-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V4wEMGMYcuAMZ6XNnoPyGpheMRUX1nxy37X0pNiWOMY5r9YdbWBgEsuKgH2kZA8s l5gjvdNcaZPNncg9rV0rQw== 0000950152-04-001930.txt : 20040315 0000950152-04-001930.hdr.sgml : 20040315 20040315120731 ACCESSION NUMBER: 0000950152-04-001930 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CITIZENS BANC CORP /OH CENTRAL INDEX KEY: 0000944745 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341558688 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25980 FILM NUMBER: 04668409 BUSINESS ADDRESS: STREET 1: 100 EAST WATER ST STREET 2: P O BOX 5016 CITY: SANDUSKY STATE: OH ZIP: 44870 BUSINESS PHONE: 4196254121 MAIL ADDRESS: STREET 1: 100 EAST WATER ST STREET 2: P O BOX 5016 CITY: SANDUSKY STATE: OH ZIP: 44870 10-K 1 l05629ae10vk.txt FIRST CITIZENS BANC CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0 - 25980 FIRST CITIZENS BANC CORP -------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1558688 ------------------------------ ------------------- State or other jurisdiction of (IRS Employer incorporation or organization Identification No.) 100 East Water Street, Sandusky, Ohio 44870 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (419) 625 - 4121 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No par value ------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes[X] No[ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing market price as of June 30, 2003 was $107,478,238. As of January 31, 2004, there were 5,033,203 shares of no par value common shares issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Annual Report to Shareholders for fiscal year ended December 31, 2003 are incorporated by reference into Parts I, II and IV of this Form 10-K. Portions of the registrant's Proxy Statement, dated to be filed pursuant to Regulation 14A of the Securities Exchange Act prior to April 29, 2004, are incorporated by reference into Part III of this Form 10-K. INDEX PART I Item 1. Business..................................................................... 3 Item 2. Properties................................................................... 16 Item 3. Legal Proceedings............................................................ 16 Item 4. Submission of Matters to a Vote of Security Holders.......................... 16 PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities............................................... 16 Item 6. Selected Financial Data...................................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.................................................... 16 Item 7(a) Quantitative and Qualitative Disclosures About Market Risk................... 16 Item 8. Financial Statements and Supplementary Data.................................. 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................... 17 Item 9(a) Controls and Procedures...................................................... 17 Item 9(b) Changes in Internal Control over Financial Reporting......................... 17 PART III Item 10. Directors and Executive Officers of the Registrant........................... 18 Item 11. Executive Compensation....................................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 18 Item 13. Certain Relationships and Related Transactions............................... 18 Item 14. Principal Accounting Fees and Services....................................... 18 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 18 Signatures............................................................................. 20 Certifications......................................................................... 21
PART I ITEM 1. BUSINESS (a) General Development of Business FIRST CITIZENS BANC CORP (FCBC) was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Act of 2000, as amended. The Corporation's office is located at 100 East Water Street, Sandusky, Ohio. The Corporation had total consolidated assets of $636,423 at December 31, 2003. FCBC and its subsidiaries are referred to together as the Corporation. THE CITIZENS BANKING COMPANY (Citizens), owned by the Corporation since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Citizens was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Citizens surrendered its trust charter and began operation under its current name. Citizens is an insured bank under the Federal Deposit Insurance Act. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio and operates three branch banking offices in Perkins Township (Sandusky, Ohio), three branch banking offices in Norwalk, Ohio, one branch banking office in Berlin Heights, Ohio, one branch banking office in Huron, Ohio, one branch banking office in Castalia, Ohio, and one Loan Production office in Port Clinton, Ohio. As part of the acquisition, which was completed in April 2002, of Independent Community Banc Corp. (ICBC) and its subsidiary, The Citizens National Bank of Norwalk, which was merged into Citizens in 2002, Citizens now provides trust services. This subsidiary accounts for 77.8% of the Corporation's consolidated assets at December 31, 2003. THE FARMERS STATE BANK (Farmers), acquired by the Corporation in 1998, was organized and chartered under the laws of the State of Ohio in 1916. Farmers is an insured bank under the Federal Deposit Insurance Act. Farmers maintains its main office at 102 South Kibler Street, New Washington, Ohio and operates branch offices in Crestline, Ohio, Willard, Ohio and the Ohio Villages of Chatfield, Tiro, Richwood and Green Camp. Farmers also has a loan production office in Marion, Ohio. Farmers accounts for 19.4% of the Corporation's consolidated assets at December 31, 2003. SCC RESOURCES INC. (SCC) is organized under the laws of the State of Ohio. Begun as a joint venture of three local Sandusky, Ohio banks in 1966, SCC provides item-processing services for financial institutions, including the Banks, and other nonrelated entities. The Corporation acquired total ownership of SCC in February 1993. On June 19, 1999, SCC entered into an agreement with Jack Henry & Associates, Inc. (JHA) to sell all of their contracts for providing data processing services to community banks. JHA agreed to pay SCC a fee based upon annual net revenue under a new JHA contract for each bank that signed a five-year contract with JHA by January 31, 2000. This subsidiary accounts for less than one percent of the Corporation's consolidated assets as of December 31, 2003. R. A. REYNOLDS APPRAISAL SERVICE, INC. (Reynolds), owned by the Corporation since 1993, was organized under the laws of the State of Ohio in September 1993. Reynolds provides real estate appraisal services, for lending purposes, to the Banks and to other financial institutions. Reynolds accounts for less than one percent of the Corporation's consolidated assets as of December 31, 2003. MR. MONEY FINANCE COMPANY (Mr. Money) was formed in year 2000 under the laws of the State of Ohio, to provide consumer-lending products to customers who may not qualify for conventional commercial bank lending products. Mr. Money has its main office in Sandusky, Ohio and an office in Mansfield, Ohio. Loans for Mr. Money come from direct consumer lending to customers and loans from third party home improvement vendors. Mr. Money accounts for 2.3% of the Corporation's consolidated assets as of December 31, 2003. FIRST CITIZENS TITLE INSURANCE AGENCY INC. (Title Agency) was formed in 2001 to provide customers with a seamless mortgage product with improved service. Assets of the Title Agency are not significant as of December 31, 2003. 3 FIRST CITIZENS INSURANCE AGENCY INC. (Insurance Agency) was also formed in 2001 to allow the Corporation to participate in commission revenue generated through its third party insurance agreement. Assets of the Insurance Agency are not significant as of December 31, 2003. WATER STREET PROPERTIES (Water St.) was formed to hold properties repossessed by FCBC subsidiaries. Assets of Water St. are not significant as of December 31, 2003. (b) Financial Information About Industry Segments FCBC is a financial holding company. Through the two subsidiary banks, the Corporation is primarily engaged in the business of commercial banking, which accounts for substantially all of its revenue, operating income and assets. Financial information regarding the Corporation is included herein under Item 8 of this Form 10-K and statistical information regarding the Corporation is located under Item 1 of this Form 10-K, and each is incorporated into this Section by reference. (c) Narrative Description of Business General The Corporation's primary business is incidental to the two subsidiary banks. Citizens and Farmers, located in Erie, Crawford, Huron, Union, Marion, Richland, and Ottawa Counties, Ohio, conduct a general banking business that involves collecting customer deposits, making loans and purchasing securities. With the acquisition of ICBC and its subsidiary bank, which was merged with and into Citizens, Citizens now provides trust services. Interest and fees on loans accounted for 68% of total revenue for 2003, 69% of total revenue for 2002, and 70% of total revenue in 2001. The primary focus of lending was real estate mortgages, but has now moved towards commercial loan products. Residential real estate mortgages comprised 44% of the total loan portfolio in 2003, 50% of the total loan portfolio in 2002, and 61% of the total loan portfolio in 2001. Commercial and agricultural loans comprised 11% of the total loan portfolio in both 2003 and 2002, and 8% in 2001, while commercial real estate loans comprised 34% in 2003, 28% in 2002, and 21% in 2001. Citizens' and Farmers' loan portfolios do not include any foreign-based loans, loans to lesser-developed countries or loans to FCBC. On a parent company only basis, FCBC's primary source of funds is the receipt of dividends paid by its subsidiaries, principally the Banks. The ability of the Banks to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, each Bank may declare a dividend without the approval of the State of Ohio Division of Financial Institutions unless the total of the dividends in a calendar year exceeds the total net profits of the bank for the year combined with the retained profits of the bank for the two preceding years. Earnings have been sufficient to support asset growth at the Banks and at the same time provide funds to FCBC for shareholder dividends. The Corporation's business is not seasonal, nor is it dependent on a single or small group of customers. In the opinion of management, the Corporation does not have exposure to material costs associated with environmental hazardous waste cleanup. Competition The primary market area for Citizens and Farmers is Erie, Huron and Crawford counties. A secondary market includes portions of Union, Marion, Richland, and Ottawa counties. Citizens and Farmers were operated as independent commercial banks in their respective market area. Traditional financial service competition for the Banks consists of large regional financial institutions, community banks, thrifts and credit unions operating within the Corporation's market area. A growing nontraditional source of competition for loan and deposit dollars comes from captive auto finance companies, mortgage banking companies, internet banks, brokerage companies, insurance companies and direct mutual funds. 4 Employees FCBC has no employees. The subsidiary companies employ approximately 263 full-time equivalent employees to whom a variety of benefits are provided. FCBC and its subsidiaries are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good. Supervision and Regulation The Bank Holding Company Act. As a bank holding company, FCBC is subject to regulation under the Bank Holding Company Act of 1956, as amended (the BHCA) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (Federal Reserve Board). Under the BHCA, FCBC is subject to periodic examination by the Federal Reserve Board and required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require. The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring substantially all the assets of any bank, acquiring direct or indirect ownership or control of more than 5% of the voting shares of a bank or merging or consolidating with another bank holding company. Privacy Provisions of GLB Act. Under the GLB act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These rules contain extensive provisions on a customer's right to privacy of non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. The privacy provisions of the GLB Act affect how consumer information is conveyed to outside vendors. FCBC and its subsidiaries are also subject to certain state laws that deal with the use and distribution of non-public personal information. Interstate Banking and Branching. Prior to enactment of the Interstate Banking and Branch Efficiency Act of 1995, neither FCBC nor its subsidiaries could acquire banks outside Ohio, unless the laws of the state in which the target bank was located specifically authorized the transaction. The Interstate Banking and Branch Efficiency Act has eased restrictions on interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching. Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent federal agency which insures the deposits of federally-insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of FCBC's bank subsidiaries are subject to the deposit insurance assessments of the Bank insurance Fund of the FDIC. Under the FDIC's deposit insurance assessment system, the assessment rate for any insured institution may vary according to regulatory capital levels of the institution and other factors such as supervisory evaluations. The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against banks, after first giving the institution's primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in 5 unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC. Capital Guidelines. The Federal Reserve Board has adopted risk-based capital guidelines to evaluate the adequacy of capital of bank holding companies and state member banks. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the holding company's capital base. Failure to meet capital guidelines could subject a banking institution to various penalties, including termination of FDIC deposit insurance. Both FCBC and its subsidiary Banks had risk-based capital ratios above "well capitalized" requirements at December 31, 2003. Community Reinvestment Act. The Community Reinvestment Act requires depository institutions to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. Under this Act, each institution is required to adopt a statement for each of its marketing areas describing the depositary institution's efforts to assist in its community's credit needs. Depositary institutions are periodically examined for compliance and assigned ratings. Banking regulators consider these ratings when considering approval of a proposed transaction by an institution. USA Patriot Act of 2001. Further regulations may arise from the events of September 11, 2001, such as the USA Patriot Act of 2001 which grants law enforcement officials greater powers over financial institutions to combat money laundering and terrorist access to the financial system in our country. The USA Patriot Act requires that the Corporation, upon request from the appropriate federal banking agency, provide records related to anti-money laundering, perform due diligence for private banking and correspondent accounts, establish standards for verifying customer identity and perform other related duties. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 contains important new requirements for public companies in the area of financial disclosure and corporate governance. In accordance with section 302(a) of the Sarbanes-Oxley Act, written certifications by FCBC's Chief Executive Officer and Chief Financial Officer are required. These certifications attest that FCBC's quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. See Item 9(a) "Controls and Procedures" of this form 10-K for FCBC's evaluation of its disclosure controls and procedures. Regulation of Bank Subsidiaries In addition to regulation of FCBC, FCBC's banking subsidiaries are subject to federal regulation regarding such matters as reserves, limitations on the nature and amount of loans and investments, issuance or retirement of their own securities, limitations on the payment of dividends and other aspects of banking operations. As Ohio chartered banks, both of FCBC's banking subsidiaries, Citizens and Farmers, are supervised and regulated by the State of Ohio Department of Commerce, Division of Financial Institutions. In addition, Citizens is a member of the Federal Reserve System. Both banks are subject to periodic examinations by the State of Ohio Department of Commerce, Division of Financial Institutions and Citizens is additionally subject to periodic examinations by the Federal Reserve Board. These examinations are designed primarily for the protection of the depositors of the banks and not for their shareholders. In addition, Mr. Money is supervised and regulated by, and is subject to periodic examinations by, the State of Ohio Department of Commerce, Division of Financial Institutions. The deposits of Citizens and Farmers are insured by the Bank Insurance Fund of the FDIC, and both entities are subject to the Federal Deposit Insurance Act. Farmers is subject to periodic examinations by the FDIC. Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a subsidiary of a financial holding company may be required to reimburse the FDIC for any loss incurred due to the default of another FDIC insured subsidiary of the financial holding company or 6 for FDIC assistance provided to such a subsidiary in danger of default. "Default" means generally the appointment of a conservator or receiver. "In danger of default" means generally the existence of certain conditions indicating that a default is likely to occur in the absence. Effects of Government Monetary Policy The earnings of the Banks are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. Federal Reserve Board monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including the Banks, and are expected to continue to do so in the future. Future Regulatory Uncertainty Federal regulation of financial institutions changes regularly and is the subject of constant legislative debate. As a result, FCBC cannot forecast how federal regulation of financial institutions may change in the future or the impact that any such regulatory changes would have on the financial condition or results of operations of FCBC or any of its subsidiaries. (d) Financial Information About Foreign and Domestic Operations and Export Sales The Corporation does not have any offices located in a foreign country, nor do they have any foreign assets, liabilities, or related income and expense for the years presented. (e) Available Information FCBC's Internet address is www.fcza.com The Corporation will provide a copy of FCBC's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act to shareholders upon request. Materials that FCBC files with the SEC may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20459. This information may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Statistical Information The following section contains certain financial disclosures related to the Registrant as required under the Securities and Exchange Commission's Industry Guide 3, "Statistical Disclosures by Bank Holding Companies", or a specific reference as to the location of the required disclosures in the Registrant's 2003 Annual Report to Shareholders, portions of which are incorporated in this Form 10-K by reference. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL Average balance sheet information and the related analysis of net interest income for the years ended December 31, 2003, 2002 and 2001 is included on pages 14 through 16 - "Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential" and "Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rates", within Management's Discussion and Analysis of Financial Condition and Results of Operations of the Registrant's 2003 Annual Report to Shareholders and is incorporated into this Item I by reference. 7 II. INVESTMENT PORTFOLIO The following table sets forth the carrying amount of securities at December 31.
2003 2002 2001 -------- -------- -------- (Dollars in thousands) AVAILABLE FOR SALE (1) U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 64,333 $102,780 $ 55,362 Corporate bonds 1,030 2,475 4,618 Obligations of states and political subdivisions 35,036 41,458 38,551 Mortgage-backed securities 8,426 7,803 9,243 -------- -------- -------- Total debt securities 108,825 154,516 107,774 Equity securities 683 652 456 -------- -------- -------- Total $109,508 $155,168 $108,230 ======== ======== ======== HELD TO MATURITY (1) Obligations of states and political subdivisions $ - $ - $ 78 Mortgage-backed securities 14 42 61 -------- -------- -------- Total $ 14 $ 42 $ 139 ======== ======== ========
(1) The Corporation has no securities of an "issuer" where the aggregate carrying value of such securities exceeded ten percent of shareholders' equity. The following tables set forth the maturities of securities at December 31, 2003 and the weighted average yields of such securities. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions.
Maturing after one After five but Within one year but within five years within ten years After ten years ----------------- --------------------- ----------------- ------- ------- Amount Yield Amount Yield Amount Yield Amount Yield ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) AVAILABLE FOR SALE (2) U.S. Treasury securities and obligations of U.S. government corporations and agencies $52,972 3.17% $11,361 3.44% $ - -% $ - -% Obligations of states and political subdivisions (1) 9,309 3.95 19,995 4.20 4,425 3.87 1,307 3.80 Corporate bonds 501 7.41 529 2.00 - - - - Mortgage-backed securities 125 4.63 1,896 5.16 6,405 3.75 Equity securities - - - - - - 683 - ------- ------- ------- ------- Total $62,907 3.32% $33,781 3.96% $10,830 3.80% $ 1,990 2.50% ======= ======= ======= =======
(1) Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security. (2) The weighted average yield has been computed using the historical amortized cost for available-for-sale securities. 8
Maturing after one After five but Within one year but within five years within ten years After ten years ----------------- --------------------- ----------------- ------- ------- Amount Yield Amount Yield Amount Yield Amount Yield ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) HELD TO MATURITY Mortgage-backed securities $ - - $ 14 6.84% $ - - $ - - ======= ======= ======= =======
III. LOAN PORTFOLIO Types of Loans The amounts of gross loans outstanding at December 31 are shown in the following table according to types of loans.
