10-Q 1 l06874ae10vq.txt FIRST CITIZENS BANC CORP. 10-Q/3-31-04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended:...................................March 31, 2004 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 incorporation (I.R.S. Employer or organization) Identification Number) 100 East Water Street, Sandusky, Ohio 44870 ---------------------------------------------- (Address of principle executive offices) (Zip Code) Registrant's telephone number, including area code: (419) 625-4121 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value Outstanding at May 10, 2004 5,033,203 common shares FIRST CITIZENS BANC CORP Index PART I. Financial Information ITEM 1. Financial Statements: Consolidated Balance Sheets (unaudited) March 31, 2004 and December 31, 2003.........................................................3 Consolidated Statements of Income (unaudited) Three months ended March 31, 2004 and 2003...................................................4 Consolidated Statements of Comprehensive Income (unaudited) Three months ended March 31, 2004 and 2003...................................................5 Consolidated Statements of Shareholders' Equity (unaudited) Three months ended March 31, 2004 and March 31, 2003.........................................6 Condensed Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, 2004 and 2003...................................................7 Notes to Consolidated Financial Statements (unaudited)........................................8-17 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................18-22 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...................................22-24 ITEM 4. Controls and Procedures.........................................................................24 PART II. Other Information ITEM 1. Legal Proceedings...............................................................................25 ITEM 2. Changes in Securities and Use of Proceeds.......................................................25 ITEM 3. Defaults Upon Senior Securities.................................................................25 ITEM 4. Submission of Matters to a Vote of Security Holders.............................................25 ITEM 5. Other Information...............................................................................25 ITEM 6. Exhibits and Reports on Form 8-K................................................................25 Signatures .......................................................................................26
FIRST CITIZENS BANC CORP Consolidated Balance Sheets (Unaudited) (In thousands, except share data)
March 31, December 31, ASSETS 2004 2003 --------- --------- Cash and due from financial institutions $ 21,083 $ 21,983 Securities available for sale 101,569 109,508 Securities held to maturity (Fair value of $14 in 2004 and $15 in 2003) 13 14 Loans held for sale 335 159 Loans, net of allowance of $6,521 and $6,308 469,325 462,878 FHLB, FRB, GLBB and NCDC stock 7,269 7,211 Premises and equipment, net 10,416 10,481 Goodwill 15,052 15,052 Core deposit and other intangibles 2,385 2,506 Other assets 8,444 6,631 --------- --------- Total assets $ 635,891 $ 636,423 ========= ========= LIABILITIES Deposits Noninterest-bearing $ 68,755 $ 73,391 Interest-bearing 429,867 436,781 --------- --------- Total deposits 498,622 510,172 Federal Home Loan Bank advances 30,800 18,975 Securities sold under agreements to repurchase 10,447 12,115 U. S. Treasury interest-bearing demand note payable 1,209 939 Notes payable 9,000 9,000 Subordinated debentures 12,500 12,500 Accrued expenses and other liabilities 4,342 3,597 --------- --------- Total liabilities 566,920 567,298 SHAREHOLDERS' EQUITY Common stock, no par value, 10,000,000 shares authorized, 5,326,441 shares issued 47,370 47,370 Retained earnings 28,416 28,612 Treasury stock, 293,238 shares at cost (7,241) (7,241) Accumulated other comprehensive income 426 384 --------- --------- Total shareholders' equity 68,971 69,125 --------- --------- Total liabilities and shareholders' equity $ 635,891 $ 636,423 ========= =========
See notes to interim consolidated financial statements Page 3 FIRST CITIZENS BANC CORP Consolidated Statements of Income (Unaudited) (In thousands, except per share data)
