumulated other comprehensive income and stockholders dividends of $0.3 million, which was offset by net income of $0.4 million.
Liquidity and Capital Resources
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
15
of September 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.
16
FC BANC CORP.
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(numbers in thousands except per share amounts)
Results of Operations
Comparison of Nine Months Ended September 30, 2005 and 2004
General. Net income decreased by $204, from $593 to $389 during the first nine months of 2005 as compared to the same nine-month period ended September 30, 2004.
Net Interest Income.Net interest income increased by $136 for the nine months ended September 30, 2005 as compared to September 30, 2004. An increase of $662 in interest income was offset by an increase of $526 in interest expense. There continues to be pressure on the margin. This is shown when you compare that the average rate earned on earnings assets have increased 16 basis points, but the average rate on our funding has increased 36 basis points. The increase of $136 was mostly due to the increase in size of the bank. Total loan income increased by only $125 due to the net effect of a small increase in average balances of $1.2 million at an increase of only 16 basis points in yield. The small net increase 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 $533 due to an increase in average balances of $12.1 million and a 29 basis point increase in average rate earned. The average rate earned on earning assets was 5.26% for the first nine months of 2005 compared to 5.10% in the first nine months of 2004.
Interest expense increased by $526 for the nine months ended September 30, 2005, as compared to the same period in 2004. Average deposits decreased by $0.3 million comparing September 30, 2005 to 2004. The cost of deposits increased by 9 basis points year to date which has resulted in a $5 increase in deposit cost. Interest expense paid on borrowings increased $521 due to a $12.9 million increase in average balances. The Company’s average cost of funds (including borrowings) for the first nine months of 2005 was 3.54%, as compared to 2.82% for the same period in 2004. This was mainly due to the cost of fed funds purchased and repurchase agreements which have increased because rates are higher.
Provision for Loan Losses. A provision for loan losses of $95 has been provided in 2005 as a result of management’s analysis of the banks portfolio and the factors surrounding the current market conditions. As of September 30, 2005, the reserve for loan losses was $1,052 which represents 1.23% of outstanding loans. The reserve is 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 has expensed $95 during 2005 compared to $75 during the same time period in 2004.
Non-Interest Income. Non-interest income increased by $58, or 6.16%, to $1,000 for the nine months ended September 30, 2005, from $942 for the nine months ended September 30, 2004. In 2005, we have recorded a net gain of $216 from the sale of investment securities as compared to $56 in 2004. There has been small decreases in service charges on deposit accounts and bank owned life insurance earnings.
Non-Interest Expense. Non-interest expense increased by $335, or 9.48%, to $3,867 for the nine months ended September 30, 2005, from $3,532 in the comparable period in 2004. Significant increases were in salaries and employee benefits of $193, professional fees of $28, and other expense of $142. Salaries and employee benefits increased mostly due to an increase in full time equivalent employees. Professional fees have increased due to the expense of going private. The future benefits of going private will far outweigh current cost. Other expense variances were increases in FDIC fees ($13), postage/courier ($25), advertising ($17), business development ($21), and ATM fees ($44). The increase in ATM Fees was due to a refund of $30 in 2004.
Income Taxes. The provision for income taxes increased by $43 for the nine months ended September 30, 2005, compared with the prior year, primarily as a result of lower tax exempt income in 2005.
17
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 September 30, 2005 and 2004
General. Net income for the three months ended September 30, 2005 decreased by $122, to $70 from $192 as compared to the same three-month period ended September 30, 2004.
Net Interest Income.Net interest income increased by $97 for the three months ended September 30, 2005 as compared to September 30, 2004. An increase of $341 in interest income was offset by an increase of $244 in interest expense. The increase of $341 in interest income was due to the growth in the balance sheet. Total loan income increased by $117 because of the increase in average loan balances in the third quarter. The average YTD rate earned increased by 3 basis points during the quarter. Interest and dividends on investment securities increased by $212 due to an increase in average balances of $3.5 million during the quarter and a 6 basis point increase in average rate earned. The average rate earned on earning assets was 5.24% for the third quarter of 2005 compared to 4.95% in the third quarter of 2004.
Interest expense on liabilities increased by $244 for the three months ended September 30, 2005, as compared to the same period in 2004. Average deposits increased by $4.4 million during the third quarter due to our CD marketing campaign. The costs of deposits have increased by 2 basis points during the quarter. Interest expense paid on borrowings increased $258 when comparing the quarter. This was due to a $12.8 million year to date increase in average balances. The Company’s average cost of funds (including borrowings) for the third three months of 2005 increase 12 basis points when comparing 2005 to the same period in 2004.
Provision for Loan Losses. A provision for loan losses of $30 has been provided in the third 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 September 30, 2005, the reserve for loan losses was $1,052 which represents 1.23% 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 $25 during the third quarter of 2004.
Non-Interest Income. Non-interest income decreased by $99, or 26.68%, to $272 for the three months ended September 30, 2005, from $371 for the three months ended September 30, 2004. This decreased when compared to last year due to gains of $56 recorded in the third quarter of 2004 from the sale of investment securities. Service charges on deposit accounts decreased by $22. The bank recorded a loss of $17 on the sale of assets.
Non-Interest Expense. Non-interest expense increased by $134, or 10.94%, to $1,359 for the three months ended September 30, 2005, from $1,225 in the comparable period in 2004. Significant increases were in salaries and employee benefits of $59 (higher FTE), professional fees of $27 (going private), and other expenses of $65 (advertising). Net occupancy and equipment expense decreased by $18.
Income Taxes. The provision for income taxes decreased by $19 for the three months ended September 30, 2005, compared with the prior year. This was due to lower income before taxes of $141.
18
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).
| Sept 30, 2005 | December 31, 2004 | |||||||
Non-accruing loans | $ | 146 | $ | 278 | ||||
Impaired loans | — | — | ||||||
Accrual loans - 90 days or more past due | 187 | 89 | ||||||
Total non-performing loans | 333 | 367 | ||||||
Foreclosed assets held for sale | — | — | ||||||
Total non-performing assets | $ | 333 | $ | 367 | ||||
Non-performing loans as a percent of loans net of unearned income | 0.39 | % | 0.46 | % | ||||
Non-performing assets as a percent of assets | 0.19 | % | 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 September 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 September 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 September 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
19
PART II - OTHER INFORMATION
Not Applicable
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On September 9, 2005, the Company accepted subscription agreements from a limited number of accredited investors for the purchase of 72,400 of our common shares at a price per share of $29.12, for a total amount of $2,108,288, in a private placement exempt from registration pursuant to Rule 506 of Regulation D of the Securities and Exchange Commission. On September 14, 2005, the Company filed a Current Report on Form 8-K to report this private placement.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Not Applicable
(a) All applicable exhibits required by Item 601 of Regulation S-B are furnished with this report.
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, 2005 | By | /s/ Coleman J. Clougherty | ||
| Coleman J. Clougherty | ||||
| President and Principal Executive Officer | ||||
| Date November 14, 2005 | By | /s/ Jeffrey A. Wise | ||
| Jeffrey A. Wise | ||||
| Treasurer and Principal Accounting Officer | ||||
20
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 | |
21