2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (Dollars in thousands) Commercial and agricultural $ 51,146 $ 46,495 $ 26,708 $ 26,416 $ 26,077 Commercial real estate 158,125 116,674 70,616 60,546 48,301 Residential real estate 205,635 210,931 204,496 217,344 178,876 Real estate construction 22,708 13,179 9,402 9,684 4,482 Consumer 24,765 30,278 23,100 29,509 28,106 Leases 2,293 1,302 435 590 392 Credit card and other 4,977 3,700 2,315 2,979 3,576 -------- -------- -------- -------- -------- $469,649 $422,559 $337,072 $347,068 $289,810 ======== ======== ======== ======== ========
Commercial loans are those made for commercial, industrial and professional purposes to sole proprietorships, partnerships, corporations and other business enterprises. Agricultural loans are for financing agricultural production, including all costs associated with growing crops or raising livestock. Commercial and Agricultural loans may be secured, other than by real estate, or unsecured, requiring one single repayment or on an installment repayment schedule. The loans involve certain risks relating to changes in local and national economic conditions and the resulting effect on the borrowing entities. Secured loans not collateralized by real estate mortgages maintain a loan-to-value ratio ranging from 50% as in the case of certain stocks, to 100% in the case of collateralizing with a savings or time deposit account. Unsecured credit relies on the financial strength and previous credit experience of the borrower and in many cases the financial strength of the principals when such credit is extended to a corporation. Commercial real estate mortgage loans are made predicated on having a security interest in real property and are secured wholly or substantially by that lien on real property. Commercial real estate mortgage loans generally maintain a loan-to-value ratio of 75%. Residential real estate mortgage loans are made predicated on security interest in real property and secured wholly or substantially by that lien on real property. Such real estate mortgage loans are primarily loans secured by one-to-four family real estate. Residential real estate mortgage loans generally pose less risk to the Corporation due to the nature of the collateral being less susceptible to sudden changes in value. Real estate construction loans are for the construction of new buildings or additions to existing buildings. Generally, these loans are secured by one-to-four family real estate. The Corporation controls disbursements in connection with construction loans. 9 Consumer loans are made to individuals for household, family and other personal expenditures. These include the purchase of vehicles, furniture, educational expenses, medical expenses, taxes or vacation expenses. Consumer loans may be secured, other than by real estate, or unsecured, generally requiring repayment on an installment repayment schedule. Consumer loans pose a relatively higher credit risk. This higher risk is moderated by the use of certain loan value limits on secured credits and aggressive collection efforts. The collectibility of consumer loans is influenced by local and national economic conditions. Lease loans are made for commercial, industrial and professional purposes. These loans are made to sole proprietorships, partnerships, corporations, and other business enterprises. The Corporation no longer makes credit card loans to its customers. In October 2003, Citizens sold its credit card portfolio to a third party provider. Through this provider, we can now offer a choice of cards and features, as well as improved service to our customers. Letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the Corporation's consolidated financial statements. As of December 31, 2003 and 2002, the Corporation was contingently liable for $3,447,000 and $547,000 of letters of credit. In addition, the Corporation had issued lines of credit to customers. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 2003 and 2002, the Corporation had commitments to extend credit in the aggregate amounts of approximately $57,813,000 and $67,852,000. Of these amounts, $51,155,000 and $56,467,000 represented lines of credit and construction loans, $0 and $6,127,000 represented credit card commitments, and $6,658,000 and $5,258,000 represented overdraft protection commitments. Such amounts represent the portion of total commitments that had not been used by customers as of December 31, 2003 and 2002. Maturities and Sensitivity of Loans to Changes in Interest Rates The following table shows the amount of commercial and agricultural, commercial real estate, and real estate construction loans outstanding as of December 31, 2003, which, based on the contract terms for repayments of principal, are due in the periods indicated. In addition, the amounts due after one year are classified according to their sensitivity to changes in interest rates.
Maturing ------------------------------------------------- After one Within but within After one year five years five years Total ---------- ---------- ---------- ---------- (Dollars in thousands) Commercial and agricultural $ 22,523 $ 11,064 $ 17,559 $ 51,146 Commercial real estate 8,426 18,230 131,469 158,125 Real estate construction 3,607 3,609 15,492 22,708 ---------- ---------- ---------- ---------- $ 34,556 $ 32,903 $ 164,520 $ 231,979 ========== ========== ========== ==========
Interest Sensitivity ----------------------- Fixed Variable rate rate ---------- ---------- (Dollars in thousands) Due after one but within five years $ 8,355 $ 24,548 Due after five years 4,783 159,737 ---------- ---------- $ 13,138 $ 184,285 ========== ==========
10 The preceding maturity information is based on contract terms at December 31, 2003 and does not include any possible "rollover" at maturity date. In the normal course of business, the Corporation considers and acts on the borrowers' requests for renewal of loans at maturity. Evaluation of such requests includes a review of the borrower's credit history, the collateral securing the loan and the purpose for such request. Risk Elements The following table presents information concerning the amount of loans at December 31 that contain certain risk elements.
2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on a nonaccrual basis (1) $3,204 $3,468 $2,413 $1,368 $1,682 Loans contractually past due 90 days or more as to principal or interest payments (2) 3,206 2,414 2,818 558 834 Loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower (3) 87 158 467 634 693 ------ ------ ------ ------ ------ Total $6,497 $6,040 $5,698 $2,560 $3,209 ====== ====== ====== ====== ====== Impaired loans included in above totals 420 879 1,973 2,778 994 Impaired loans not included in above totals 5,945 6,050 1,592 2,374 3,166 ------ ------ ------ ------ ------ Total impaired loans $6,365 $6,929 $3,565 $5,152 $4,160 ====== ====== ====== ====== ======
There are no loans as of December 31, 2003, other than those disclosed above, where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. There are no other interest-bearing assets that would be required to be disclosed in the table above, if such assets were loans as of December 31, 2003. (1) Loans are placed on nonaccrual status when doubt exists as to the collectibility of the loan, including any accrued interest. With a few immaterial exceptions, commercial and agricultural, commercial real estate, residential real estate and construction loans past due 90 days are placed on nonaccrual unless they are well collateralized and in the process of collection. Generally, consumer loans are charged-off within 30 days after becoming past due 90 days unless they are well collateralized and in the process of collection. Credit card loans are charged-off before reaching 120 days of delinquency. Once a loan is placed on nonaccrual, interest is then recognized on a cash basis where future collections of principal is probable. (2) Excludes loans accounted for on a nonaccrual basis. (3) Excludes loans accounted for on a nonaccrual basis and loans contractually past due ninety days or more as to principal or interest payments. 11 Interest income recognition associated with impaired loans was as follows.
(Dollars in thousands) 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Interest income on impaired loans, including interest income recognized on a cash basis $409 $346 $184 $344 $320 ==== ==== ==== ==== ==== Interest income on impaired loans recognized on a cash basis $409 $346 $184 $344 $320 ==== ==== ==== ==== ====
There were no foreign outstandings for any period presented. No concentrations of loans exceeded 10% of total loans. 12 IV. SUMMARY OF LOAN LOSS EXPERIENCE Analysis of the Allowance for Loan Losses The following table shows the daily average loan balances and changes in the allowance for loan losses for the years indicated.
2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (Dollars in thousands) Daily average amount of loans net of unearned income $ 445,205 $ 431,243 $ 346,696 $ 314,071 $ 284,080 ========= ========= ========= ========= ========= Allowance for loan losses at beginning of year $ 6,325 $ 4,865 $ 4,107 $ 4,274 $ 4,567 Loan charge-offs: Commercial and agricultural and commercial real estate 344 382 987 612 63 Real estate mortgage 873 222 29 166 95 Real estate construction - - - - - Consumer 1,056 877 392 447 581 Leases - - - - - Credit card and other 83 36 52 46 49 --------- --------- --------- --------- --------- 2,356 1,517 1,460 1,271 788 Recoveries of loans previously Charged-off: Commercial and agricultural and commercial real estate 37 75 249 75 29 Real estate mortgage 43 50 68 57 13 Real estate construction - - - - - Consumer 290 230 52 148 170 Leases - - 21 - - Credit card and other 25 18 25 17 17 --------- --------- --------- --------- --------- 395 373 415 297 229 --------- --------- --------- --------- --------- Net charge-offs (1) (1,961) (1,144) (1,045) (974) (559) Balance from acquisition - 1,426 - - - Provision for loan losses (2) 1,944 1,178 1,803 807 266 --------- --------- --------- --------- --------- Allowance for loan losses at end of year $ 6,308 $ 6,325 $ 4,865 $ 4,107 $ 4,274 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of loans at year-end 1.34% 1.50% 1.45% 1.19% 1.48% ========= ========= ========= ========= ========= Ratio of net charge-offs during the year to average loans outstanding 0.44% 0.27% 0.30% 0.31% 0.20% ========= ========= ========= ========= =========
(1) The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy and specific business segments. (2) The determination of the balance of the allowance for loan losses is based on an analysis of the loan portfolio and reflects an amount that, in management's judgment, is adequate to provide for probable incurred loan losses. Such analysis is based on a review of specific loans, the character of the loan portfolio, current economic conditions, past loan loss experience and such other factors as management believes require current recognition in estimating probable incurred loan losses. 13 Allocation of Allowance for Loan Losses The following table allocates the allowance for loan losses at December 31 to each loan category. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probable losses estimated to be incurred within the following categories of loans at the dates indicated.
2003 2002 ------------------------- ------------------------- Percentage Percentage of loans to of loans to (Dollars in thousands) Allowance total loans Allowance total loans ---------- ----------- ---------- ----------- Commercial and agricultural $ 1,153 10.9% $ 803 11.0% Commercial real estate 1,946 33.7 1,455 27.6 Real estate mortgage 1,173 43.8 1,392 49.9 Real estate construction 87 4.8 51 3.1 Consumer 314 5.3 415 7.2 Credit card and other - 1.0 14 0.9 Leases 7 0.5 3 0.3 Unallocated 1,628 - 2,192 - ---------- ----------- ---------- ----------- $ 6,308 100.0% $ 6,325 100.0% ========== =========== ========== ===========
2001 2000 ------------------------- ------------------------- Percentage Percentage of loans to of loans to Allowance total loans Allowance total loans ---------- ----------- ---------- ----------- Commercial and agricultural $ 223 7.9% $ 316 7.8% Commercial real estate 1,116 21.0 969 17.4 Real estate mortgage 1,313 60.8 1,439 62.6 Real estate construction 17 2.8 12 2.8 Consumer 347 6.9 327 8.5 Credit card and other 7 0.5 8 0.8 Leases 46 0.1 - 0.1 Unallocated 1,796 - 1,036 - ---------- ----------- ---------- ----------- $ 4,865 100.0% $ 4,107 100.0% ========== =========== ========== ===========
1999 ------------------------- Percentage of loans to Allowance total loans ---------- ----------- Commercial and agricultural $ 531 9.0% Commercial real estate 152 16.7 Real estate mortgage 1,447 61.7 Real estate construction - 1.6 Consumer 544 9.7 Credit card and other 12 1.2 Leases 23 0.1 Unallocated 1,565 - ---------- ----------- $ 4,274 100.0% ========== ===========
The allocation of the reserve is based on managements' estimation of the allowance using information such as past loan loss experience, risks in the nature and volume of the portfolio, economic conditions, and other factors. Management believes that the allocations above are representative of its loan portfolio. 14 Consumer loss allocation has declined due to several factors. The credit quality of these loans has improved over the past few years due to the tightening of underwriting standards. Also, based on its knowledge of the consumer loan portfolio, management believes the charge-off rate experienced in the last few years is not a trend but rather the impact of more relaxed underwriting standards in the past. Management expects net consumer loan charge-offs to decline considerably in 2004 and as a result allocated a lower allowance to this portfolio. Deposits The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated.
2003 2002 2001 ------------------- ------------------- ------------------- Average Average Average Average Average Average balance rate paid balance rate paid balance rate paid -------- --------- -------- --------- -------- --------- (Dollars in thousands) Noninterest-bearing demand deposits $ 71,797 N/A $ 62,707 N/A $ 45,048 N/A Interest-bearing demand deposits 66,923 0.64% 69,586 1.05% 56,769 1.47% Savings, including Money Market deposit accounts 177,855 0.67% 168,480 1.55% 106,002 3.16% Certificates of deposit, including IRA's 214,226 2.72% 233,096 3.19% 204,566 4.73% -------- -------- -------- $530,801 $533,869 $412,385 ======== ======== ========
Maturities of certificates of deposits and individual retirement accounts of $100,000 or more outstanding at December 31, 2003 are summarized as follows.
Individual Certificates Retirement of Deposits Accounts Total ------------ ---------- ------- (Dollars in thousands) 3 months or less $ 14,884 $ 207 $15,091 Over 3 through 6 months 8,011 348 8,359 Over 6 through 12 months 8,281 1,112 9,393 Over 12 months 10,826 1,647 12,473 ------------ ---------- ------- $ 42,002 $ 3,314 $45,316 ============ ========== =======
Return on Equity and Assets Information required by this section is incorporated by reference to the information appearing under the caption "Five-Year Selected Consolidated Financial Data" located on page 1 and 2 of First Citizens Banc Corp's Annual Report to Shareholders. The dividend payout ratio was 118.2% in 2003, 87.8% in 2002 and 95.4% in 2001. Short-term Borrowings See Note 10 to the consolidated financial statements (located at page 44 of the Annual Report to Shareholders) and "Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential" (located at pages 14 and 16 of the Annual Report to Shareholders) for the statistical disclosures for short-term borrowings for 2003, 2002 and 2001. 15 ITEM 2. PROPERTIES FCBC neither owns nor leases any properties. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio, which is also the office of FCBC. Citizens also operates three branch banking offices in Perkins Township (Sandusky, Ohio), three branch banking offices in Norwalk, Ohio, branch banking offices in the Ohio communities of Berlin Heights, Castalia, and Huron, and a loan production office in Port Clinton, Ohio. Farmers maintains its main office at 102 South Kibler Street, New Washington, Ohio. Farmers also owns and operates a branch banking office in the Ohio communities of Chatfield, Tiro, Richwood and Green Camp. Farmers also leases two branch banking offices in the Ohio communities of Willard and Crestline, as well as leasing a loan production office in Marion, Ohio. SCC maintains its processing center located at 303 Howard Drive, Sandusky, Ohio. Reynolds and SCC lease offices at 303 Howard Drive. Mr. Money leases two properties, one in Sandusky, Ohio and the other in Mansfield, Ohio. FCBC has two wholly-owned subsidiary banks, a wholly-owned item processing company subsidiary, a wholly owned finance company, a wholly-owned real estate appraisal company subsidiary, a wholly owned title insurance agency, a wholly owned insurance agency, and a wholly owned property liquidation company. ITEM 3. LEGAL PROCEEDINGS The Corporation's management is aware of no pending or threatened litigation in which the Corporation faces potential loss or exposure that will materially affect the consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information required by this section is incorporated by reference to the information appearing under the caption "Common Stock and Shareholder Matters" located on page 3 of First Citizens Banc Corp's Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Information required by this section is incorporated by reference to the information appearing under the caption "Five-Year Selected Consolidated Financial Data" and "Five-Year Selected Ratios" located on page 1 and 2 of First Citizens Banc Corp's Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - AS OF DECEMBER 31, 2003 AND DECEMBER 31, 2002 AND FOR THE YEARS ENDING DECEMBER 31, 2003, 2002 AND 2001 Information required by this section is incorporated by reference to the information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" located on pages 5 through 19 of First Citizens Banc Corp's 2003 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk is incorporated herein by reference to pages 19 through 21 of First Citizens Banc Corp's 2003 Annual Report to Shareholders. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA First Citizens Banc Corp's Report of Independent Auditors and Consolidated Financial Statements and accompanying notes are listed below and are incorporated herein by reference to First Citizens Banc Corp's 2003 Annual Report to Shareholders (Exhibit 13, pages 23 through 58). The supplementary financial information specified by Item 302 of Regulation S-K, selected quarterly financial data, is included in Note 21 - "Quarterly Financial Data (Unaudited)" to the consolidated financial statements found on page 57. Report of Independent Auditors Consolidated Balance Sheets December 31, 2003 and 2002 Consolidated Statements of Income For each of the three years in the period ended December 31, 2003 Consolidated Statements of Changes in Shareholders' Equity For each of the three years in the period ended December 31, 2003 Consolidated Statements of Cash Flows For each of the three years in the period ended December 31, 2003 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Corporation has had no disagreements with the independent accountants on matters of accounting principles or financial statement disclosure required to be reported under this item. ITEM 9(a). CONTROLS AND PROCEDURES DISCLOSURES As of the end of the period covered by this annual report, an evaluation was carried out under the supervision and with the participation of First Citizens Banc Corp's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by First Citizens Banc Corp in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in First Citizens Banc Corp's internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 9(b). CHANGES IN INTERNAL CONTROLS No changes in FCBC's internal control over financial reporting came to management's attention that have materially affected, or are reasonably likely to materially affect, FCBC's internal control over financial reporting. 