Three months ended March 31, ------------------------------- 2004 2003 Interest and dividend income Loans, including fees $ 6,689 $ 7,041 Taxable securities 688 1,121 Tax-exempt securities 317 386 Federal funds sold and other (2) 46 ----------- ----------- 7,692 8,594 Interest expense Deposits 1,571 2,129 Federal Home Loan Bank advances 34 2 Subordinated debentures 138 62 Other 125 141 ----------- ----------- 1,868 2,334 ----------- ----------- Net interest income 5,824 6,260 Provision for loan losses 435 215 ----------- ----------- Net interest income after provision for loan losses 5,389 6,045 ----------- ----------- Noninterest income Computer center item processing fees 290 288 Service charges 763 762 Net gains on sale of securities 106 289 Net gain on sale of loans 53 154 ATM fees 123 118 Trust fees 165 73 Other 223 456 ----------- ----------- 1,723 2,140 Noninterest expense Salaries, wages and benefits 2,738 2,570 Net occupancy expense 361 322 Equipment expense 276 293 Contracted data processing 204 237 State franchise tax 198 212 Professional services 265 286 Amortization of intangible assets 121 108 Advertising 99 98 ATM expense 102 71 Other operating expenses 1,141 1,370 ----------- ----------- Total noninterest expense 5,505 5,567 ----------- ----------- Income before income taxes 1,607 2,618 Income tax expense 444 768 ----------- ----------- Net income $ 1,163 $ 1,850 =========== =========== Earnings per common share, basic $ 0.23 $ 0.37 =========== =========== Earnings per common share, diluted $ 0.23 $ 0.37 =========== =========== Weighted average basic common shares 5,033,203 5,033,203 =========== =========== Weighted average diluted common shares 5,041,469 5,041,068 =========== ===========
See notes to interim consolidated financial statements Page 4 FIRST CITIZENS BANC CORP Consolidated Comprehensive Income Statements (Unaudited) (In thousands)
Three months ended March 31, 2004 2003 ------- ------- Net income $ 1,163 $ 1,850 Unrealized holding gains and (losses) on available for sale securities 42 (464) Reclassification adjustment for (gains) and losses later recognized in income (106) (289) ------- ------- Net unrealized gains and (losses) (64) (753) Tax effect 22 256 ------- ------- Total other comprehensive income (loss) (42) (497) ------- ------- Comprehensive income $ 1,121 $ 1,353 ======= =======
See notes to interim consolidated financial statements Page 5 FIRST CITIZENS BANC CORP Consolidated Statements of Shareholders' Equity (Unaudited) Form 10-Q (In thousands, except share data)
Accumulated Common Stock Other Total Outstanding Retained Treasury Comprehensive Shareholders Shares Amount Earnings Stock Income/(Loss) Equity ----------- --------- --------- --------- ------------- ------------ Balance, January 1, 2003 5,033,203 $ 47,370 $ 29,588 $ (7,241) $ 1,972 $ 71,689 Net income 1,850 1,850 Change in unrealized gain/(loss) on securities available for sale, net of reclassifications and tax effects (497) (497) Cash dividends ($.26 per share) (1,308) (1,308) ---------- --------- --------- --------- -------- --------- Balance, March 31, 2003 5,033,203 $ 47,370 $ 30,130 $ (7,241) $ 1,475 $ 71,734 ========== ========= ========= ========= ======== ========= Balance, January 1, 2004 5,033,203 $ 47,370 $ 28,612 $ (7,241) $ 384 $ 69,125 Net income 1,163 1,163 Change in unrealized gain/(loss) on securities available for sale, net of reclassifications and tax effects 42 42 Cash dividends ($.27 per share) (1,359) (1,359) ---------- --------- --------- --------- -------- --------- Balance, March 31, 2004 5,033,203 $ 47,370 $ 28,416 $ (7,241) $ 426 $ 68,971 ========== ========= ========= ========= ======== =========
See notes to interim consolidated financial statements Page 6 FIRST CITIZENS BANC CORP Condensed Consolidated Statement of Cash Flows (Unaudited) (In thousands)
------------------------- 2004 2003 -------- -------- Net cash from operating activities $ 629 $ 3,941 Cash flows from investing activities Maturities and calls of securities, held-to-maturity 1 2 Maturities and calls of securities, available-for-sale 19,670 20,023 Purchases of securities, available-for-sale (12,003) (17,193) Proceeds from sale of securities, available-for-sale 241 7,124 Purchases of FRB Stock - (195) Loans made to customers, net of principal collected (6,861) (5,674) Proceeds from sale of OREO properties 76 - Change in federal funds sold - (7,050) Net purchases of office premises and equipment (171) (366) -------- -------- Net cash from investing activities 953 (3,329) Cash flows from financing activities Repayment of FHLB borrowings - (151) Net change in short-term FHLB advances 11,825 - Net change in deposits (11,550) (3,260) Change in securities sold under agreements to repurchase (1,668) (458) Change in U. S. Treasury interest-bearing demand note payable 270 (3,810) Net proceeds from obligated mandatorily redeemable capital securities - 7,500 Cash dividends paid (1,359) (1,308) -------- -------- Net cash from financing activities (2,482) (1,487) -------- -------- Net change in cash and due from banks (900) (875) Cash and due from banks at beginning of period 21,983 23,797 -------- -------- Cash and due from banks at end of period $ 21,083 $ 22,922 ======== ======== Cash paid during the period for: Interest $ 1,978 $ 2,568 Income taxes $ - $ -
See notes to interim consolidated financial statements Page 7 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- (1) Consolidated Financial Statements 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 8, a trust that had previously been consolidated with the Corporation is now reported separately as of December 31, 2003. The consolidated financial statements have been prepared by the Corporation without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Corporation's financial position as of March 31, 2004 and its results of operations and changes in cash flows for the periods ended March 31, 2004 and 2003 have been made. The accompanying consolidated financial statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the period ended March 31, 2004 are not necessarily indicative of the operating results for the full year. Reference is made to the accounting policies of the Corporation described in the notes to financial statements contained in the Corporation's 2003 annual report. The Corporation has consistently followed these policies in preparing this Form 10-Q. 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 real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions. In 2004, SCC provided item processing for nine financial institutions in addition to the two subsidiary banks. SCC accounted for 3.1% of the Corporation's total revenues through March 31, 2004. Reynolds provides real estate appraisal services for lending purposes to subsidiary banks and other financial institutions. Reynolds accounts for less than 1.0% of total Corporation revenues. Mr. Money provides consumer and real estate financing that the Banks would not normally provide to B and C credits at a rate commensurate with the risk. Mr. Money accounted for 4.4% of total Corporation revenues. 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 is less than 1.0% of total revenue for the first quarter ended March 31, 2004. Water Street Properties, Inc. was formed to hold repossessed assets of FCBC's subsidiaries. Water St. revenue was less than 1.0% of total revenue through March 31, 2004. Management considers the Page 8 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- Corporation to operate primarily in one reportable segment, banking. 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 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. Income tax expense is based on the effective tax rate expected to be applicable for the entire year. 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. On December 31, 2002, SFAS No. 148, "Accounting for Stock-Based Compensation" was issued and amended SFAS No. 123. 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 SFAS No. 123. No stock options were granted prior to July 2, 2002.
2004 2003 ---- ---- Net income as reported $ 1,163 $ 1,850 Deduct: Stock-based compensation expense determined under fair value based method 19 8 --------- --------- Pro forma net income 1,144 1,842 ========= ========= Basic earnings per share as reported $ 0.23 $ 0.37 Pro forma basic earnings per share 0.23 0.37 Diluted earnings per share as reported $ 0.23 $ 0.37 Pro forma diluted earnings per share 0.23 0.37
Page 9 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- (2) Securities Securities at March 31, 2004 and December 31, 2003 were as follows:
March 31, 2004 Gross Gross Unrealized Unrealized AVAILABLE FOR SALE Fair Value Gains Losses -------- -------- -------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 59,728 $ 628 $ (2) Corporate Bonds 531 - (3) Obligations of states and political subdivisions 32,971 1,507 - Mortgage-back securities 7,856 90 - -------- -------- -------- Total debt securities $101,086 $ 2,225 $ (5) Equity securities 483 - - -------- -------- -------- $101,569 $ 2,225 $ (5) ======== ======== ========
March 31, 2004 Gross Gross Amortized Unrecognized Unrecognized HELD TO MATURITY Cost Gains Losses Fair Value --------- ------------ ------------ ---------- Mortgage-backed securities $13 $ 1 $ - $14 === === === ===
Page 10 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) --------------------------------------------------------------------------------
December 31, 2003 Gross Gross AVAILABLE FOR SALE Unrealized Unrealized Fair Value Gains Losses ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 64,333 $ 636 $ (2) Corporate Bonds 1,030 1 (8) Obligations of states and political 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) ======== ======== ========
December 31, 2003 Gross Gross Carrying Unrecognized Unrecognized HELD TO MATURITY Amount Gains Losses Fair Value -------- ------------ ------------ ---------- Mortgage-backed securities $14 $ 1 $ - $15 === === === ===
Page 11 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- The amortized cost and fair value of securities at March 31, 2004, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities and equity securities are shown separately.