17 PART III Information relating to the Items 10, 11, 12, 13 and 14 are included in First Citizens Banc Corp's Proxy Statement and Notice of Annual Meeting of Shareholders to be held Tuesday, April 20, 2004, ("2003 Proxy Statement") dated March 19, 2004, to be filed with the Commission on Form DEF 14-A, pursuant to Section 14(A) of the Securities Exchange Act of 1934 and is incorporated by reference into this Form 10-K Annual Report (Exhibit 22). ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the captions "Election of Directors" and "Executive Officers of the Corporation" of the 2004 Proxy Statement is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION. The information contained under the captions "Executive Compensation" of the 2004 Proxy Statement is incorporated by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained under the caption "Information Concerning Directors and Nominees" of the 2004 Proxy Statement is incorporated by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained under the caption "Transactions with Directors, Officers and Associates" of the 2004 Proxy Statement is incorporated by reference in response to this item. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information contained under the caption "Principal Independent Accountants", "Audit Fees", Audit-Related Fees", "Tax Fees", and "Other Fees" of the 2004 Proxy Statement filed with the Securities and Exchange Commission is incorporated by reference in response to this item. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS A PART OF THE REPORT 1 FINANCIAL STATEMENTS. The following financial statements, together with the applicable report of independent auditors, can be located under Item 8 of this Form 10-K: Report of Independent Auditors Consolidated Balance Sheets December 31, 2003 and 2002 Consolidated Statements of Income For the three years ended December 31, 2003 Consolidated Statements of Changes in Shareholder's Equity For the three years ended December 31, 2003 Consolidated Statements of Cash Flows For the three years ended December 31, 2003 18 Notes to Consolidated Financial Statements 2 FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3 EXHIBITS 2 Agreement and Plan of Merger dated as of November 1, 2001 between First Citizens Banc Corp and Independent Community Banc Corp. (filed as Exhibit 2 to the Registration Statement on Form S-4 filed on December 14, 2001 and incorporated herein by reference.) 3.1 Articles of Incorporation, as amended, of First Citizens Banc Corp are incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 2000, filed on March 24, 2001. 3.2 Amended Code of Regulations of First Citizens Banc Corp is incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 2000, filed on March 24, 2001. 4.1 Certificate for Registrant's Common Stock is incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 2000, filed on March 24, 2001. 11.1 Statement regarding earnings per share is included in Note 1 to the Consolidated Financial Statements and can be located under Item 8 and filed as Exhibit 13 of this Form 10-K. 13.1 First Citizens Banc Corp 2003 Annual Report to Shareholders. 14.1 FCBC's Code of Ethics (incorporated by reference to First Citizens Banc Corp's 2003 Proxy statement for the year ended December 31, 2002, filed on March 17, 2003.) 20.1 FCBC's Proxy Statement for its 2004 Annual Meeting (incorporated by reference from the information contained in FCBC's 2004 Proxy Statement). 21.1 Subsidiaries of FCBC (incorporated by reference from the information contained in FCBC's 2003 Annual Report) 23.1 Consent of Independent Accountants. 24.1 Power of Attorney 99.1 Safe Harbor under private Securities Litigation Reform Act of 1995 is incorporated by reference to Exhibit 99 of First Citizens Banc Corp's Annual Report for the year ended December 31, 1999, filed on March 24, 2000. 31.1 Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K. On December 30, 2003, a Form 8-K was filed to announce that earnings were down in 2003 compared to 2002, as well as some of the steps being taken to try to improve profitability in the future. The two main steps taken were to close two branch offices, which included a reduction in work force, and to move the operations function to a central location. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) First Citizens Banc Corp By /s/ David A. Voight --------------------------------------------------------------------------- David A. Voight, President (Principal Executive Officer) By /s/ Todd A. Michel --------------------------------------------------------------------------- Todd A. Michel, Senior Vice President (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 15, 2004 by the following persons (including a majority of the Board of Directors of the Registrant) in the capacities indicated: /s/ John L. Bacon /s/ David A. Voight - -------------------------------- --------------------------------- John L. Bacon David A. Voight Director President and CEO, Director /s/ Robert L. Bordner /s/ George L. Mylander - -------------------------------- --------------------------------- Robert L. Bordner George S. Mylander Director Director /s/ Mary Lee G. Close /s/ Allen R. Nickles, CPA, CFE - -------------------------------- --------------------------------- Mary Lee G. Close Allen R. Nickles, CPA, CFE Director Director /s/ Blythe A. Friedley /s/ Robert L. Ransom - -------------------------------- --------------------------------- Blythe A. Friedley Robert L. Ransom Director Director /s/ Richard B. Fuller /s/ Leslie D. Stoneham - -------------------------------- --------------------------------- Richard B. Fuller Leslie D. Stoneham Director Director /s/ H. Lowell Hoffman, M.D. /s/ Daniel J. White - -------------------------------- --------------------------------- H. Lowell Hoffman, M.D. Daniel J. White Director Director /s/ W. Patrick Murray - -------------------------------- W. Patrick Murray Director 20
EXHIBIT NUMBER DESCRIPTION - -------- ----------------------------------------------------------------------- 2 Agreement and Plan of Merger dated as of November 1, 2001 between First Citizens Banc Corp and Independent Community Banc Corp. (filed as Exhibit 2 to the Registration Statement on Form S-4 filed on December 14, 2001 and incorporated herein by reference.) 3.1 Articles of Incorporation, as amended, of First Citizens Banc Corp are incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 2000, filed on March 24, 2001. 3.2 Amended Code of Regulations of First Citizens Banc Corp is incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 2000, filed on March 24, 2001. 4.1 Certificate for Registrant's Common Stock is incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 2000, filed on March 24, 2001. 11.1 Statement regarding earnings per share is included in Note 1 to the Consolidated Financial Statements and can be located under Item 8 and filed as Exhibit 13 of this Form 10-K. 13.1 First Citizens Banc Corp 2003 Annual Report to Shareholders. 14.1 FCBC's Code of Ethics (incorporated by reference to First Citizens Banc Corp's 2003 Proxy statement for the year ended December 31, 2002, filed on March 17, 2003.) 20.1 FCBC's Proxy Statement for its 2004 Annual Meeting (incorporated by reference from the information contained in FCBC's 2004 Proxy Statement). 21.1 Subsidiaries of FCBC (incorporated by reference from the information contained in FCBC's 2003 Annual Report) 23.1 Consent of Independent Accountants. 24.1 Power of Attorney 99.1 Safe Harbor under private Securities Litigation Reform Act of 1995 is incorporated by reference to Exhibit 99 of First Citizens Banc Corp's Annual Report for the year ended December 31, 1999, filed on March 24, 2000. 31.1 Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15-d-14(a) Certification of Chief Financial Officer 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-13.1 3 l05629aexv13w1.txt ANNUAL REPORT EXHIBIT 13.1 First Citizens Banc Corp 2003 Annual Report to Shareholders Dear Shareholder: Profit performance for 2003 was disappointing and will continue to be a challenge in the present interest-rate environment; the lowest interest prime-rate environment reported by the Federal Reserve since September of 1958. Management and the Board of Directors are committed to not taking actions that may have short-term benefits but are detrimental for the long term. An example would be a wholesale move away from variable-rate lending to fixed rates. This would have a near-term positive impact on earnings, but when interest rates increase, would have an adverse effect. Looking at our comparative balance sheets you see that we are continuing to emphasize lending, specifically commercial lending at variable rates, and moving away from investments. On the deposit side, certificates of deposit are being replaced with lower cost Fed Funds purchased. These changes have resulted in interest margins that are favorable compared to peer companies, but below our budget and not sufficient to absorb increased overhead for the year. Increases in the overhead costs were attributable to regulatory requirements, emphasis on our commercial lending staff, addition of new facilities, expanding our courier banking services, and the creation of First Citizens Advisors. Increased regulatory costs will add little to our shareholder profitability, while the other expenses are investments in future profitability. Regulation Like all public companies, especially banking, we are subject to regulatory controls. The Sarbanes-Oxley Act has resulted in increases in those expenses. For example, we are examined by the Federal Reserve, FDIC, and State of Ohio, and our external auditors Crowe Chizek and Company LLC. In addition, we have our own internal audit department which answers directly to your board's Risk Management Committee. The Sarbanes-Oxley Act, reacting to the abuses of a few companies, will now require management of public companies to conduct an additional review of internal control separate from external and internal auditors. For banks this adds another layer of examination to an already heavily reviewed and regulated business which will add additional costs to our company. Commercial Lending We have been fortunate to attract proven commercial lenders to our company. These are the people responsible for our loan growth in 2003. Our commercial lenders, rewarded with an incentive-based program, have established the First Citizens affiliates as strong, community lenders. Commercial relationships provide an avenue to many additional opportunities in trust, insurance, investment services, and pension and 401k products. Commercial relationships can also provide access to a customer's employee group, providing additional opportunity to provide products and services. Facilities During 2003, affiliate offices were opened in Marion, Ohio; Mansfield, Ohio and Crestline, Ohio. These offices are viewed as opportunities in new markets for our companies. At the same time, we closed a Mr. Money facility in Norwalk Ohio, and are closing a Citizens facility in Sandusky and a Citizens facility in Norwalk. Changing customer-office preferences provided the opportunity to close these offices and take advantage of the accompanying economies without jeopardizing our customer base. At year end we also moved into our new operations center in Margaretta Township. This facility houses loan, deposit, and check processing. The new facility is expected to provide economies by having all back-room functions under one roof. Courier Banking During 2003 we continued to expand our courier banking services. Using an arrangement with a third-party vendor, the courier banking allows us to service larger commercial customers and provides a competitive advantage. While there is a cost to provide a courier, we can attract customers in adjoining communities and outlying areas without the significant costs of increasing our branch network. The courier banking product, in combination with the electronic capabilities through our "Net Teller" on-line banking, can provide our customers services comparable to having a bank branch next door. We currently service loan and deposit balances of over $50,000,000 with courier banking. First Citizens Advisors 2003 was our year to introduce First Citizens Advisors. A combination of the trust department acquired from the Citizens National Bank of Norwalk, our Select Banking department, and the addition of four proven investment professionals is the basis for the department. First Citizens Advisors provides our customers access to fiduciary and asset management services, access to a breadth of investment resources, access to insurance products through Dawson & Citizens Insurance, and private banking with one-on-one personal service. Over the course of the last year, the department has grown approximately $70,000,000. We have reached the break-even point in this new venture and it should be a contribution to profitability in 2004 and beyond. New Opportunities As we have stated in many of our communications, we are always looking for partnership opportunities that will benefit our shareholders. On March 3, 2004, we announced the signing of a definitive agreement with FNB Financial Corp of Shelby, Ohio. FNB's affiliate First National Bank of Shelby is a $220,000,000 commercial bank servicing the residents of Richland and southern Huron Counties. Our plan is to merge the First National Bank and our Farmers State Bank to create a commercial bank of approximately $350,000,000. Subject to regulatory approval and with the assistance of our investment bankers, Keefe, Bruette, & Woods, our legal counsel, Squire Sanders & Dempsey, and our auditors Crowe Chizek and Company LLC, we expect this transaction to close in the fourth quarter of 2004. As we move through 2004, our goal remains to develop customer relationships as a community bank. We must leverage our new and existing customer relationships into new products and offerings such as First Citizens Advisors to provide new sources of non-interest income. Continuing to expand opportunities in non-interest income will reduce the reliance on interest margin for the company. And as we weather this interest-rate environment, we strive to balance the control of overhead costs with costs that represent investment in future revenue opportunity. Lastly, we continue to look for partnership opportunities that are beneficial to our shareholders. We believe that our philosophy of maintaining community decision making and local board interaction, coupled with our ability to provide backroom support in audit and accounting, compliance, personnel, and operations, is attractive to potential partners. Very truly yours, David A. Voight President/Chief Executive Officer Five Year Consolidated Financial Summary
2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- EARNINGS Net Income (000) $ 5,567 $ 7,127 $ 5,293 $ 5,692 $ 6,063 Per Common Share (1) Earnings (basic) $ 1.11 $ 1.48 $ 1.30 $ 1.39 $ 1.43 Earnings (diluted) $ 1.10 $ 1.48 $ 1.30 $ 1.39 $ 1.43 Book Value $ 13.73 $ 14.24 $ 11.94 $ 11.72 $ 11.58 Dividends Paid $ 1.30 $ 1.30 $ 1.24 $ 1.24 $ 1.15 BALANCES Assets (millions) 636.4 651.6 487.7 489.3 472.2 Deposits (millions) 510.2 539.9 410.2 392.0 403.2 Net Loans (millions) 462.9 415.7 331.3 342.0 284.4 Shareholders' Equity (millions) 69.1 71.7 48.7 47.9 48.2 PERFORMANCE RATIOS Return on Average Assets 0.87% 1.12% 1.06% 1.19% 1.24% Return on Average Equity 7.82% 10.22% 10.65% 12.09% 11.58% Equity to Assets Ratio 10.86% 11.00% 9.99% 9.80% 10.21% Net Loans to Deposit Ratio 90.73% 76.99% 80.78% 87.25% 70.55% Loss Allowance to Total Loans 1.34% 1.50% 1.45% 1.19% 1.48%
ANNUAL REPORT CONTENTS Five - Year Selected Consolidated Financial Data 1 Common Stock and Shareholder Matters 3 General Development of Business 3 Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Quantitative and Qualitative Disclosures About Market Risk 19 Financial Statements Report of Independent Auditors 23 Consolidated Balance Sheets 25 Consolidated Statements of Income 26 Consolidated Statements of Changes in Shareholders' Equity 27 Consolidated Statement of Cash Flows 28 Notes to Consolidated Financial Statements 30
FIVE-YEAR SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share data)
Year ended December 31, -------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Statements of income: Total interest and dividend income $ 33,267 $ 36,007 $ 35,348 $ 34,190 $ 33,067 Total interest expense 8,417 11,724 15,453 15,756 15,130 ---------- ---------- ---------- ---------- ---------- Net interest income 24,850 24,283 19,895 18,434 17,937 Provision for loan losses 1,944 1,178 1,803 807 266 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 22,906 23,105 18,092 17,627 17,671 Security gains (1) 301 8 863 1,080 1,602 Other noninterest income 7,423 6,823 5,254 4,583 3,927 ---------- ---------- ---------- ---------- ---------- Total noninterest income 7,724 6,831 6,117 5,663 5,529 Total noninterest expense 22,925 19,893 16,933 15,466 14,771 ---------- ---------- ---------- ---------- ---------- Income before federal income taxes 7,705 10,043 7,276 7,824 8,429 Federal income tax expense 2,138 2,916 1,983 2,132 2,366 ---------- ---------- ---------- ---------- ---------- Net income $ 5,567 $ 7,127 $ 5,293 $ 5,692 $ 6,063 ========== ========== ========== ========== ========== Per share of common stock: Basic earnings $ 1.11 $ 1.48 $ 1.30 $ 1.39 $ 1.43 Diluted earnings 1.10 1.48 1.30 1.39 1.43 Dividends 1.30 1.30 1.24 1.24 1.15 Book value 13.73 14.24 11.94 11.72 11.58 Average common shares outstanding: Basic 5,033,203 4,811,591 4,082,879 4,107,269 4,242,546 Diluted (2) 5,041,877 4,812,664 4,082,879 4,107,269 4,242,546 Year-end balances: Loans, net $ 462,878 $ 415,682 $ 334,347 $ 341,982 $ 284,446 Securities 116,733 161,962 113,726 115,792 150,661 Total assets 635,394 651,634 487,671 489,259 472,220 Deposits 510,172 539,899 410,178 391,968 403,160 Borrowings 53,529 36,692 25,842 46,153 18,000 Shareholders' equity 69,125 71,689 48,727 47,925 48,195 Average balances: Loans, net $ 439,261 $ 424,947 $ 342,443 $ 309,878 $ 279,649 Securities 140,418 138,062 114,072 135,129 163,134 Total assets 642,300 638,664 499,109 476,874 487,242 Deposits 530,801 533,869 412,385 400,921 409,665 Borrowings 36,766 30,983 33,321 26,541 20,525 Shareholders' equity 71,192 69,767 49,693 47,062 52,347
(1) Partial recoveries of $10 and $10 were received in 2000 and 1999 for securities that were written off in prior periods. (2) Prior to 2002, there were no additional potential common shares issuable under stock options. 1 FIVE-YEAR SELECTED RATIOS (Dollars in thousands, except per share data)
Year ended December 31, ---------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ Net yield on average interest-earning assets 4.21% 4.09% 4.23% 4.10% 3.89% Return on average total assets 0.87 1.12 1.06 1.19 1.24 Return on average shareholders' equity 7.82 10.22 10.65 12.09 11.58 Average shareholders' equity as a percent of average total assets 11.08 10.92 9.96 9.87 10.74 Net loan charge-offs as a percent of average total loans 0.44 0.27 0.30 0.31 0.20 Allowance for loan losses as a percent of loans at year-end 1.34 1.50 1.45 1.19 1.48 Shareholders' equity as a percent of total year-end assets 10.86 11.00 9.99 9.80 10.21
A copy of Form 10-K, as filed with the Securities and Exchange Commission, will be furnished, free of charge, to shareholders, upon written request to the Secretary of First Citizens Banc Corp, 100 East Water Street, Sandusky, Ohio 44870. 2 COMMON STOCK AND SHAREHOLDER MATTERS The common shares of First Citizens Banc Corp trade on The NASDAQ Stock Market under the symbol "FCZA". As of December 31, 2003, there were 5,033,203 shares outstanding held by approximately 1,085 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms). Information below is the range of sales prices for each quarter for the last two years.