AVAILABLE FOR SALE Fair Value ---------- Due in one year or less $ 58,418 Due after one year through five years 29,020 Due after five years through ten years 4,490 Due after ten years 1,302 Mortgage-backed securities 7,856 Equity securities 483 --------- Total securities available for sale $ 101,569 =========
Estimated Fair HELD TO MATURITY Amortized Cost Value -------------- -------------- Mortgage-backed securities $13 $14 === ===
Proceeds from sales of securities, gross realized gains and gross realized losses were as follows:
Three Months Ended March 31, -------------------- 2004 2003 ------- ------- Proceeds $ 241 $7,124 Gross gains 103 289 Gross losses - - Gains from securities called or settled by the issuer 3 0
Securities with a carrying value of approximately $78,090 and $83,813 were pledged as of March 31, 2004 and December 31, 2003, respectively, to secure public deposits, other deposits and liabilities as required by law. Page 12 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- (3) Loans Loans at March 31, 2004 and December 31, 2003 were as follows:
3/31/2004 12/31/2003 --------- ---------- Commercial and Agriculture $ 55,178 $ 51,146 Commercial real estate 162,737 158,125 Real Estate - mortgage 204,481 205,635 Real Estate - construction 23,848 22,708 Consumer 23,461 24,765 Credit card and other 4,520 4,977 Leases 2,105 2,293 --------- --------- Total loans 476,330 469,649 Allowance for loan losses (6,521) (6,308) Deferred loan fees (482) (460) Unearned interest (2) (3) --------- --------- Net loans $ 469,325 $ 462,878 ========= =========
(4) Allowance for Loan Losses A summary of the activity in the allowance for loan losses for the three months ended March 31, 2004 and 2003 was as follows:
2004 2003 ------- ------- Balance January 1, $ 6,308 $ 6,325 Loans charged-off (337) (637) Recoveries 115 67 Provision for loan losses 435 215 ------- ------- Balance March 31, $ 6,521 $ 5,970 ======= =======
Page 13 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- Information regarding impaired loans was as follows for the three months ended March 31:
2004 2003 ------ ------ Average investment in impaired loans $6,923 $6,085 Interest income recognized on impaired loans including interest income recognized on cash basis 115 98 Interest income recognized on impaired loans on cash basis 115 98
Information regarding impaired loans at March 31, 2004 and December 31, 2003 was as follows:
3/31/2004 12/31/2003 --------- ---------- Balance impaired loans $ 7,480 $ 6,365 Less portion for which no allowance for loan losses is allocated (875) (924) ------- ------- Portion of impaired loan balance for which an allowance for credit losses is allocated $ 6,605 $ 5,441 ======= ======= Portion of allowance for loan losses allocated to impaired loans $ 1,882 $ 1,181 ======= =======
Nonperforming loans were as follows:
3/31/04 12/31/03 ------- -------- Loans past due over 90 days still on accrual $1,153 $3,206 Nonaccrual $4,333 $3,204
Nonperforming loans include both smaller balance homogeneous loans, such as residential mortgages and consumer loans, that are collectively evaluated for impairment and individual classified impaired loans. Page 14 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- (5) 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 customers financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of 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 commitment. The contractual amount of financial instruments with off-balance-sheet risk was as follows for March 31, 2004 and December 31, 2003:
Contract Amount --------------- 2004 2003 ---- ---- Fixed Variable Fixed Variable Rate Rate Rate Rate ------- ------- ------- ------- Commitment to extend credit: Lines of credit and construction loans $ 4,815 $51,322 $ 4,199 $46,956 Overdraft protection - 6,651 - 6,658 Letters of credit 20 3,352 70 3,377 ------- ------- ------- ------- $ 4,835 $61,325 $ 4,269 $56,991 ======= ======= ======= =======
Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments above had interest rates ranging from 3.25% to 6.50% at March 31, 2004 and 3.25% to 8.00% at December 31, 2003. Maturities extend up to 30 years. The Banks are required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements for the periods ended March 31, 2004 and December 31, 2003 approximated $9,664 and $9,293. (6) Merger 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 the Corporation's 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. Page 15 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- (7) Pension Information Net periodic pension expense for:
March 31 -------- 2004 2003 -------------------- ------------------ Service cost $ 130 $ 114 Interest cost 115 106 Expected return on plan assets 83 70 Other components Amortization of net loss/(gain) from earlier periods 30 39 Amortization of unrecognized service cost 3 3 Amortization of the remaining unrecognized net obligation/(asset) existing at the date of initial application of FASB statement no. 87 (20) (20) ---- ---- Net total components 14 22 --- --- Net periodic pension cost $ 175 $ 172 ===== =====
The total amount of contributions expected to be paid by the Corporation in 2004 total $1,196, compared to $430 in 2003 due to four additional payments that the Corporation is required to make in 2004. (8) 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. 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 Page 16 First Citizens Banc Corp Notes to Interim Consolidated Financial Statements (Unaudited) Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- 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. Page 17 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- Introduction ------------ The following discussion focuses on the consolidated financial condition of First Citizens Banc Corp at March 31, 2004 compared to December 31, 2003 and the consolidated results of operations for the three-month period ending March 31, 2004 compared to the same period in 2003. This discussion should be read in conjunction with the consolidated financial statements and footnotes included in this Form 10-Q. The registrant is not aware of any trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on the liquidity, capital resources, or operations except as discussed herein. Also, the registrant is not aware of any current recommendation by regulatory authorities, which would have a material effect if implemented. When used in this Form 10-Q or future filings by the Corporation with the Securities and Exchange Commission, in press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "believe," or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could effect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Financial Condition ------------------- Total assets of the Corporation at March 31, 2004 totaled $635,891 compared to $636,423 at December 31, 2003, which was a decrease of $532. Within the structure of the assets, net loans have increased $6,447, or 1.4 percent since December 31, 2003. The commercial real estate portfolio increased by $4,612 and the commercial and agriculture portfolio increased $4,032, while residential real estate and consumer loans decreased by $1,154 and $1,304 respectively. The increase in the commercial loan portfolio is reflective of the shift in focus by the Corporation during the last two years toward commercial loans and away from residential real estate and consumer loans. The Corporation has continued to emphasize increasing its share of the local market for commercial real estate loans. New lending officers have been hired to enable the Corporation to continue its proactive approach in contacting new and current clients. Commercial lending relationships generally offer more attractive returns than residential loans and also offer opportunities for attracting larger balance deposit relationships. Page 18 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- In the continued low interest rate environment, the greatest demand for residential real estate loans has been for a fixed rate loan. Rather than add these loans to the portfolio, the Corporation has generally sold these loans on the secondary market. This has allowed for additional funding to be used for commercial lending. Mr. Money continues to service the needs of B and C credit customers for consumer and real estate financing that the Banks would not normally provide, and at a rate commensurate with the risk. Mr. Money had loans outstanding of $14,480 at March 31, 2004 compared to $14,442 at December 31, 2003. Loans held-for-sale increased $176, or 110.7 percent from December 31, 2003. At March 31, 2004, the net loan to deposit ratio was 94.1 percent compared to 90.1 percent at December 31, 2003. At March 31, 2004, available for sale securities totaled $101,569 compared to $109,508 at December 31, 2003, a decrease of $7,939. The decrease in securities was due to paydowns, calls, maturities and sales of its portfolio. Funds not used to replace these securities were used to fund other assets, primarily the loan portfolio. Bank stocks increased $58 from December 31, 2003, due to $58 in FHLB dividends. For the three months of operations in 2004, $435 was placed into the allowance for loan losses from earnings compared to $215 for the same period of 2003. The increase of the provision is related to the increase of the loan portfolio, especially the commercial loan portfolio, and an increase in impaired loans of $1,115 from December 31, 2003. 