2003 - ------------------------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter - ------------------ ------------------ ------------------ ------------------- $23.73 to $32.50 $25.06 to $35.57 $24.39 to $30.31 $26.37 to $31.08
2002 - ------------------------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter - ------------------ ------------------ ------------------ ------------------- $19.85 to $24.50 $18.00 to $22.75 $20.25 to $24.25 $21.98 to $23.73
Dividends per share declared by the Corporation on common shares were as follows:
2003 2002 ----- ----- First quarter $ .26 $ .19 Second quarter .26 .25 Third quarter .26 .25 Fourth quarter .52 .61 ----- ----- $1.30 $1.30 ----- -----
GENERAL DEVELOPMENT OF BUSINESS Dollars in thousands, except for per share data FIRST CITIZENS BANC CORP (FCBC) was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Act of 2000 (GLB Act), as amended. The Corporation's office is located at 100 East Water Street, Sandusky, Ohio. The Corporation had total consolidated assets of $636,423 at December 31, 2003. FCBC and its subsidiaries are referred to together as the Corporation. THE CITIZENS BANKING COMPANY (Citizens), owned by the Corporation since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Citizens was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Citizens surrendered its trust charter and began operation under its current name. Citizens is an insured bank under the Federal Deposit Insurance Act. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio and operates three branch banking offices in Perkins Township (Sandusky, Ohio), three branch banking offices in Norwalk, Ohio, one branch banking office in Berlin Heights, Ohio, one branch banking office in Huron, Ohio, one branch banking office in Castalia, Ohio and one loan production office in Port Clinton, Ohio. As part of the acquisition, which was completed in April 2002, of Independent Community Banc Corp. (ICBC) and its subsidiary, The Citizens National Bank of Norwalk, which was merged into Citizens, Citizens has trust authority again. This subsidiary accounts for 77.8% of the Corporation's consolidated assets at December 31, 2003. 3 THE FARMERS STATE BANK (Farmers), acquired by the Corporation in 1998, is organized and chartered under the laws of the State of Ohio in 1916. Farmers is an insured bank under the Federal Deposit Insurance Act. Farmers maintains its main office at 102 South Kibler Street, New Washington, Ohio and operates branch offices in Willard, Ohio, Crestline, Ohio, and the Ohio villages of Chatfield, Tiro, Richwood and Green Camp. Farmers also has a loan production office in Marion, Ohio. Farmers accounts for 19.4 of the Corporation's consolidated assets at December 31, 2003. SCC RESOURCES INC. (SCC) is organized under the laws of the State of Ohio. Begun as a joint venture of three local Sandusky, Ohio banks in 1966, SCC provides item-processing services for financial institutions, including the Banks, and other nonrelated entities. The Corporation acquired total ownership of SCC in February 1993. On June 19, 1999, SCC entered into an agreement with Jack Henry & Associates, Inc. (JHA) to sell all of their contracts for providing data processing services to community banks. JHA agreed to pay SCC a fee based upon annual net revenue under a new JHA contract for each bank that signed a five-year contract with JHA by January 31, 2000. This subsidiary accounts for less than one percent of the Corporation's consolidated assets as of December 31, 2003. R. A. REYNOLDS APPRAISAL SERVICE, INC. (Reynolds), owned by the Corporation since 1993, was organized under the laws of the State of Ohio in September 1993. Reynolds provides real estate appraisal services, for lending purposes, to the Banks and to other financial institutions. Reynolds accounts for less than one percent of the Corporation's consolidated assets as of December 31, 2003. MR. MONEY FINANCE COMPANY (Mr. Money) was formed in year 2000 to provide consumer lending products to customers who may not qualify for conventional commercial bank lending products. Mr. Money has its main office in Sandusky, Ohio and an office in Mansfield, Ohio. Loans for Mr. Money come from direct consumer lending to customers and loans from third party home improvement vendors. Mr. Money accounts for 2.3% of the Corporation's consolidated assets as of December 31, 2003. FIRST CITIZENS TITLE INSURANCE AGENCY INC. (Title Agency) has been formed to provide customers with a seamless mortgage product with improved service. Assets of the Title Agency are not significant at December 31, 2003. FIRST CITIZENS INSURANCE AGENCY INC. (Insurance Agency) was formed to allow the Corporation to participate in commission revenue generated through its third party insurance agreement. Assets of the Insurance Agency are not significant at December 31, 2003. WATER STREET PROPERTIES (Water St.) was formed to hold properties repossessed by FCBC subsidiaries. Assets of Water St. are not significant. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - AS OF DECEMBER 31, 2003 AND DECEMBER 31, 2002 AND FOR THE YEARS ENDING DECEMBER 31, 2003, 2002 AND 2001 (Dollars in thousands, except per share data) General The following paragraphs more fully discuss the significant highlights, changes and trends as they relate to the Corporation's financial condition, results of operations, liquidity and capital resources as of December 31, 2003 and 2002, and during the three-year period ended December 31, 2003. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements, which are included elsewhere in this report. Forward-Looking Statements This report includes forward-looking statements by the Corporation relating to such matters as anticipated operating results, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Such statements are based upon the current beliefs and expectations of the Corporation's management and are subject to risks and uncertainties. While the Corporation believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation in its forward-looking statements. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to, regional and national economic conditions; volatility and direction of market interest rates; credit risks of lending activities, governmental legislation and regulation, including changes in accounting regulation or standards; material unforeseen changes in the financial condition or results of operations of the Corporation's clients; and other risks identified from time-to-time in the Corporation's other public documents on file with the Securities and Exchange Commission. The Corporation is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on its liquidity, capital resources or operations except as discussed herein. The Corporation is not aware of any current recommendations by regulatory authorities that would have such effect if implemented. The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this section is to secure the use of the safe harbor provisions. Financial Condition At December 31, 2003, total assets were $636,423, compared to $651,634 at December 31, 2002. The decrease in assets is primarily due to a decline in deposits which was not fully replaced by other funding sources. Although total assets declined, net loans increased $47,196, or 11.4% from 2002 to 2003. Commercial real estate loans increased $41,451, or 35.5%, real estate construction loans increased $9,529, or 72.3% and commercial and agricultural loans increased $4,651, or 10.0% from 2002 to 2003. Residential real estate loans decreased by $5,297, or 2.5%, from 2002 to 2003 to total $205,635. Consumer loans decreased $5,513, or 18.2% from 2002 to total $24,765. Lease loans increased $991, or 76.1%, from 2002 to 2003 to total 5 $2,293. Credit card and other loans, which include overdraft protection (ODP) lines of credit, increased $1,277 from 2002 to total $4,977 in 2003. The increase is net of the sale of the credit card portfolio in October 2003. Management sold the portfolio to a third party provider so that we could offer a choice of cards and features, along with increased service, to our customers. In 2003, due to low interest rates, the demand for fixed rate residential real estate loan products remained strong. However, FCBC continued to sell loans in the secondary market and retain fewer in the portfolio to mitigate the interest rate risk of holding longer term fixed-rate loans. In 2003, management continued its emphasis on increasing the Corporation's share of the local market for commercial and commercial real estate loans and expanded into new markets, such as opening a loan office in Marion County. The Corporation hired lending officers native to the new markets, and is taking a proactive approach in contacting new and current clients. These lending relationships generally offer more attractive returns than residential loans and also offer opportunities for attracting larger balance deposit relationships. However, the shift in loan portfolio mix from residential real estate to commercial oriented loans may increase credit risk. Both year-end and average 2003 deposit balances decreased from 2002. Year-end deposit balances totaled $510,172 in 2003 compared to $539,899 in 2002, a decrease of $29,727, or 5.5%. As the stock market experienced some gains in 2003, we saw that some investors who sought short-term financial institution deposit products during the market declines of 2002 have started to move out of deposits and into other financial instruments. Average deposit balances for 2003 were $530,801 compared to $533,869 for 2002, a decrease of $3,068, or 0.6%. Noninterest-bearing deposits averaged $71,797 for 2003, compared to $62,707 for 2002, increasing $9,090, or 14.5%. Savings, NOW, and MMIA accounts averaged $244,778 for 2003 compared to $238,066 for 2002. Average certificates of deposit decreased $18,870 to total an average balance of $214,226 for 2003. The decrease in certificates of deposit occurred as a result of management's decision to allow higher rate certificates which were maturing to be withdrawn from the Corporation rather than trying to retain these deposits by paying above market rates. To offset the decline in deposits, the Corporation utilized alternative funding sources by drawing from the Corporation's cash management advance availability for the Federal Home Loan Bank and by issuing subordinated debentures of $7,500. In March 2003 and March 2002, the Corporation issued $7,500 of floating rate 4.41% and $5,000 of floating rate 5.59% trust preferred securities through special purpose entities as part of pooled offerings of such securities. Prior to 2003, the trust formed in 2002 was consolidated in the Corporation's financial statements, with the trust preferred securities issued by the trust reported in liabilities as "trust preferred securities" and the subordinated debentures eliminated in consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised December 2003, the trust is no longer consolidated by the Corporation. Accordingly, the Corporation does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Corporation and held by the trust, as these are no longer eliminated in consolidation. Amounts previously reported as "trust preferred securities" in liabilities have been recaptioned "subordinated debentures" and continue to be presented in liabilities on the balance sheet. Borrowings from the Federal Home Loan Bank of Cincinnati were $183 at December 31, 2002. As a result of scheduled pay downs, these borrowings were paid off in 2003, with the last advance paid off in May. At December 31, 2003, the Corporation had utilized $18,975 of its $20,000 cash management advance line of credit with the Federal Home Loan Bank to offset part of the decline in deposits. The Corporation also has a borrowing agreement for the purpose of funding loans originated by Mr. Money. FCBC restructured this borrowing in 2002 into two different loans, a $5,000 line of credit and a $10,000 term note. Total borrowings under these loans were $9,000 at December 31, 2003 compared to $13,000 at December 31, 2002. During 2003, the Corporation made its $1,000 scheduled payment on the term loan and paid off outstanding borrowings on the line of credit. Note 11 in the consolidated financial statements provides further details regarding the borrowing arrangement. 6 The Banks offer repurchase agreements in the form of sweep accounts to commercial checking account customers. At December 31, 2003, total repurchase agreements in the form of sweep accounts totaled $12,115. This compares to $13,509 at December 31, 2002. U.S. Treasury securities and obligations of U.S. government agencies maintained under the Banks' control are pledged as collateral for the repurchase agreements. Securities available for sale, securities held to maturity and Federal Home Loan Bank (FHLB), Federal Reserve Bank (FRB), Great Lakes Bankers Bank (GLBB), and Norwalk Community Development Corporation (NCDC) stock decreased a total of $45,229, or 27.9% from $161,962 on December 31, 2002 to $116,733 on December 31, 2003. U.S. Treasury securities and obligations of U.S. government agencies accounted for the majority of the decrease, declining from $102,780 at December 31, 2002 to $64,333 at December 31, 2003. Obligations of states and political subdivisions available for sale decreased $6,422 from 2002 to 2003. Securities decreased to help fund the growth of the loan portfolio that was experienced in 2003. Mortgage-backed securities totaled $8,426 at December 31, 2003 and none are considered unusual or "high risk" securities as defined by regulating authorities. Of this total, $8,266 are pass-through securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC); $123 are collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) issued by FNMA and FHLMC; and $37 are privately issued and are collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or Government National Mortgage Association (GNMA). The average interest rate of the mortgage-backed portfolio at December 31, 2003 was 4.08%. The average maturity at December 31, 2003 was approximately 5.78 years. The Corporation has not invested in any derivative securities. Securities held to maturity at December 31, 2003 had unrealized gains of approximately $1. Since management intends to hold this portion of the portfolio to maturity, the unrecognized gains have no impact on operations of the Corporation. Securities available for sale had an estimated fair value at December 31, 2003 of $109,508. This fair value includes unrealized gains of approximately $2,220 and unrealized losses of approximately $64. Net unrealized gains of $2,156 on December 31, 2003 was a decrease over net unrealized gains of $3,766 at December 31, 2002 primarily due to changes in market interest rates. Premises and equipment, net of accumulated depreciation, increased $2,262 from December 31, 2002 to December 31, 2003. During 2003, a new $2,100 operations center was constructed to house several departments of the Corporation. This building should help the increase efficiency in several areas of the Corporation. Total shareholders' equity decreased $2,564, or 3.6% during 2003 to $69,125. The change in shareholders' equity is made up of earnings of $5,567, less dividends paid of $6,543 and the decrease in the market value of securities available for sale, net of tax, of $1,063. Also, during 2003, the Corporation's additional minimum pension liability, net of tax, increased $525, which decreased equity. See Note 14 for further explanation. The Corporation paid cash dividends on February 1, 2003, May 1, 2003, August 1, 2003 and November 1, 2003 each at a rate of $.26 per share. Also on November 1, 2003, the Corporation paid a special dividend of $.26 per share. Total outstanding common shares at December 31, 2003 were 5,033,203. The ratio of total shareholders' equity to total assets was 10.9% at December 31, 2003 compared to 11.0% at December 31, 2002. Results of Operations The operating results of the Corporation are affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. The Corporation's cost of funds is influenced by interest rates on competing investments and 7 general market rates of interest. Lending activities are influenced by the demand for real estate loans, and other types of loans, which in turn is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities. The Corporation's net income primarily depends on its net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The level of net interest income is dependent on the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net income is also affected by provisions for loan losses, service charges, gains on the sale of assets, other income, noninterest expense and income taxes. Comparison of Results of Operations for the Year Ended December 31, 2003 and December 31, 2002 Net Income The Corporation's net income for the year ended December 31, 2003 was $5,567, compared to $7,127 for the year ended December 31, 2002, a decrease of $1,560 or 21.9%. The decrease in net income was the result of the items discussed in the following sections. Net Interest Income Net interest income for 2003 was $24,850, an increase of $567, or 2.3% from 2002. The change in net interest income for 2003 was the result of a larger decrease in interest expense compared to the decrease in interest income. The decline in the yield on interest earning assets and interest-bearing liabilities is the result of continued repricing of assets and liabilities in the low interest rate environment that existed throughout 2003. The Corporation continues to examine its rate structure to ensure that its interest rates are competitive and reflective of the current rate environment in which it competes. Total interest income decreased $2,740, or 7.6% for 2003. The decline resulted from average interest earning-assets decreasing from $596,228 in 2002 to $592,863 in 2003 combined with a decline in yield earned on average earning assets. Average loans increased $13,962 from 2002 to 2003. Income earned on the loan portfolio decreased $1,557 from 2002 to 2003 due to the decline in yield more than offsetting the impact of the higher average balance of loans. Although the securities portfolio declined significantly from December 31, 2002 to December 31, 2003, the average balance of the securities portfolio for 2002 and 2003 was similar. The decrease in interest income on securities was primarily due to the decline in yields. Average balances of Federal Funds sold and interest-bearing deposits in other banks declined which was the primary reason for the interest earned on these assets declining $400. Funds that were sold in the fed funds market in 2002 were used to help fund the increase the Corporation had in its loan portfolio in 2003. Total interest expense decreased $3,307, or 28.2% for 2003 compared to 2002. The decrease in interest expense can be attributed to a decrease in the rate on interest-bearing liabilities from 2.33% in 2002 to 1.70% in 2003, as well as a decline in average balance of $6,375. Average interest-bearing deposits declined $12,158 from 2002 to 2003. This decline combined with a 67 basis point drop in the cost of deposits caused interest expense on deposits to decrease $3,320. Interest expense on the various borrowings remained relatively unchanged as the increase in average balance from 2002 to 2003 more than offset the decrease in cost by a slight margin. Refer to "Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential" and "Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate" on pages 14 through 16 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Corporation's net interest income. 8 Provision and Allowance for Loan Losses The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for loan losses as of and for each of the three-years in the period ended December 31, 2003.
As of and for year ended December 31, ------------------------------------- 2003 2002 2001 --------- --------- --------- Net loan charge-offs $ 1,961 $ 1,144 $ 1,045 Provision for loan losses charged to expense 1,944 1,178 1,803 Net loan charge-offs as a percent of average outstanding loans 0.44% 0.27% 0.30% Allowance for loan losses $ 6,308 $ 6,325 $ 4,865 Allowance for loan losses as a percent of year-end outstanding loans 1.34% 1.50% 1.45% Allowance for loan losses as a percent of impaired loans 99.10% 91.28% 136.47% Impaired loans $ 6,365 $ 6,929 $ 3,565 Impaired loans as a percent of gross year-end loans(1) 1.36% 1.64% 1.06% Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans (1) 1.37% 1.39% 1.56%