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. Charge-offs for the first three months of 2003 were $337 compared to $637 for the same period of 2003. As part of an ongoing review of the above factors, the allowance for loan losses was adjusted from year end to reflect conditions in the first quarter of 2004. The March 31, 2004 allowance for loan losses as a percent of total loans was 1.37 percent compared to 1.34 percent at December 31, 2003. Office premises and equipment have decreased $65 and intangible assets have decreased $121 since December 31, 2003. The decrease in office premises and equipment is attributed to new purchases of $171 and depreciation of $236. Intangible assets decreased due to amortization of the core deposit premium. Total deposits at March 31, 2004 decreased $11,550 from year-end 2003. Noninterest-bearing deposits decreased $4,636 from year-end 2003. Interest-bearing deposits, including savings and time deposits, decreased $6,914 from year-end 2003. The year to date average balance of total deposits decreased $28,120 compared to the average balance of the same period 2003. As the stock market continues to recover, investors who had sought out short-term financial institution deposit products are now moving funds into different markets. The year to date 2004 average balance of savings deposits has decreased $4,757 compared to the average balance of the same period for 2003. The current average rate of these deposits is 0.41 percent compared to 0.57 Page 19 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- percent in 2003. The year to date 2004 average balance of time certificates has decreased $19,724 compared to the average balance for the same period for 2003. Additionally, the year to date 2004 average balances compared to the same period in 2003 of Demand Deposits increased $6,016, while N.O.W. accounts increased $9,118, and Money Market Savings decreased $15,550. Total borrowed funds have increased $10,427 from December 31, 2003 to March 31, 2004. The company used FHLB advances to offset the decline in deposits experienced in the first quarter of 2004. At March 31, 2004, the Corporation had $30,800 in outstanding advances compared to $18,975 at December 31, 2003. The Corporation has notes outstanding with other financial institutions totaling $9,000 at March 31, 2004 and December 31, 2003. These notes were primarily used to fund the loan growth at Mr. Money. Securities sold under agreements to repurchase, which tend to fluctuate, have decreased $1,668 and U.S. Treasury Tax Demand Notes have increased $270. Shareholders' equity at March 31, 2004 was $68,971, or 10.8 percent of total assets, compared to $69,125 at December 31, 2003, or 10.9 percent of total assets. The decrease in shareholders' equity resulted from earnings of $1,163, less dividends paid of $1,359 and the increase in the market value of securities available for sale, net of tax, of $42. The Corporation paid a cash dividend on February 1, 2004 at a rate of $.27 per share. Total outstanding shares at March 31, 2004 were 5,033,203. Results of Operations --------------------- Three Months Ended March 31, 2004 and 2003 Net income for the three months ended March 31, 2004 was $1,163, or $.23 basic and diluted earnings per common share compared to $1,850 or $.37 basic and diluted earnings per common share for the same period in 2003. This was a decrease of $687, or 37.1 percent. Some of the reasons for the changes are explained below. Total interest income for the first three months of 2004 decreased by $902, or 10.5 percent compared to the same period in 2003. The average rate on earning assets on a tax equivalent basis for the first three months of 2004 was 5.07 percent and 5.68 percent for the first three months of 2003. The decrease in yield is due to the rate environment in which the Corporation has operated in 2004. Total interest expense for the first three months of 2004 has decreased by $466, or 20.0 percent compared to the same period of 2003. This decrease is mainly attributed to a decrease in interest on deposits of $558, a decrease in other borrowings of $16, partially offset by an increase in FHLB borrowings of $32 and an increase in trust preferred securities of $76. Interest on other borrowings decreased due to the continued decline in interest rates on the borrowings. Interest on FHLB borrowings has increased due to the additional advances taken by the Corporation through March 31, 2004. The Corporations two Trust preferred issuances account for the $62 increase in Trust preferred expense. The average rate on interest-bearing liabilities for the first three months of 2004 was 1.44 percent compared to 1.74 percent for the same period of 2003. The net interest margin on a tax equivalent basis was 4.01 percent for the Page 20 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- three-month period ended March 31, 2004 and 4.34 percent for the same period ended March 31, 2003. Noninterest income for the first three months of 2004 totaled $1,723, compared to $2,140 for the same period of 2003, a decrease of $417. Revenue from computer operations, service charge income, and ATM fees all increased minimally from 2003. Gain on sale of securities decreased $183 from 2003. Citizens sold securities at a $103 gain, using the proceeds to help fund its loan growth. Gain on the sale of loans decreased $101 compared to the first three months of 2003. In the first quarter of 2003, mortgage refinancing's were at a high level as interest rates continued to be low and the demand for fixed rate mortgages was high. In 2004, the amount of refinancing's decreased as the market of customers wanting to refinance diminished. These two factors have caused the decline of gain of loan sales in 2004. Compared to March 31, 2003, Trust fees increased $92, up to $165. The Trust department continues to add assets to its portfolio, resulting in increased revenue generated by the Trust department. Other operating income declined $233 in 2004 compared with the same period of time in 2003. Within other operating income, income earned from the origination of wholesale mortgages in 2004 declined $156 compared to the first three months in 2003. As with the traditional secondary market, the amount of loans sold has declined dramatically in 2004 compared to 2003. Additionally, Citizens, revenue earned through its credit card portfolio has decreased $46. In November 2003, Citizens sold its credit card portfolio. The fees earned in the past with the portfolio will no longer be earned. Noninterest expense for the three months ended March 31, 2004 totaled $5,505 compared to $5,567 for the same period in 2003. This was a decrease of $62, or 1.1 percent. Salaries and benefits increased $168, or 6.5 percent compared to the first three months of 2003. Net occupancy expense increased from $322 for the first three months of 2003, to $361 in 2004, an increase of $39. This increase is primarily due to the rise in utility payments and building depreciation associated with the new operations center constructed in 2003. Equipment expense decreased $17, as a result of decreased depreciation and maintenance expense. Computer processing expense decreased by $33 compared to last year. State franchise taxes decreased $14 compared to the first three months in 2003. Professional services decreased $21 for the first three months of 2004 compared to the same period in 2003. ATM expenses increased $31 in the first quarter 2004 compared to the same period in 2003. The primary reason for the increase was due to the increased volume of transactions executed at Corporation ATM machines as well as a timing issue with an invoice in 2003. Income tax expense for the first three months of 2004 totaled $444 compared to $768 for the first three months of 2003. This was a decrease of $324, or 42.2 percent. The decrease in the federal income taxes is a result of the decrease in total income before taxes of $1,011. The effective tax rates were comparable for the three-month periods ended March 31, 2004 and March 31, 2003, at 27.6% and 29.3%, respectively. Page 21 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- Capital Resources ----------------- Shareholders' equity totaled $68,971, at March 31, 2004 compared to $69,125 at December 31, 2003. All of the capital ratios exceed the regulatory minimum guidelines as identified in the following table:
To Be Well Capitalized Under Prompt For Capital Corrective Corporation Ratios Adequacy Action 3/31/2004 12/31/2003 Purposes Provisions --------------------- --------------------- -------------------------- ------------------- Tier I Risk Based Capital 13.4% 10.9% 4.0% 6.0% Total Risk Based Capital 14.6% 14.8% 8.0% 10.0% Leverage Ratio 10.0% 8.1% 4.0% 5.0%