(1) Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. The Corporation's policy is to maintain the allowance for loan losses at a level to provide for probable incurred losses. Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. The provision for loan losses increased by $766 in 2003 from $1,178 in 2002 to $1,944 in 2003. The increase in the provision was a result of a net increase in net charge-offs of $817 from 2002 to 2003. As of December 31, 2003, impaired loans have decreased $564 from December 31, 2002. Efforts are continually made to examine both the level and mix of the reserve by loan type as well as the overall level of the reserve. Management specifically evaluates loans that are impaired, or graded as doubtful by the internal grading function for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. The composition and overall level of the loan portfolio and charge-off activity are also factors used to determine the amount of the allowance for loan losses. Management analyzes commercial and commercial real estate loans on an individual basis and classifies a loan as impaired when an analysis of the borrower's operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Often this is associated with a delay or shortfall in payments of 90 days or more. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one- to four-family residences, residential construction loans and consumer automobile, boat, home equity and 9 credit card loans. In addition, loans held for sale and leases are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are also often considered impaired. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. Noninterest Income Noninterest income totaled $7,724 in 2003 compared to $6,831 in 2002, an increase of 13.1%. The more significant items contributing to this change are as follows. During 2003, the Corporation recognized gains from calls and sales of securities of $301. In 2002, the Corporation recognized gains from calls of securities of $8. Sales of securities were utilized to assist in the funding of loans although the overall sales activity as a percentage of the securities portfolio was not significant. Due to the continued low interest rates, customers continued to refinance their loans to lower fixed-rate loans. Rather than add these lower fixed-rate loans to the Corporation's loan portfolio, the loans were sold in the secondary loan market. Net gains on the loans sold totaled $631 in 2003 compared to a net gain of $333 in 2002. The additional gain is due to the increase in volume of loans sold in 2003 compared to the volume sold in 2002. The volume of loans sold in 2003 approximately doubled the volume sold in 2002. Service charges by the Banks increased $225 from 2002 to 2003. The full year in 2003 of the additional customer base created as a result of this merger with ICBC in April 2002 was the primary cause of this increase. Check Protect, which is the Corporation's courtesy pay program, generated an additional $228 in additional service charge income in 2003. ATM fees increased $50 from 2002 to 2003. With the addition of the customer base acquired through the entering new markets, additional fees were gained. Other noninterest income totaled $2,030 in 2003, compared to $1,976 in 2002. In November, Citizens sold its credit card portfolio for a net gain of $152. Additionally, increases in other noninterest income are a result of additional products and services introduced to generate noninterest income. These products include brokerage and insurance commissions, the sale of wholesale mortgages, and income from the Trust Department. The Trust Department has developed into the cornerstone of wealth management services provided by the Corporation. Noninterest Expense Noninterest expense totaled $22,925 in 2003, an increase of $3,032, or 15.2% over 2002. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense. Salaries, wages and benefits totaled $11,572 in 2003 compared to $9,460 in 2002 for an increase of $2,112. This increase can be attributed to several factors. First, salaries for 2002 are reflective of nine months salary and benefits of the Independent Community Banc Corp. acquisition compared to twelve months in 2003. Second, Mr. Money and Farmers opened offices in Marion, Ohio and Mansfield, Ohio in 2003. Third, in 2003, the formation of First Citizens Advisors as a department of Citizens, which serves the customer's trust and investment needs, required the addition of staff. Fourth, pension expense increased $483 from 2002 to 2003 which is further disclosed in Note 14. Finally, 2003 salaries, wages, and benefits includes $160 of severance payments to employees as part of the Corporation's reassessment of staffing needs. Net occupancy expense increased $163 from $1,073 in 2002 to $1,236 in 2003. Equipment expense increased $131 from 2002 to 2003. The primary cause of these increases was the expansion of the Corporation. With the addition of new branches, costs paid for real estate taxes, rent expense, and repair and maintenance costs, along with several smaller items, increased. 10 State of Ohio franchise taxes were $761 in 2003 compared to $642 in 2002. The franchise taxes are based on the capital positions of the subsidiaries. The addition of the Insurance Agency and Title Agency, along with two refunds received in 2002 by FCBC, lead to the increase in franchise tax in 2003. Professional fees represent legal, audit and outside consulting fees paid by the Corporation. Professional fees totaled $817 in 2003 compared to $920 in 2002. In 2003, FCBC hired an in-house attorney to deal with legal matters that were outsourced in the past. This helped reduce the fees paid to legal counsel, but also contributed to the increase in salaries, wages and benefits. Advertising expense increased from $410 in 2002 to $466 in 2003. Entering into new markets with the merger as well as creating new branches is the primary reason for the increase in advertising. The Corporation will continue our marketing and advertising efforts to increase our customer base. Contracted data processing increased from $899 in 2002, to $989 in 2003. The additional customer base created through the expansion into new markets was the primary reason for this increase. Also, data processing for the Trust Department increased $51 from 2002 to 2003. Other operating expenses totaled $5,240 in 2003, compared to $4,944 in 2002. Other operating expenses related to the Trust department increased $67 compared to 2002. Also, with new branches being opened in 2003, an increase of $95 was experienced in courier expense. Along with the above items, the Corporation increased its expenditures in employee education and training in customer service and cross selling. These expenditures are expected to continue as the Corporation seeks to increase its customer base and enhance customer service. Income Tax Expense Income before federal income taxes amounted to $7,705 in 2003 and $10,043 in 2002. The Corporation's effective income tax rate was 27.7% in 2003 compared to 29.0% in 2002. The decline in the effective tax rate resulted from the relatively consistent total of interest income on tax exempt securities compared to the decline in income before taxes. Proposed Acquisition On March 4, 2004, the Company signed a letter of intent to acquire FNB Financial Corporation ("FNB"), a $215,000 bank holding company headquartered in Shelby, Ohio. The merger would create a combined financial institution with assets of approximately $860,000, total deposits of approximately $700,000, shareholders' equity of approximately $91,000 and a market capitalization of $156,000. The merger is expected to be completed in the fourth quarter of 2004. Comparison of Results of Operations for the Year Ended December 31, 2002 and December 31, 2001 Net Income The Corporation's net income for the year ended December 31, 2002 was $7,127, compared to $5,293 for the year ended December 31, 2001, an increase of $1,834, or 34.6%. The increase in net income was the result of the items discussed in the following sections. 11 Net Interest Income Net interest income for 2002 was $24,283, an increase of $4,388, or 22.1% from 2001. The change in the net interest income for 2002 was the net result of an increase in interest income of $659 and a decrease in interest expense of $3,729. Total interest income increased $659, or 1.9% for 2002. Average interest earning-assets increased from $472,965 to $596,228 from 2001 to 2002. Average loans increased $84,547 from 2001 to 2002. Income earned on the loan portfolio increased $694 from 2001 to 2002 due to the increase in balance more than offsetting a significant decline in yield. Other interest bearing assets increased $38,716. However, the decline in the rate earned on other earning assets more than offset the impact from the increase in average balance, causing a reduction in interest income of $35. Total interest expense decreased $3,729, or 24.1% for 2002. The decrease in interest expense can be attributed to a decrease in the rate on interest-bearing liabilities from 3.86% in 2001 to 2.33% in 2002. An increase in average interest-bearing liabilities from $400,658 to $502,145, or $101,487 from 2001 to 2002 offset some of the decrease due to rate. The decline in the yield on interest earning assets and interest-bearing liabilities is result of continued repricing of assets and liabilities in the low interest rate environment that existed throughout 2002. Refer to "Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential" and "Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate" located on pages 14 through 16 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Corporation's net interest income. Provisions and Allowance for Loan Losses The provision for loan losses decreased by $625 in 2002, from $1,803 in 2001 to $1,178 in 2002. Impaired loans have increased, which include those acquired in ICBC's portfolio. ICBC already had specific allowances in place for its impaired loans; therefore, management felt the allowance was adequate with no additional provision for these loans. Efforts are continually made to examine both the level and mix of the reserve by loan type as well as the overall level of the reserve. Management specifically evaluates loans that are impaired, or graded as doubtful by the internal grading function for estimates of loss. Other pools of loans are evaluated for loss using historical experience and consideration of changes in delinquency trends and portfolio composition. Noninterest Income Noninterest income totaled $6,831 in 2002 compared to $6,117 in 2001, an increase of 11.7%. The more significant items contributing to this change are as follows. During 2002, the Corporation recognized gains from calls and sales of securities of $8. In 2001, the Corporation recognized gains from calls of securities of $7 and net gains of $856 from the sales of securities available for sale. The gains in 2001 were primarily from the sale of the majority of the remaining equity securities at Farmers. Due to the continued low interest rates, customers continued to refinance their loans to lower fixed-rate loans. Net gains were $333 for 2002 compared to the net gain of $438 in 2001. The decline in 2002 was due to many customers having already refinanced in this low interest rate environment as the volume of loans the Corporation sold in the secondary market declined in 2002. ATM fees increased from $406 in 2001 to $468 in 2002. The additional customer base acquired through the merger is the primary reason for this increase. The Banks introduced a new deposit product called 12 Check Protect which helped generate $471 of additional service charge fee income for the year compared to 2001. Customers acquired through the merger were not qualified to enter Check Protect until December 2, 2002. The Corporation expects the addition of these customers to increase the amount of service charge income generated through Check Protect. Other noninterest income totaled $1,976 in 2002 compared to $1,438 in 2001. Increases in other noninterest income are a result of additional products and services introduced to generate noninterest income. These products include brokerage and insurance commissions, the sale of wholesale mortgages, and income from the Trust Department which was acquired in the ICBC merger. The Trust Department will be the cornerstone of wealth management services currently being developed by the Corporation. Noninterest Expense Noninterest expense totaled $19,893 in 2002, an increase of $2,960, or 17.5% over 2001. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense. Salaries, wages and benefits totaled $9,460 in 2002 compared to $7,863 in 2001 for an increase of $1,597. The primary reason for the change in salaries and benefits is due to the addition of approximately 40 employees through the merger with ICBC. Net occupancy expense increased $191 from 2001 to 2002. The primary cause of this increase in expense was due to the addition of the branches assumed with the ICBC merger. Equipment expense also increased in 2002, from $1,110 in 2001 to $1,219 in 2002. The primary cause of this increase was due to the ICBC merger and the costs associated with equipping and maintaining new branches. State of Ohio franchise taxes were $642 in 2002 compared to $759 in 2001. The franchise taxes are based on the capital positions of the Banks. Professional fees represent legal, audit and outside consulting fees paid by the Corporation. Professional fees totaled $920 in 2002 compared to $719 in 2001. The overall increase is due to services related to the acquisition of ICBC. Contracted data processing increased from $736 in 2001, to $899 in 2002. The additional customer base acquired through the ICBC merger was the primary reason for this increase. Also, data processing for the Trust Department added $30 to expense. Amortization of goodwill declined from $201 in 2001 to $0 in 2002. Upon adoption of Financial Accounting Standards Board (FASB) Statement No. 142 on January 1, 2002, goodwill was no longer amortized but rather assessed annually for impairment. Amortization of intangible assets increased due to amortization of core deposits related to the ICBC acquisition. Advertising expense decreased $10 from 2001 to 2002. Other operating expenses totaled $4,944 in 2002 compared to $4,118 in 2001. The ICBC merger was the primary cause of this increase, along with increased expenditures in employee education and training in customer service and cross selling. Training of the employees to further service the Corporations customers will continue. Income Tax Expense Income before federal income taxes amounted to $10,043 in 2002 and $7,276 in 2001. The Corporation's effective income tax rate was 29.0% in 2002, compared to 27.3% in 2001. The shifting in the security portfolio from tax-free municipal securities to taxable securities contributed to the increase in the Corporations effective tax rate. 13 Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential The following table sets forth, for the years ended December 31, 2003, 2002 and 2001, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Dollars in thousands):
2003 2002 2001 -------------------------------- ----------------------------- --------------------------- Average Yield/ Average Yield/ Average Yield/ balance Interest rate balance Interest rate balance Interest rate --------- --------- --------- --------- --------- ------ --------- -------- ------ Assets Interest-earning assets: Loans (1)(2)(3) $ 445,205 $ 28,045 6.30% $ 431,243 $ 29,602 6.86% $ 346,696 $ 28,908 8.34% Taxable securities (4) 104,364 3,634 3.52% 100,819 4,318 4.33 72,856 4,345 6.13 Non-taxable securities (4)(5) 36,054 1,502 4.28% 37,243 1,601 4.38 41,216 1,702 4.18 Federal funds sold 6,485 82 1.26% 26,699 476 1.78 11,013 360 3.27 Interest-bearing deposits in other banks 755 4 0.53% 224 10 4.46 1,184 33 2.79 --------- --------- --------- --------- --------- -------- Total interest-earning assets 592,863 33,267 5.63 596,228 36,007 6.06 472,965 35,348 7.51 Noninterest-earning assets: Cash and due from financial institutions 19,966 17,711 15,696 Premises and equipment, net 9,038 8,377 7,217 Accrued interest receivable 4,144 4,285 3,821 Intangible assets 17,831 11,795 1,716 Other assets 4,402 6,564 1,947 Less allowance for loan losses (5,944) (6,296) (4,253) --------- --------- --------- Total $ 642,300 $ 638,664 $ 499,109 ========= ========= =========
(1) For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale. (2) Included in loan interest income are loan fees of $1,162 in 2003, $988 in 2002 and $994 in 2001. (3) Nonaccrual loans are included in loan totals and do not have a material impact on the analysis presented. (4) Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities. (5) Interest income is reported on a historical basis without tax-equivalent adjustment. 14 Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential (Continued) The following table sets forth, for the years ended December 31, 2003, 2002 and 2001, the distribution of liabilities and shareholders' equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Dollars in thousands):
2003 2002 2001 ------------------------------ ----------------------------- ----------------------------- Liabilities and Average Yield/ Average Yield/ Average Yield/ Shareholders' Equity balance Interest rate balance Interest rate balance Interest rate - -------------------------------- --------- ---------- ------ --------- ---------- ------ --------- ---------- ------ Interest-bearing liabilities: Savings and interest- bearing demand accounts $ 244,778 $ 1,629 0.66% $ 238,066 $ 3,340 1.40% $ 162,771 $ 4,189 2.57% Certificates of deposit 214,226 5,827 2.72% 233,096 7,436 3.19 204,566 9,668 4.73 Federal Home Loan Bank advances 1,809 23 1.27% 519 27 5.20 1,127 66 5.86 Securities sold under repurchase agreements 12,277 103 0.84% 11,491 158 1.37 13,078 395 3.02 Federal funds purchased - - - - - - 4,493 141 3.14 Notes payable 10,564 329 3.11% 13,838 534 3.86 13,655 962 7.05 Subordinated debentures 11,108 498 4.48% 3,866 212 5.48 - - - U.S. Treasury demand notes payable 1,008 8 0.79% 1,269 17 1.34 968 32 3.31 --------- ---------- --------- ---------- --------- ---------- Total interest- bearing liabilities 495,770 8,417 1.70 502,145 11,724 2.33 400,658 15,453 3.86 --------- ---------- --------- ---------- --------- ---------- Noninterest-bearing liabilities: Demand deposits 71,797 62,707 45,048 Other liabilities 3,541 4,045 3,710 --------- --------- --------- 75,338 66,752 48,758 Shareholders' equity 71,192 69,767 49,693 --------- --------- --------- Total $ 642,300 $ 638,664 $ 499,109 ========= ========= ========= Net interest income and interest rate spread $ 24,850 3.93% $ 24,283 3.73% $ 19,895 3.65% ========== ====== ========== ====== ========== ====== Net yield on interest- earning assets 4.21% 4.09% 4.23% ====== ====== ======
15 Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate.
2003 compared to 2002 2002 compared to 2001 Increase (decrease) Increase (decrease) due to (1) due to (1) ------------------------- --------------------------- Volume Rate Net Volume Rate Net ------ ------- ------- ------- ------- ------- (Dollars in thousands) Interest income: Loans $ 936 $(2,493) $(1,557) $ 6,327 $(5,633) $ 694 Taxable securities 157 (841) (684) 1,460 (1,487) (27) Nontaxable securities (63) (36) (99) (181) 80 (101) Federal funds sold (285) (109) (394) 336 (220) 116 Interest-bearing deposits in other banks 8 (14) (6) (36) 13 (23) ----- ------- ------- ------- ------- ------- Total interest- earning assets $ 753 $(3,493) $(2,740) $ 7,906 $(7,247) $ 659 ===== ======= ======= ======= ======= ======= Interest expense: Savings and interest- bearing demand accounts $ 92 $(1,803) $(1,711) $ 1,493 $(2,342) $ (849) Certificates of deposit (571) (1,038) (1,609) 1,217 (3,449) (2,232) Federal Home Loan Bank advances 28 (32) (4) (32) (7) (39) Securities sold under repurchase agreements 10 (65) (55) (43) (194) (237) Federal funds purchased - - - (141) - (141) Note payable (113) (92) (205) 13 (441) (428) Subordinated debentures 331 (45) 286 212 - 212 U.S. Treasury demand notes payable (3) (6) (9) 8 (23) (15) ----- ------- ------- ------- ------- ------- Total interest- bearing liabilities $(226) $(3,081) $(3,307) $ 2,727 $(6,456) $(3,729) ===== ======= ======= ======= ======= ======= Net interest income $ 979 $ (412) $ 567 $ 5,179 $ (791) $ 4,388 ===== ======= ======= ======= ======= =======
(1) The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate. 16 Liquidity and Capital Resources The Banks maintain a conservative liquidity position. Liquidity is evidenced by all but $14 of securities being classified as available for sale. At December 31, 2003, securities with maturities of one year or less totaled $62,782. The Consolidated Statements of Cash Flows contained in the consolidated financial statements detail the Corporation's cash flows from operating activities resulting from net earnings. Cash from operations for 2003 was $9,111. This includes net income of $5,567 plus net adjustments of $3,544 to reconcile net earnings to net cash provided by operations. Cash from investing activities was $8,508 in 2003, resulting from security purchases and increases in loans which more than offset by maturities, prepayments and sales of securities and a decrease in fed funds sold. Cash from financing activities in 2003 totaled $(19,433). This includes the decrease in deposits, increases of FHLB borrowings, the payments of dividends and changes in other borrowings. Cash from operating and investing activities was less than cash used by financing activities by $1,814, which resulted in a decrease in cash and cash equivalents to $21,983. Future loan demand of the Banks can be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the federal funds market and/or borrowing from the Federal Home Loan Bank (FHLB). As of December 31, 2003, the Banks had total credit availability with the FHLB of $106,997 of which $18,975 was outstanding. Future loan demand of Mr. Money can be funded by proceeds from payments on existing loans, sales of existing loans on the secondary market as well as borrowings from affiliates or other institutions. On a separate entity basis, the Corporation's primary source of funds is dividends paid primarily by the subsidiary Banks. The ability of the Banks to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to applicable minimum capital requirements, the Banks may declare a dividend without the approval of the State of Ohio Department of Commerce, Division of Financial Institutions, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. In 2003, Citizens paid $6,530 and Farmers paid $1,109 in dividends to the Corporation. The purpose of these dividends was to accumulate cash at the Corporation to be used for general corporate purposes including the possible repurchase of its common shares. The amount of unrestricted dividends available to be paid by the Banks to the Corporation was approximately $1,565 at December 31, 2003. Management believes the future earnings of the Banks will be sufficient to support anticipated asset growth at the Banks and provide funds to the Corporation to continue paying dividends at their current level. Capital Adequacy The Corporation's policy is, and always has been, to maintain its capital levels above the well capitalized regulatory standards. Under the regulatory capital standards, total capital has been defined as Tier I (core) capital and Tier II (supplementary) capital. The Corporation's Tier I capital includes shareholders' equity (net of unrealized security gains and losses) and Tier II capital includes the allowance for possible loan losses. The definition of risk-adjusted assets has also been modified to include items both on and off the balance sheet. Each item is then assigned a risk weight or risk adjustment factor to determine ratios of capital to risk adjusted assets. The standards require that total capital (Tier I plus Tier II) be a minimum of 8.0% of risk-adjusted assets, with at least 4.0% being in Tier I capital. To be well capitalized, a company must have a minimum of 10.0% of risk adjusted assets, with at least 6.0% being Tier I capital The Corporation's ratios as of December 31, 2003 and 2002 were 14.8% and 14.9% respectively for total risk-based capital, and 10.9% and 12.5% respectively for Tier I risk-based capital. 17 Additionally, the Federal Reserve Board has adopted minimum leverage-capital ratios. These standards were established to supplement the previously issued risk based capital standards. The leverage ratio standards use the existing Tier I capital definition but the ratio is applied to average total assets instead of risk-adjusted assets. The standards require that Tier I capital be a minimum of 4.0% of total average assets for high rated entities such as the Corporation and a minimum of 5.0% of total average assets to be well capitalized. The Corporation's leverage ratio was 8.1% and 8.0% at December 31, 2003 and 2002. Effects of Inflation The Corporation's balance sheet is typical of financial institutions and reflects a net positive monetary position whereby monetary assets exceed monetary liabilities. Monetary assets and liabilities are those which can be converted to a fixed number of dollars and include cash assets, securities, loans, money market instruments, deposits and borrowed funds. During periods of inflation, a net positive monetary position may result in an overall decline in purchasing power of an entity. No clear evidence exists of a relationship between the purchasing power of an entity's net positive monetary position and its future earnings. Moreover, the Corporation's ability to preserve the purchasing power of its net positive monetary position will be partly influenced by the effectiveness of its asset/liability management program. Management does not believe that the effect of inflation on its nonmonetary assets (primarily bank premises and equipment) is material as such assets are not held for resale and significant disposals are not anticipated. Fair Value of Financial Instruments The Corporation has disclosed the estimated fair value of its financial instruments at December 31, 2003 and 2002 in Note 19 to the consolidated financial statements. The fair value of the Corporation's financial instruments generally increased relative to their carrying values in 2002 as a result of a decrease in the general level of longer-term interest rates. The fair value of loans at December 31, 2003 was 104.5% of the carrying value compared to 103.6% at December 31, 2002. The fair value of deposits at December 31, 2003 was 100.4% of the carrying value compared to 100.5% at December 31, 2002. Contractual Obligations and Off-Balance Sheet Arrangements The following table represents significant fixed and determinable contractual obligations of the Corporation as of December 31, 2003.
One year One to Three to Over five Contractual Obligations or less three years five years years Total - ------------------------------------ -------- ----------- ---------- ----------- -------- Deposits without a stated maturity $ 73,391 $ - $ - $ - $ 73,391 Certificates of deposit 108,819 43,926 17,458 1,988 172,191 FHLB advances, securities sold under agreements to repurchase and U.S. Treasury interest-bearing demand note 32,029 - - - 32,029 Subordinated debentures (1) - - - 12,500 12,500 Long-term debt 1,000 2,000 6,000 - 9,000 Operating leases 236 330 121 - 687
(1) The subordinated debentures consist of $5,000 and $7,500 debentures. See Note 12 for additional information. The Corporation has retail repurchase agreements with clients within its local market areas. These borrowings are collateralized with securities owned by the Corporation. See Note 8 for further detail. 18 The Corporation also has a cash management advance line of credit and outstanding letters of credit with the FHLB. For further discussion, refer to Note 9. The long-term debt consists of borrowing from a secured borrowing agreement with LaSalle Bank, NA. See Note 11 for the terms of this borrowing. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Corporation's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Interest-rate risk (IRR) is the exposure of a banking organization's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of IRR can pose a significant threat to the Corporation's earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to the Corporation's safety and soundness. Evaluating a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization's quantitative level of exposure. When assessing the IRR management process, the Corporation seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires the Corporation to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality. The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution's assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment. Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Corporation is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Corporation's primary asset/liability management technique is the measurement of the Corporation's asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this 19 situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities. Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refund its obligations at new, lower rates. The Corporation has not purchased derivative financial instruments in the past and does not intend to purchase such instruments in the near future. Prepayments of assets carrying higher rates reduce the Corporation's interest income and overall asset yields. A large portion of an institution's liabilities may be short term or due on demand, while most of its assets may be invested in long term loans or securities. Accordingly, the Corporation seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. Also, FHLB advances and wholesale borrowings may also be used as important sources of liquidity for the Corporation. The following table provides information about the Corporation's financial instruments that are sensitive to changes in interest rates as of December 31, 2003 and 2002, based on certain prepayment and account decay assumptions that management believes are reasonable. The Corporation had no derivative financial instruments or trading portfolio as of December 31, 2003 or 2002. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. From a risk management perspective, the Corporation believes that repricing dates for adjustable-rate instruments, as opposed to expected maturity dates, may be a more relevant measure in analyzing the value of such instruments. The Corporation's borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates. NET PORTFOLIO VALUE - DECEMBER 31, 2003
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE - --------------- -------- -------- -------- +200 bp $ 60,788 $ (7,659) (11)% +100 bp 64,511 (3,936) (6)% Base 68,447 - - -100 bp 71,409 2,962 4% -200 bp 74,350 5,903 9%
NET PORTFOLIO VALUE - DECEMBER 31, 2002
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE - --------------- -------- -------- -------- +200 bp $ 64,806 $(10,373) (14)% +100 bp 70,702 (4,477) (6)% Base 75,179 - - -100 bp 79,921 4,742 6% -200 bp 84,492 9,313 12%
20 The relatively minor change in net portfolio value from December 31, 2002 to December 31, 2003, is primarily a result of the following factors. First, short-term interest rates have decreased only slightly during 2003, while long-term rates have increased. As a result, the Corporation has seen a decrease in the base level of net portfolio value due to an increase in the fair value of loans, a decrease in the fair value of investments, as well as a decrease in the fair value of deposits. CRITICAL ACCOUNTING POLICIES Allowance for Loan Losses The allowance for loan losses is regularly reviewed by management to determine whether or not the amount is considered adequate to absorb probable losses in the loan portfolio. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan groups or pools that are based on historical loss experience and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower's ability to repay, and current economic and industry conditions, among other items. Those judgments and assumptions that are most critical to the application of this accounting policy are the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk gradings, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees. Note 1 and Note 4 in the Notes to Consolidated Financial Statements provide additional information regarding Allowance for Loan Losses. 21 This page left blank intentionally. 22 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors First Citizens Banc Corp Sandusky, Ohio We have audited the accompanying consolidated balance sheets of First Citizens Banc Corp as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Citizens Banc Corp as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Crowe Chizek and Company LLC Cleveland, Ohio January 29, 2004, except for Note 22 as to which the date is March 4, 2004 23 This page left blank intentionally. 24 FIRST CITIZENS BANC CORP CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002 (In thousands, except share data)
2003 2002 --------- --------- ASSETS Cash and due from financial institutions $ 21,983 $ 23,797 Federal funds sold - 12,700 Securities available for sale 109,508 155,168 Securities held to maturity (Fair value of $15 in 2003 and $44 in 2002) 14 42 Loans held for sale 159 1,390 Loans, net of allowance of $6,308 and $6,325 462,878 415,682 FHLB, FRB, GLBB and NCDC stock 7,211 6,752 Premises and equipment, net 10,481 8,219 Accrued interest receivable 4,143 4,795 Goodwill 15,052 15,052 Core deposit and other intangibles 2,506 3,000 Other assets 2,488 5,037 --------- --------- Total assets $ 636,423 $ 651,634 ========= ========= LIABILITIES Deposits Noninterest-bearing $ 73,391 $ 70,527 Interest-bearing 436,781 469,372 --------- --------- Total deposits 510,172 539,899 Federal Home Loan Bank advances 18,975 183 Securities sold under agreements to repurchase 12,115 13,509 U. S. Treasury interest-bearing demand note payable 939 5,000 Notes payable 9,000 13,000 Subordinated debentures 12,500 5,000 Accrued expenses and other liabilities 3,597 3,354 --------- --------- Total liabilities 567,298 579,945 SHAREHOLDERS' EQUITY Common stock, no par value, 10,000,000 shares authorized, 5,326,441 shares issued 47,370 47,370 Retained earnings 28,612 29,588 Treasury stock, 293,238 shares at cost (7,241) (7,241) Accumulated other comprehensive income 384 1,972 --------- --------- Total shareholders' equity 69,125 71,689 --------- --------- Total liabilities and shareholders' equity $ 636,423 $ 651,634 ========= =========
See accompanying notes to consolidated financial statements. 25 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2003, 2002 and 2001 (In thousands, except per share data)
2003 2002 2001 ---- ---- ---- Interest and dividend income Loans, including fees $ 28,045 $ 29,602 $ 28,908 Taxable securities 3,634 4,318 4,345 Tax-exempt securities 1,502 1,601 1,702 Federal funds sold 82 476 360 Other 4 10 33 ---------- ---------- ---------- 33,267 36,007 35,348 Interest expense Deposits 7,456 10,776 13,857 Federal Home Loan Bank advances 23 27 66 Subordinated debentures 498 212 - Other 440 709 1,530 ---------- ---------- ---------- 8,417 11,724 15,453 ---------- ---------- ---------- Net interest income 24,850 24,283 19,895 Provision for loan losses 1,944 1,178 1,803 ---------- ---------- ---------- Net interest income after provision for loan losses 22,906 23,105 18,092 ---------- ---------- ---------- Noninterest income Computer center item processing fees 1,157 1,184 1,173 Service charges 3,087 2,862 1,799 Net gains on sale of securities 301 8 863 Net gain (loss) on sale of loans 631 333 438 ATM fees 518 468 406 Other 2,030 1,976 1,438 ---------- ---------- ---------- 7,724 6,831 6,117 Noninterest expense Salaries, wages and benefits 11,572 9,460 7,863 Net occupancy expense 1,236 1,073 882 Equipment expense 1,350 1,219 1,110 Contracted data processing 989 899 736 State franchise tax 761 642 759 Professional services 817 920 719 Amortization of goodwill - - 201 Amortization of intangible assets 494 326 125 Advertising expense 466 410 420 Other operating expenses 5,240 4,944 4,118 ---------- ---------- ---------- Total noninterest expense 22,925 19,893 16,933 ---------- ---------- ---------- Income before income taxes 7,705 10,043 7,276 Income tax expense 2,138 2,916 1,983 ---------- ---------- ---------- Net income $ 5,567 $ 7,127 $ 5,293 ========== ========== ========== Earnings per common share, basic $ 1.11 $ 1.48 $ 1.30 ========== ========== ========== Earnings per common share, diluted $ 1.10 $ 1.48 $ 1.30 ========== ========== ========== Weighted average basic common shares 5,033,203 4,811,591 4,082,879 ========== ========== ========== Weighted average diluted common shares 5,041,877 4,812,664 4,082,879 ========== ========== ==========
See accompanying notes to consolidated financial statements. 26 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2003, 2002 and 2001 (In thousands, except share data)
Accumulated Other Total Common Stock Retained Treasury Comprehensive Shareholders' Shares Amount Earnings Stock Income (Loss) Equity ------ ------ -------- ----- ------------- ------ Balance, January 1, 2001 4,087,619 $ 23,258 $ 28,614 $ (4,818) $ 871 $ 47,925 Comprehensive Income: Net Income 5,293 5,293 Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects 673 673 ------------- Total comprehensive income 5,966 Cash dividends ($1.24 per share) (5,063) (5,063) Purchase of treasury stock, at cost (5,000) (101) (101) --------- -------- --------- ---------- ------------- ------------- Balance, December 31, 2001 4,082,619 23,258 28,844 (4,919) 1,544 48,727 Comprehensive Income: Net Income 7,127 7,127 Change in minimum additional pension liability, net of tax (513) (513) Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects 941 941 ------------- Total comprehensive income 7,555 Cash dividends ($1.30 per share) (6,383) (6,383) Issuance of common stock for merger, net of issuance costs 1,063,040 24,112 24,112 Purchase of treasury stock, at cost (112,456) (2,322) (2,322) --------- -------- --------- ---------- ------------- ------------- Balance, December 31, 2002 5,033,203 47,370 29,588 (7,241) 1,972 71,689 Comprehensive Income: Net Income 5,567 5,567 Change in minimum additional pension liability, net of tax (525) (525) Change in unrealized gain/(loss) on securities available for sale, net of reclassification and tax effects (1,063) (1,063) ------------- Total comprehensive income 3,979 Cash dividends ($1.30 per share) (6,543) (6,543) --------- -------- --------- ---------- ------------- ------------- Balance, December 31, 2003 5,033,203 $ 47,370 $ 28,612 $ (7,241) $ 384 $ 69,125 ========= ======== ========= ========== ============= =============
(Continued) 27 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001
2003 2002 2001 ---- ---- ---- Cash flows from operating activities Net income $ 5,567 $ 7,127 $ 5,293 Adjustments to reconcile net income to net cash from operating activities Security amortization, net of accretion 317 1,303 457 Depreciation 997 1,033 851 Amortization of intangible assets 494 326 326 Amortization of and valuation allowance on servicing rights 307 121 74 Net realized gain on sale of securities (301) (8) (863) FHLB stock dividends (229) (247) (351) Provision for loan losses 1,944 1,178 1,803 Loans originated for sale (20,543) (8,285) (15,420) Proceeds from sale of loans 18,020 9,405 13,412 Gain on sale of loans (631) (333) (438) (Gain) loss on sale of OREO properties 47 (19) 52 Deferred income taxes 66 95 (38) Change in Net deferred loan fees (86) (302) (109) Accrued interest receivable 652 (912) 180 Other assets 2,926 (1,665) (638) Accrued interest, taxes and other expenses (436) (1,982) (250) -------- -------- -------- Net cash from operating activities 9,111 6,835 4,341 Cash flows from investing activities Cash and cash equivalents received in bank acquisition - 3,079 - Securities available for sale Maturities, prepayments and calls 73,601 58,382 37,097 Purchases (36,690) (89,835) (34,845) Sales 7,124 4 1,452 Securities held for maturity Maturities, prepayments and calls 28 97 139 Purchases of FRB stock (230) (406) - Loan originations, net of loan payments (45,006) 12,773 8,941 Proceeds from sale of OREO properties 240 140 239 Property and equipment expenditures (3,259) (740) (633) Change in federal funds sold 12,700 (2,175) (6,025) Maturity of interest bearing deposit - - 51 -------- -------- -------- Net cash from investing activities 8,508 (18,681) 6,416
(Continued) 28 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 2003, 2002 and 2001
2003 2002 2001 ---- ---- ---- Cash flows from financing activities Change in deposits (29,727) 16,771 18,210 Repayment of Federal Home Loan Bank advances (183) (628) (589) Net change in short-term FHLB advances 18,975 - - Change in securities sold under repurchase agreements (1,394) 3,198 (2,635) Change in U.S. Treasury interest-bearing notes payable (4,061) 4,280 (487) Change in short-term note payable (3,000) (13,500) 3,400 Proceeds from long-term note payable - 10,000 - Repayment of long-term note payable (1,000) - - Change in federal funds purchased - - (20,000) Cash dividends paid (6,543) (6,383) (5,063) Net proceeds from issuance of subordinated debentures 7,500 5,000 - Purchase of treasury stock - (2,322) (101) -------- -------- -------- Net cash from financing activities (19,433) 16,416 (7,265) -------- -------- -------- Net change in cash and cash equivalents (1,814) 4,570 3,492 Cash and cash equivalents at beginning of year 23,797 19,227 15,735 -------- -------- -------- Cash and cash equivalents at end of year $ 21,983 $ 23,797 $ 19,227 ======== ======== ======== Supplemental cash flow information: Interest paid 8,729 11,722 15,651 Income taxes paid 2,385 3,027 1,913 Supplemental non-cash disclosures: Transfer of loans held for sale to portfolio $ 4,167 $ - $ - Acquisition of ICBC through issuance of common stock - 24,405 - Transfer of loans from portfolio to other real estate owned 119 341 145 Change in minimum additional pension liability, net of intangible for prior service cost 791 809 -
See accompanying notes to consolidated financial statements. 29 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the accounting policies adopted by First Citizens Banc Corp, which have a significant effect on the financial statements. Consolidation Policy: The consolidated financial statements include the accounts of First Citizens Banc Corp (FCBC) and its wholly-owned subsidiaries, The Citizens Banking Company (Citizens), The Farmers State Bank (Farmers), SCC Resources, Inc. (SCC), R. A. Reynolds Appraisal Service, Inc. (Reynolds), Mr. Money Finance Company (Mr. Money), First Citizens Title Insurance Agency Inc. (Title Agency), First Citizens Insurance Agency Inc. (Insurance Agency), and Water Street Properties, Inc. (Water St.) together referred to as the Corporation. Intercompany balances and transactions are eliminated in consolidation. As further discussed in Note 12, a trust that had previously been consolidated with the Corporation is now reported separately as of December 31, 2003. As of January 2, 2003, another wholly-owned subsidiary bank, The Castalia Banking Company, was merged into Citizens. Nature of Operations: The Corporation provides financial services through its offices in the Ohio counties of Erie, Crawford, Huron, Marion, Ottawa, Richland and Union. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and Federal Funds sold. In 2003, SCC provided item processing for nine financial institutions in addition to the two subsidiary banks. SCC accounted for 2.8% of the Corporation's total revenues. Reynolds provides real estate appraisal services for lending purposes to the subsidiary banks and other financial institutions. Reynolds accounts for less than 1.0% of total Corporation revenues. Mr. Money provides consumer finance loans and real estate loans that the Banks would not normally provide to B and C credits at a rate commensurate with the risk and accounted for approximately 4.2% of the Corporation's total revenue. First Citizens Title Insurance Agency Inc. was formed to provide customers with a seamless mortgage product with improved service. First Citizens Insurance Agency Inc. was formed to allow the Corporation to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue is less than 1.0% of total revenue for the year ended December 31, 2003. Water Street Properties, Inc. was formed to hold repossessed assets of FCBC's subsidiaries. Water St. revenue was less than 1% of total revenue for the year ended December 31, 2003. Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments, and status of contingencies are particularly subject to change. Cash Flows: Cash and cash equivalents include cash on hand and demand deposits with financial institutions. Net cash flows are reported for federal funds purchased or sold, customer loan transactions, deposit transactions, securities sold under agreements to repurchase and other short-term borrowings. (Continued) 30 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank (FHLB) stock, Federal Reserve Bank (FRB) stock and Great Lake Bankers' Bank (GLBB) stock, and Norwalk Community Development Corp (NCDC) stock are carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees over the loan term. Interest income on real estate loans is discontinued at the time the loan is 90 days delinquent. Interest income on commercial loans is also discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Interest income on consumer loans is not discontinued when the loan is 90 days delinquent, as the interest income recognized is not significant. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the loan balance is uncollectible. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. (Continued) 31 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A loan is impaired when full payment under the loan terms is not expected. Smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. If the collateral is greater than the outstanding balance of the loan, no specific allowance is allocated for the loan. Premises and Equipment: Land is carried at cost. Buildings and improvements and furniture and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both accelerated and straight-line methods over the estimated useful life of the asset, ranging from three to seven years for furniture and equipment and seven to fifty years for buildings and improvements. Other Real Estate: Other real estate acquired through or instead of loan foreclosure is initially recorded at fair value when acquired, establishing a new cost basis. Any reduction from carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair value is recognized in a valuation allowance by a charge to income. Other real estate owned included in other assets totaled approximately $725 at December 31, 2003 and $341 at December 31, 2002. Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance to the extent that fair value is less than the capitalized asset for the grouping. Goodwill and Other Intangible Assets: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Upon adopting new accounting guidance on January 1, 2002, the Corporation ceased amortizing goodwill. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit intangible assets and a non-compete agreement arising from whole bank and branch acquisitions. The core deposit intangible assets are measured at fair value and then amortized on an accelerated method over their estimated useful lives, which range from ten to twelve years. The non-compete agreement is amortized on a straight-line basis over two years. Long-term Assets: Premises and equipment, core deposit intangible asset, non-compete agreement, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. (Continued) 32 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Retirement Plans: The Corporation sponsors a noncontributory defined benefit retirement plan for all full-time employees who have attained the age of 20-1/2 and have a minimum of six months of service. Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Accrued pension costs are funded to the extent deductible for federal income tax purposes. The Corporation also provides a savings and retirement 401(k) plan for all eligible employees who elect to participate. The decision to make contributions to the plan, which represents a match of a portion of the salary deferred by participants, is made annually by the Board of Directors. Such contributions are funded as they are accrued. Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation. No stock options were granted prior to 2002.
2003 2002 ------------ --------- Net income as reported $ 5,567 $ 7,127 Deduct: Stock-based compensation expense determined under fair value based method 64 17 ------------ --------- Pro forma net income $ 5,503 $ 7,110 ============ ========= Basic earnings per share as reported $ 1.11 $ 1.48 Pro forma basic earnings per share 1.09 1.48 Diluted earnings per share as reported $ 1.10 $ 1.48 Pro forma diluted earnings per share 1.09 1.48
(Continued) 33 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The pro forma effects are computed using option pricing models, utilizing the following weighted-average assumptions as of grant date.
2003 2002 --------- --------- Risk-free interest rate 3.98% 4.77% Expected option life 10 years 10 years Expected stock price volatility 22.62% 19.37% Dividend yield 2.97% 4.44% Calculated fair value $ 8.23 $ 3.33
Off-Balance-Sheet Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in minimum pension liability, which are also recognized as separate components of shareholders' equity. Adoption of New Accounting Standards: During 2003, the Corporation adopted Financial Accounting Standards Board (FASB) Statement 143, Accounting for Asset Retirement Obligations, Statement 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, Statement 146, Accounting for Costs Associated with Exit or Disposal Activities, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest Entities. Adoption of these new standards did not materially affect the Corporation's operating results or financial condition. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Restrictions on Cash: The subsidiary Banks are required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements at December 31, 2003 and 2002 approximated $9,293 and $6,843. These balances do not earn interest. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to FCBC or by FCBC to shareholders. These restrictions pose no practical limit on the ability of the Banks or FCBC to pay dividends at historical levels. (Continued) 34 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Earnings per Common Share: Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock option, which were 8,674 shares for 2003 and 1,073 shares for 2002. Stock options for 16,000 shares of common stock were not consolidated in computing diluted earnings per share for 2003 because they were antidilutive. The Corporation had no potentially dilutive common shares in 2001. Operating Segments: While the Corporation's chief decision makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation's financial service operations are considered by management to be aggregated in one reportable operating segment. Financial Statement Presentation: Certain items in the 2001 and 2002 financial statements have been reclassified to conform to the 2003 presentation. (Continued) 35 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 2 - SECURITIES The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows.
Gross Gross Fair Unrealized Unrealized Value Gains Losses -------- ---------- ---------- 2003 U.S. Treasury securities and obligations of U.S. government agencies $ 64,333 $ 636 $ (2) Corporate bonds Obligations of states and political 1,030 1 (8) subdivisions 35,036 1,408 (3) Mortgage-back securities 8,426 82 (51) -------- ---------- ---------- Total debt securities 108,825 2,127 (64) Equity securities 683 93 - -------- ---------- ---------- Total $109,508 $ 2,220 $ (64) ======== ========== ==========
Gross Gross Fair Unrealized Unrealized Value Gains Losses -------- ---------- ---------- 2002 U.S. Treasury securities and obligations of U.S. government agencies $102,780 $ 1,822 $ - Corporate bonds 2,475 45 - Obligations of states and political subdivisions 41,458 1,688 (36) Mortgage-back securities 7,803 185 - -------- ---------- ---------- Total debt securities 154,516 3,740 (36) Equity securities 652 62 - -------- ---------- ---------- Total $155,168 $ 3,802 $ (36) ======== ========== ==========
Continued 36 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 2 - SECURITIES (Continued) The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows.
Gross Gross Carrying Unrecognized Unrecognized Fair Amount Gains Losses Value ------- ------------ ----------- ----- 2003 Mortgage-backed securities $ 14 $ 1 $ - $ 15 ======= ============ =========== ===== 2002 Mortgage-backed securities $ 42 $ 2 $ - $ 44 ======= ============ =========== =====
The fair value of securities and carrying amount, if different, at year end 2003 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Held to maturity Available for sale ----------------------------- ------------------ Amortized Cost Fair Value Fair Value -------------- ---------- ---------- Due in one year or less $ - $ - $ 62,782 Due from one to five years - - 31,885 Due from five to ten years - - 4,425 Due after ten years - - 1,307 Mortgage-backed 14 15 8,426 Equity securities - - 683 --------------- ---------- ---------- Total $ 14 $ 15 $ 109,508 =============== ========== ==========
Securities with a carrying value of $83,813 and $102,072 were pledged as of December 31, 2003 and 2002, to secure public deposits and other deposits and liabilities as required or permitted by law. Proceeds from sales of securities, gross realized gains and gross realized losses were as follows.
2003 2002 2001 ---- ---- ---- Sale proceeds $ 7,124 $ 4 $ 1,452 Gross realized gains 292 - 856 Gross realized losses - - - Gains from securities called or settled by the issuer 9 8 7
(Continued) 37 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 2 - SECURITIES (Continued) Securities with unrealized losses at year end 2003 not recognized in income are as follows.
12 Months or less More than 12 months Total ----------------------- --------------------- ------------------------ Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss - ------------------------- ----- ---- ----- ---- ----- ----- U.S. Treasury securities and $ 3,002 $ 2 $ - $ - $ 3,002 $ 2 obligations of U.S. government agencies Corporate bonds 529 8 - - 529 8 Obligations of states and political subdivisions 2,194 3 - - 2,194 3 Mortgage-backed securities 5,517 51 - - 5,517 51 -------- ---------- ----- ---------- ------- ---------- Total temporarily impaired $ 11,242 $ 64 $ - $ - $11,242 $ 64 ======== ========== ===== ========== ======= ==========
Unrealized losses on corporate bonds and obligations of states and political subdivisions have not been recognized into income because the issuers' bonds are of high credit quality. In addition, management has the intent and ability to hold these securities as well as U.S. securities and obligations of U.S. government agencies and mortgage-backed securities for the foreseeable future, and the decline in fair value is largely due to increase in market interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date. NOTE 3 - LOANS Loans at year-end were as follows.
2003 2002 ---- ---- Commercial and agricultural $ 51,146 $ 46,495 Commercial real estate 158,125 116,674 Residential real estate 205,635 210,931 Real estate construction 22,708 13,179 Consumer 24,765 30,278 Credit card and other 4,977 3,700 Leases 2,293 1,302 --------- ---------- Total Loans 469,649 422,559 Allowance for loan losses (6,308) (6,325) Net deferred loan fees (460) (546) Unearned interest (3) (6) --------- ---------- Net loans $ 462,878 $ 415,682 ========= ==========
(Continued) 38 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 3 - LOANS (Continued) Loans to directors and executive officers, including their immediate families and companies in which they are principal owners during 2003 were as follows. Balance - January 1, 2003 $ 3,814 New loans and advances 4,545 Repayments (1,686) Effect of changes in related parties (3,113) -------------- Balance - December 31, 2003 $ 3,560 ==============
Deposits from principal officers, directors, and their affiliates at year-end 2003 and 2002 were $5,650 and $5,603. NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses was as follows.
2003 2002 2001 ---- ---- ---- Balance - January 1 $ 6,325 $ 4,865 $ 4,107 Provision for loan losses 1,944 1,178 1,803 Balance from acquisition - 1,426 - Loans charged-off (2,356) (1,517) (1,460) Recoveries 395 373 415 -------- ------- ------- Balance - December 31 $ 6,308 $ 6,325 $ 4,865 ======== ======= =======
Impaired loans were as follows.
2003 2002 ---- ---- Year-end loans with no allocated allowance for loan losses $ 924 $ 930 Year-end loans with allocated allowance for loan losses 5,441 5,999 Amount of allowance for loan losses allocated 1,181 1,033
2003 2002 2001 ---- ---- ---- Average balance of impaired loans during year $ 6,768 $ 5,567 $ 3,107 Interest income recognized during impairment 409 346 184 Interest income recognized on a cash basis 409 346 184
(Continued) 39 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued) Nonperforming loans were as follows.
2003 2002 ---- ---- Loans past due over 90 days still on accrual $ 3,206 $ 2,414 Nonaccrual loans 3,204 3,468
Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individual classified impaired loans. NOTE 5 - SERVICING RIGHTS Activity for capitalized mortgage servicing rights and the related valuation allowance follows.
2003 2002 2001 ---- ---- ---- Servicing rights: Beginning of year $ 292 $ 283 $ 183 Additions 218 130 174 Amortized to expense (168) (121) (74) Direct write-downs - - - ------ ------ ------ End of year $ 342 $ 292 $ 283 ====== ====== ====== Valuation allowance: Beginning of year $ - $ - $ - Additions expensed (139) - - Reductions credited to expense - - - ------ ------ ------ End of year $ (139) $ - $ - ====== ====== ======
NOTE 6 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows.
2003 2002 ---- ---- Land and improvements $ 1,434 $ 1,327 Buildings and improvements 10,938 8,894 Furniture and equipment 8,854 7,925 --------------- ---------------- Total 21,226 18,146 Accumulated depreciation (10,745) (9,927) --------------- ---------------- Premises and equipment, net $ 10,481 $ 8,219 =============== ================
Depreciation expense was $997, $1,033, and $851 for 2003, 2002, and 2001. (Continued) 40 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 6 - PREMISES AND EQUIPMENT (Continued) Rent expense was $276, $217 and $227 for 2003, 2002, and 2001. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present. 2004 $ 236 2005 189 2006 141 2007 121 --------------- TOTAL $ 687 ===============
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS There was no change in the carrying amount of goodwill during the year-ended December 31, 2003. Goodwill is no longer amortized starting in 2002. The effect of not amortizing goodwill is summarized as follows.
2003 2002 2001 ---- ---- ---- Reported net income $ 5,567 $ 7,127 $ 5,293 Add back: goodwill amortization - - 201 ------------- --------------- ------------ Adjusted net income $ 5,567 $ 7,127 $ 5,494 ============= =============== ============ Basic earnings per share Reported net income $ 1.11 $ 1.48 $ 1.30 Goodwill amortization - - .05 ------------- --------------- ------------ Adjusted net income $ 1.11 $ 1.48 $ 1.35 ============= =============== ============ Diluted earnings per share Reported net income $ 1.10 $ 1.48 $ 1.30 Goodwill amortization - - .05 ------------- --------------- ------------ Adjusted net income $ 1.10 $ 1.48 $ 1.35 ============= =============== ============
(Continued) 41 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 7 - GOODWILL AND INTANGIBLE ASSETS (Continued) ACQUIRED INTANGIBLE ASSETS Acquired intangible assets were as follows as of year end.
2003 2002 ---- ---- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ----------- ------------ ------ ------------ Core deposit intangibles $ 3,735 $ 1,336 $ 3,735 $ 949 Noncompete agreement 214 107 214 - ----------- ------------- --------------- ---------------- $ 3,949 $ 1,443 $ 3,949 $ 949 =========== ============= =============== ================
Aggregate amortization expense was $494, $326 and $326 for 2003, 2002, and 2001. Estimated amortization expense for each of the next five years and thereafter is as follows. 2004 $ 486 2005 370 2006 362 2007 343 2008 331 Thereafter 614 ------------- $ 2,506 =============
NOTE 8 - INTEREST-BEARING DEPOSITS Interest-bearing deposits as of December 31, 2003 and 2002 were as follows.
2003 2002 ---- ---- Demand $ 68,903 $ 64,746 Statement and passbook savings 168,835 183,339 Certificates of deposit: In excess of $100,000 42,002 46,830 Other 130,189 146,789 Individual Retirement Accounts 26,852 27,668 ----------------- ----------------- Total $ 436,781 $ 469,372 ================= =================
(Continued) 42 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 8 - INTEREST-BEARING DEPOSITS (Continued) Scheduled maturities of certificates of deposit at December 31, 2003 were as follows. 2004 $ 108,819 2005 32,014 2006 11,912 2007 16,421 2008 1,037 Thereafter 1,988 ---------------- Total $ 172,191 ================
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES The Corporation has a $20 million cash management advance line of credit with the Federal Home Loan Bank. The Corporation had $18,975 in advances outstanding on this line as of December 31, 2003 at a rate of 1.11%. No advances were outstanding on this line as of December 31, 2002. The Corporation has fixed-rate mortgage-matched advances from the Federal Home Loan Bank. Mortgage-matched advances are utilized to fund specific fixed-rate loans with certain prepayment of principal permitted without penalty. At December 31, 2003 and 2002, Federal Home Loan Bank borrowings were as follows. The notes outstanding at December 31, 2002 matured in 2003.
2003 2002 ---- ---- 5.80 percent secured note $ - $ 22 5.60 percent secured note - 81 5.55 percent secured note - 80 --------------- ---------------- $ - $ 183 =============== ================
In addition to the borrowing, the Corporation has outstanding letters of credit with the Federal Home Loan Bank totaling $15,700 at year-end 2003 and $12,300 at year-end 2002 used for pledging against public funds. Federal Home Loan Bank borrowings and the letters of credit are collateralized by Federal Home Loan Bank stock and by $46,811 and $16,915 of residential mortgage loans under a blanket lien arrangement at year-end 2003 and 2002. (Continued) 43 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 10 - OTHER BORROWINGS Information concerning securities sold under agreements to repurchase and treasury tax and loan deposits was as follows.
2003 2002 ---- ---- Average balance during the year $ 13,285 $ 12,760 Average interest rate during the year 0.89% 1.37% Maximum month-end balance during the year $ 16,119 $ 19,301 Weighted average interest rate at year end 0.80% 1.10%
Securities underlying repurchase agreements had a fair value of $15,756 at December 31, 2003 and $17,984 at December 31, 2002. NOTE 11 - NOTE PAYABLE FCBC has a secured borrowing agreement with LaSalle Bank, NA for up to $15,000. The agreement is split into two pieces; a $5,000 secured revolving line of credit which matures July 30, 2004, and a $10,000 term loan. The term loan matures July 30, 2007 and requires annual principal payments of $1,000 with a $6,000 balloon principal payment at maturity. At December 31, 2003, no amounts were outstanding on the line of credit balance and the term loan had a balance of $9,000. At December 31, 2002, the line of credit balance was $3,000 and the term loan was $10,000. The interest rate is LIBOR plus 1.75%, or 2.91% at December 31, 2003 and adjusts quarterly. The borrowings are secured by 100% of the common stock of Citizens. Maturities over the next four years were as follows. 2004 $ 1,000 2005 1,000 2006 1,000 2007 6,000 ---------------- Total $ 9,000 ================
NOTE 12 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES Trusts formed by the Corporation, in March 2003 and March 2002, issued $7,500 of 4.41% floating rate and $5,000 of 5.59% floating rate trust preferred securities through special purpose entities as part of pooled offerings of such securities. The Corporation issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Corporation may redeem the subordinated debentures, in whole but not in part, any time prior to March 26, 2008 and March 26, 2007, respectively at a price of 107.50% of face value for those issued in 2003 and 2002. After March 26, 2008 and March 26, 2007, respectively, subordinated debentures may be redeemed at face. (Continued) 44 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 12 - TRUST PREFERRED SUBORDINATED DEBENTURES (Continued) Prior to December 31, 2003, the trusts were consolidated in the Corporation's financial statements, with the trust preferred securities issued by the trusts reported in liabilities as "trust preferred securities" and the subordinated debentures eliminated in consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trusts are no longer consolidated with the Corporation. Accordingly, the Corporation does not report the securities issued by the trusts as liabilities, and instead reports as liabilities the subordinated debentures issued by the Corporation and held by the trusts, as these are no longer eliminated in consolidation. Amounts previously reported as "trust preferred securities" in liabilities have been recaptioned "subordinated debentures" and continue to be presented in liabilities on the balance sheet. The effect of no longer consolidating the trusts does not significantly change the amounts reported as the Corporation's assets, liabilities, equity, or interest expense. NOTE 13 - INCOME TAXES Income tax expense was as follows. Current $ 2,072 $ 2,821 $ 2,021 Deferred 66 95 (38) ------------ ------------ ------------ Income tax expense $ 2,138 $ 2,916 $ 1,983 ============ ============ ============
Effective tax rates differ from the statutory federal income tax rate of 34% due to the following.
2003 2002 2001 ---- ---- ---- Income taxes computed at the statutory federal tax rate $ 2,620 $ 3,415 $ 2,474 Add (subtract) tax effect of Nontaxable interest income, net of nondeductible interest expense (481) (498) (503) Dividends received deduction (1) - (9) Amortization of goodwill - - 68 Other - (1) (47) ------------ ---------- ----------- Income tax expense $ 2,138 $ 2,916 $ 1,983 ============ ========== ===========
Tax expense attributable to security gains totaled $102, $3 and $294 in 2003, 2002, 2001 45 (Continued) FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 13 - INCOME TAXES (Continued) Year-end deferred tax assets and liabilities were due to the following.
2003 2002 ------ ------- Deferred tax assets Allowance for loan losses $1,884 $ 1,816 Deferred compensation 509 455 Intangible assets 1,022 1,112 Deferred loan fees 155 202 Pension costs 473 121 Other 8 8 ------ ------- Deferred tax asset 4,051 3,714 ------ ------- Deferred tax liabilities Tax depreciation in excess of book depreciation (596) (410) Discount accretion on securities (21) (45) Purchase accounting adjustments (936) (986) FHLB stock dividends (901) (823) Unrealized gain on securities available for sale (733) (1,280) Leases (23) (19) Other (106) (136) ------ ------- Deferred tax liability (3,316) (3,699) ------ ------- Net deferred tax asset $ 735 $ 15 ====== =======
NOTE 14 - RETIREMENT PLANS The Corporation sponsors a savings and retirement 401(k) plan, which covers all employees who meet certain eligibility requirements and who choose to participate in the plan. The matching contribution to the 401(k) plan was $95, $76 and $58 in 2003, 2002 and 2001. The Corporation and its subsidiaries also sponsor a pension plan which is a noncontributory defined benefit retirement plan for all employees who have attained the age of 20-1/2, completed six months of service and work 1,000 or more hours per year. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. The Corporation uses a September 30 measurement date for its plan. (Continued) 46 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 14 - RETIREMENT PLANS (Continued) Information about the pension plan is as follows.
2003 2002 ------------ ------------ Change in benefit obligation: Beginning benefit obligation $ 6,148 $ 4,111 Service cost 455 313 Interest cost 423 296 Actuarial (gain) loss 1,326 1,678 Benefits paid (298) (216) Expenses paid (41) (33) ------------ ------------ Ending benefit obligation 8,013 6,148 Change in plan assets, at fair value: Beginning plan assets 3,879 3,902 Actual return 576 (140) Employer contribution 430 366 Benefits paid (298) (216) Expenses paid (41) (33) ------------ ------------ Ending plan assets 4,546 3,879 ------------ ------------ Funded status (3,467) (2,269) Unrecognized net actuarial loss 3,854 2,980 Unrecognized prior service cost 51 64 Unrecognized net transition asset at January 1, 1989 being recognized over 17 years (179) (258) Minimum additional liability adjustment (1,651) (873) ------------ ------------ Accrued benefit cost $ (1,392) $ (356) ============ =============
Pension amounts recognized in the consolidated balance sheets were as follows.
Pension Benefits --------------------------- 2003 2002 ------------ ------------ Accrued benefit cost (1,392) (356) Intangible assets 51 64 Accumulated other comprehensive income (1,038) (513) ------------ ------------ Net amount recognized $ (2,379) $ (805) ============ ============
The accumulated benefit obligation for the defined benefit pension plan was $5,938 in 2003 and $4,236 in 2002. (Continued) 47 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 14 - RETIREMENT PLANS (Continued) The components of net periodic pension expense were as follows.
2003 2002 2001 ------------- ------------ ------------ Service cost $ 455 $ 313 $ 238 Interest cost 423 296 276 Expected return on plan assets (534) 173 293 Net amortization and deferral 344 (576) (707) ------------- ------------ ------------ Net $ 688 $ 206 $ 100 ============= ============ ============ Additional information Increase in minimum liability included in other comprehensive income $ 791 $ 809 $ -
The weighted average assumptions used to determine benefit obligations at year-end were as follows.
2003 2002 2001 ---- ---- ---- Discount rate on benefit obligation 5.86% 7.00% 7.28% Long-term rate of return on plan assets 7.00 7.00 9.00 Rate of compensation increase 3.00 4.00 4.00
The weighted average assumptions used to net periodic pension cost were as follows.
2003 2002 2001 ---- ---- ---- Discount rate on benefit obligation 7.00% 7.28% 7.83% Long-term rate of return on plan assets 7.00 9.00 9.00 Rate of compensation increase 4.00 4.00 4.00
The expectation for long-term rate of return on the pension assets and the expected rate of compensation increases are reviewed periodically by management in consultation with outside actuaries and primary investment consultants. Factors considered in setting and adjusting these rates are historic and projected rates of return on the portfolio and historic and estimated rates of increases of compensation. (Continued) 48 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 14 - RETIREMENT PLANS (Continued) The Corporation's pension plan asset allocation at year-end 2003, and 2002, target allocation for 2004, and expected long-term rate of return by asset category are as follows.
Percentage of Plan Weighted- Target Assets Average Expected Allocation at Year-end Long-Term Rate Asset Category 2004 2003 2002 of Return - 2003 - ------------------ ---------- -------- -------- ---------------- Equity securities 20-50% 55.0% 55.9% 3.0% Debt securities 30-60 17.4 18.6 4.0 Money market funds 0.7 0.9 0.5 Other 20-30 26.9 24.6 10.0 -------- -------- ---------------- Total 100.0% 100.0% 7.0% ======== ======== ================
The Corporation developed the pension plan investment policies and strategies for plan assets with its pension management firm. The long-term guidelines from above were created to maximize the return on portfolio assets while reducing the risk of the portfolio. Using a combination of equity and debt securities, money market funds, and other funds, such as mutual funds, the Corporation believes the plan has followed the policy and strategy of plan assets. The management firm may allocate assets among the separate accounts with the established long-term guidelines. Transfers among these accounts will be at the management firms discretion based on their investment outlook and the investment strategies that are outlined at periodic meetings with the Corporation. The Corporation expects to contribute $598 to its pension plan in 2004. NOTE 15 - STOCK OPTIONS Options to buy stock are granted to directors, officers and employees under the stock option plan, which provides for issue of up to 225,000 options. Exercise price is the market price at date of grant, so there is no expense recognized in the income statement. The maximum option term is ten years, and options vest after three years. (Continued) 49 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 15 - STOCK OPTIONS (Continued) A summary of the activity in the plan is as follows.
2003 2002 ------------------- ---------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price -------- -------- --------- ---------- Outstanding at beginning of year 30,700 $ 20.50 - $ - Granted 16,000 35.00 30,700 20.50 Exercised - - - - Forfeited - - - - -------- -------- --------- ---------- Outstanding at end of year 46,700 $ 25.47 30,700 $ 20.50 ======== ======== ========= ========== Options exercisable at year-end - - ======== ========= Weighted average fair value of options granted during year $ 8.23 $ 3.33 ======== =========
Options outstanding at year-end 2003 were as follows.
Outstanding Weighted Average Weighted Remaining Average Contractual Exercise Exercise price Number Life Price - ----------------------- -------- -------------- -------- $20.50 30,700 8 yrs 5 mos. $ 20.50 35.00 16,000 9 yrs 3.5 mos. 35.00 -------- -------------- Outstanding at year-end 46,700 8 yrs 8 mos. $ 25.47 ======== ========
NOTE 16 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. (Continued) 50 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 16 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK (Continued) The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end.
2003 2002 ----------------- -------------------- Fixed Variable Fixed Variable Rate Rate Rate Rate ------ -------- --------- -------- Commitments to extend credit: Lines of credit and construction loans $4,199 $ 46,956 $ 7,983 $ 48,484 Credit cards - - - 6,127 Overdraft protection - 6,658 - 5,258 Letters of credit 70 3,377 95 452 ------ -------- --------- -------- $4,269 $ 56,991 $ 8,078 $ 60,321 ====== ======== ========= ========
Commitments to make loans are generally made for a period of one year or less. Fixed-rate loan commitments included above had interest rates ranging from 3.25% to 8.00% at December 31, 2003 and 3.25% to 10.50% at December 31, 2002. Maturities extend up to 30 years. NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS The Corporation and the subsidiary Banks are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The Corporation and the Banks were well capitalized at December 31, 2003 and 2002. No conditions or events have occurred since the last notification from regulators that management believes have changed the Corporation's or the Banks' classification. (Continued) 51 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued) At December 31, 2003 and 2002, the Corporation's and the Banks' actual capital levels and minimum required levels were as follows.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio --------- -------- --------- -------- --------- ------- (Dollars in Millions) 2003 Total capital to risk- weighted assets Consolidated $ 69.1 14.8% $ 36.9 8.0% $ 46.1 10.0% Citizens 43.4 13.0 26.7 8.0 33.4 10.0 Farmers 15.7 15.1 8.3 8.0 10.4 10.0 Tier I (Core) capital to risk- weighted assets Consolidated 50.1 10.9 18.4 4.0 27.7 6.0 Citizens 39.5 11.8 13.4 4.0 20.0 6.0 Farmers 14.4 13.9 4.2 4.0 6.2 6.0 Tier I (Core) capital to average assets Consolidated 50.1 8.1 24.7 4.0 30.9 5.0 Citizens 39.5 8.3 19.1 4.0 23.9 5.0 Farmers 14.4 10.4 5.5 4.0 6.9 5.0
(Continued) 52 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued)
To Be Well Capitalized Under Prompt Corrective For Capital Action Provisions Actual Adequacy Purposes ----------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- --------------------- ------ ----- (Dollars in Millions) 2002 Total capital to risk- weighted assets Consolidated $ 61.2 14.9% $ 32.8 8.0% $ 41.0 10.0% Citizens 37.5 12.8 23.4 8.0 29.2 10.0 Castalia 6.0 18.5 2.6 8.0 3.2 10.0 Farmers 15.3 19.4 6.3 8.0 7.9 10.0 Tier I (Core) capital to risk- weighted assets Consolidated 51.1 12.5 16.4 4.0 24.6 6.0 Citizens 33.9 11.6 11.7 4.0 17.5 6.0 Castalia 5.6 17.3 1.3 4.0 1.9 6.0 Farmers 14.3 18.2 3.1 4.0 4.7 6.0 Tier I (Core) capital to average assets Consolidated 51.1 8.0 25.6 4.0 32.0 5.0 Citizens 33.9 7.4 18.3 4.0 22.9 5.0 Castalia 5.6 11.0 2.0 4.0 2.5 5.0 Farmers 14.3 11.7 4.9 4.0 6.1 5.0
FCBC's primary source of funds for paying dividends to its shareholders and for operating expenses is dividends received from the Banks. Payment of dividends by the Banks to FCBC is subject to restrictions by the Banks' regulatory agencies. These restrictions generally limit dividends to the current and prior two years retained earnings as defined by the regulations. In addition, dividends may not reduce capital levels below minimum regulatory requirements. Under the most restrictive of these requirements, the Corporation estimates that retained earnings available for payment of dividends by the Banks to FCBC approximated $1,565 and $2,096 at December 31, 2003 and 2002. (Continued) 53 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of FCBC follows.
CONDENSED BALANCE SHEETS 2003 2002 --------- --------- Assets: Cash $ 3,115 $ 821 Securities available for sale 483 483 Loans, net of allowance of $229 and $0 690 929 Investment in bank subsidiaries 72,855 74,264 Investment in nonbank subsidiaries 2,117 2,614 Note receivable from nonbank subsidiaries 12,250 11,650 Other assets 818 362 --------- --------- Total assets $ 92,328 $ 91,123 ========= ========= Liabilities and Shareholders' Equity: Deferred income taxes and other liabilities $ 1,703 $ 1,434 Subordinated debentures 12,500 5,000 Note payable 9,000 13,000 Common stock 47,370 47,370 Retained earnings 28,612 29,588 Treasury Stock (7,241) (7,241) Accumulated other comprehensive income 384 1,972 --------- --------- Total liabilities and shareholders' equity $ 92,328 $ 91,123 ========= =========
CONDENSED STATEMENTS OF INCOME 2003 2002 2001 --------- --------- --------- Dividends from bank subsidiaries $ 7,639 $ 3,495 $ 8,900 Interest income 395 514 789 Other income 3 6 8 Provision for loan losses (229) - - Interest expense (828) (695) (787) Other expense, net (1,214) (771) (569) --------- --------- --------- Earnings before equity in undistributed net earnings of subsidiaries 5,766 2,549 8,341 Income tax benefit 637 322 241 (Distributions in excess of earnings of subsidiaries) / equity in undistributed net earnings of subsidiaries (836) 4,256 (3,289) --------- --------- --------- Net income $ 5,567 $ 7,127 $ 5,293 ========= ========= =========
(Continued) 54 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS 2003 2002 2001 -------- --------- --------- Operating activities: Net income $ 5,567 $ 7,127 $ 5,293 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan losses 229 - - Change in other assets and other liabilities (1,905) (1,278) (1,643) Distributions in excess of/(equity in undistributed) net earnings of subsidiaries 836 (4,256) 3,289 -------- --------- --------- Net cash from operating activities 4,727 1,593 6,939 Investing activities: Loan originations, net of loan payments 10 (929) - Change in loan to nonbank subsidiaries 600 1,850 (2,900) -------- --------- --------- Net cash from investing activities 610 921 (2,900) Financing activities: Net change in short term note payable (3,000) (11,000) 3,400 Repayment of long-term note payable (1,000) - - Proceeds from long-term borrowings - 10,000 - Proceeds from subordinated debentures payable to First Citizens Statutory Trust I and II 7,500 5,000 - Cash paid for treasury stock - (2,322) (101) Cash dividends paid (6,543) (6,383) (5,063) -------- --------- --------- Net cash from financing activities (3,043) (4,705) (1,764) -------- --------- --------- Net change in cash and cash equivalents 2,294 (2,191) (2,275) Cash and cash equivalents at beginning of year 821 3,012 737 -------- ---------- --------- Cash and cash equivalents at end of year $ 3,115 $ 821 $ 3,012 ======== ========== =========
(Continued) 55 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair values of financial instruments were as follows.
December 31, 2003 December 31, 2002 ----------------- ----------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ----------- ---------- ---------- Financial assets: Cash and due from financial institutions $ 21,983 $ 21,983 $ 23,797 $ 23,797 Federal funds sold - - 12,700 12,700 Securities available for sale 109,508 109,508 155,168 155,168 Securities held to maturity 14 15 42 44 Loans held for sale 159 159 1,390 1,390 Loans, net of allowance for loan losses 462,878 483,583 415,682 430,555 FHLB, FRB, GLBB, and NCDC stock 7,211 7,211 6,752 6,752 Accrued interest receivable 4,143 4,143 4,795 4,795 Financial liabilities: Deposits (510,172) (512,090) (539,899) (542,786) Federal Home Loan Bank advances (18,975) (18,975) (183) (174) U.S. Treasury interest-bearing demand note payable (939) (939) (5,000) (5,000) Securities sold under agreements to repurchase (12,115) (12,115) (13,509) (13,509) Notes payable (9,000) (9,000) (13,000) (13,000) Subordinated debentures (12,500) (12,500) (5,000) (5,000) Accrued interest payable (521) (521) (833) (833)
The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are considered nominal. (Continued) 56 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 (Amounts in thousands, except share data) NOTE 20 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows.
2003 2002 2001 --------- -------- -------- Unrealized holding gains (losses) on available for sale securities $ (1,309) $ 1,435 $ 1,882 Reclassification adjustments for gains later recognized in income (301) (8) (863) --------- -------- -------- Net unrealized gains (losses) (1,610) 1,427 1,019 Minimum pension liability adjustment (791) (809) - Tax effect 813 (190) (346) --------- -------- -------- Other comprehensive income (loss) $ (1,588) $ 428 $ 673 ========= ======== ========
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Basic Diluted Interest Net Interest Net Earnings per Earnings per Income Income Income Common Share Common Share -------- ------------ --------- ------------ ------------ 2003 First quarter $ 8,594 $ 6,260 $ 1,850 $ 0.37 $ 0.37 Second quarter 8,490 6,304 1,703 0.34 0.34 Third quarter 8,182 6,180 1,307 0.26 0.26 Fourth quarter * 8,001 6,106 707 0.14 0.13 2002 First quarter ** $ 7,710 $ 4,936 $ 1,419 $ 0.35 $ 0.35 Second quarter 9,506 6,272 1,901 0.37 0.37 Third quarter 9,629 6,613 2,072 0.41 0.41 Fourth quarter 9,162 6,462 1,735 0.35 0.35
* Net income in the fourth quarter of 2003 reflects $160 of severance expense for employees terminated as part of a reassessment of staffing needs. Also, in the fourth quarter of 2003, an additional provision for loan losses of $420 was expensed. The provision related to management's analysis of the loss reserve for adequacy and also to the establishment of a reserve at FCBC for a loan participated with Farmers. ** Amounts for the first quarter 2002 are prior to the merger with ICBC (Continued) 57 NOTE 22 - PROPOSED ACQUISITION On March 4, 2004, the Corporation signed a letter of intent to acquire FNB Financial Corporation ("FNB"), a $215,000 bank holding company headquartered in Shelby, Ohio. The shareholders of FNB will be able to elect to receive 2.62 shares of First Citizens common shares, $72.00 in cash or a combination of 60% stock and 40% cash, subject to an overall limitation. At the time of the merger, FNB's subsidiary, First National Bank of Shelby, will be merged into Farmers. The merger is subject to shareholder and regulatory approval and is expected to be consummated in the fourth quarter of 2004. 58 EX-23.1 4 l05629aexv23w1.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement No. 333-99089 on Form S-8 for First Citizens Banc Corp, The First Citizens Banc Corp 2000 Stock Option and Stock Appreciation Rights Plan, of our report dated January 29, 2004, except for Note 22, which is dated March 4, 2004, relating to the consolidated balance sheets of First Citizens Banc Corp as of December 31, 2003 and 2002 and the related Consolidated Statements of Income, Changes in Shareholders' Equity and Cash Flows, for each of three years in the period ending December 31, 2003, which report was filed with Form 10-K of First Citizens Banc Corp for the year ended December 31, 2003. Crowe Chizek and Company LLC Cleveland, Ohio March 15, 2004 EX-24.1 5 l05629aexv24w1.txt POA EXHIBIT 24.1 POWER OF ATTORNEY The undersigned directors of First Citizens Banc Corp hereby authorize and appoint David A. Voight as our agent and attorney-in-fact, with full power to act for us and all of us, for the purpose of subscribing our names to the Form 10-K thereof to be filed with the Securities and Exchange Commission, and for the purpose of making any changes or amendments necessary or desirable to such documents and to any documents ancillary thereto, with the same powers and to the same effect as we may do if personally present. This power of attorney has been signed in counterpart and dated this 15th day of March by the following persons in the capacities indicated below. /s/ John L. Bacon /s/ David A. Voight - ------------------------------ --------------------------------------- John L. Bacon David A. Voight Director President and CEO, Director /s/ Robert L. Bordner /s/ George L. Mylander - ------------------------------ --------------------------------------- Robert L. Bordner George S. Mylander Director Director /s/ Mary Lee G. Close /s/ Allen R. Nickles, CPA, CFE - ------------------------------ --------------------------------------- Mary Lee G. Close Allen R. Nickles, CPA, CFE Director Director /s/ Blythe A. Friedley /s/ Robert L. Ransom - ------------------------------ --------------------------------------- Blythe A. Friedley Robert L. Ransom Director Director /s/ Richard B. Fuller /s/ Leslie D. Stoneham - ------------------------------ --------------------------------------- Richard B. Fuller Leslie D. Stoneham Director Director /s/ H. Lowell Hoffman, M.D. /s/ Daniel J. White - ------------------------------ ---------------------------------------- H. Lowell Hoffman, M.D. Daniel J. White Director Director /s/ W. Patrick Murray - ------------------------------ W. Patrick Murray Director EX-31.1 6 l05629aexv31w1.txt CEO 302 CERT Exhibit 31.1 Certification of Principal Executive Officer CERTIFICATIONS FOR ANNUAL REPORT ON FORM 10-K I, David A. Voight, certify that: 1. I have reviewed this annual report on Form 10-K of First Citizens Banc Corp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Signature and Title: /s/ David A. Voight, Date: March 15, 2004 ------------------------------ President, Chief Executive Officer EX-31.2 7 l05629aexv31w2.txt PFO 302 CERT Exhibit 31.2 Certification of Principal Financial Officer CERTIFICATIONS FOR ANNUAL REPORT ON FORM 10-K I, Todd A. Michel, certify that: 1. I have reviewed this annual report on Form 10-K of First Citizens Banc Corp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Signature and Title: /s/ Todd A. Michel, Date: March 15, 2004 ---------------------- Senior Vice President, Controller EX-32.1 8 l05629aexv32w1.txt CEO 906 CERT EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of First Citizens Banc Corp (the "Corporation") on Form 10-K for the period ending December 31, 2003, as filed with the Securities and Exchange Commission on the date of this certification (the Report"), I, David A. Voight, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ David A. Voight David A. Voight Chief Executive Officer March 15, 2004 EX-32.2 9 l05629aexv32w2.txt CFO 906 CERT EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of First Citizens Banc Corp (the "Corporation") on Form 10-K for the period ending December 31, 2003, as filed with the Securities and Exchange Commission on the date of this certification (the Report"), I, Todd A. Michel, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Todd A. Michel Todd A. Michel Chief Financial Officer March 15, 2004 -----END PRIVACY-ENHANCED MESSAGE-----