The Corporation paid a cash dividend of $.27 per common share on February 1, 2004 compared to $.26 per common share on February 1, 2003. Liquidity --------- Liquidity as it relates to the banking entities of the Corporation is the ability to meet the cash demand and credit needs of its customers. The Banks, through their respective correspondent banks, maintain federal funds borrowing lines totaling $22,750 and the Banks have additional borrowing availability at the Federal Home Loan Bank of Cincinnati of $56,183 at March 31, 2004. Liquidity is also evidenced by all but $13 of its security portfolio being classified as available for sale. ITEM 3. 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. The Banks do not maintain a trading account for any class of financial instrument and the Corporation is not affected by foreign currency exchange rate risk or commodity price risk. Interest rate risk is the risk that the Corporation's financial condition will be adversely affected due to movements in interest rates. The Corporation, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than interest-bearing liabilities. The income of financial institutions is primarily derived from the excess of Page 22 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- interest earned on interest-earning assets over interest paid on interest-bearing liabilities. One of the Corporation's principal financial objectives is to achieve long-term profitability while reducing its exposure to fluctuations in interest rates. Accordingly, the Corporation places great importance on monitoring and controlling interest rate risk. There are several methods employed by the Corporation to monitor and control interest rate risk. One such method is using gap analysis. The gap is defined as the repricing variance between rate sensitive assets and rate sensitive liabilities within certain periods. The repricing can occur due to changes in rates on variable products as well as maturities of interest-earning assets and interest-bearing liabilities. A high ratio of interest sensitive liabilities, generally referred to as a negative gap, tends to benefit net interest income during periods of falling rates as the average rate on interest-bearing liabilities falls faster than the average rate earned on interest-earning assets. The opposite holds true during periods of rising rates. The Corporation attempts to minimize the interest rate risk through management of the gap in order to achieve consistent shareholder return. The Corporation's Assets and Liability Management Policy is to maintain a laddered gap position. One strategy is to originate variable rate loans tied to market indices. Such loans reprice as the underlying market index changes. Currently, approximately 75.2 percent of the Corporation's loan portfolio reprices on at least an annual basis. The Corporation's usual practice is to invest excess funds in federal funds that mature and reprice daily. The following table provides information about the Corporation's financial instruments that are sensitive to changes in interest rates as of March 31, 2004 and December 31, 2003, 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 March 31, 2004 or December 31, 2003. Net Portfolio Value
March 31, 2004 December 31, 2003 -------------------------------------------- ------------------------------------------------ Change in Dollar Dollar Percent Dollar Dollar Percent Rates Amount Change Change Amount Change Change ---------- -------------------------------------------- ------------------------------------------------ +400bp 69,854 (12,584) -15% 66,508 (14,439) -18% +300bp 72,623 (9,815) -12% 69,854 (11,093) -14% +200bp 75,776 (6,662) -8% 73,288 (7,659) -9% +100bp 79,086 (3,352) -4% 77,011 (3,936) -5% Base 82,438 - - 80,947 - - -100bp 84,192 1,754 2% 83,909 2,962 4%
The relatively minor change in net portfolio value from December 31, 2003 to March 31, 2004, is primarily a result of two factors. First, long-term interest rates have decreased only slightly during 2004. The Corporation has seen an increase in the base level of net portfolio value due to a slight increase in the fair value of loans and investments, as well as a decrease in the fair value of certificates of deposits. Page 23 First Citizens Banc Corp Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) -------------------------------------------------------------------------------- ITEM 4. Controls and Procedures Disclosure ---------------------------------- As of the end of the period covered by this quarterly 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 control or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Page 24 Part II - Other Information ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBIT NO. 31.1 Certification of Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002. (b) EXHIBIT NO. 31.2 Certification of Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002. (c) EXHIBIT NO. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (d) EXHIBIT NO. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (e) EXHIBIT NO. 99 - Safe Harbor under the Private Securities Litigation Reform Act of 1995. (f) REPORTS ON FORM 8-K - Filed on April 20, 2004, announcing 2004 quarterly earnings of $0.23 per share compared to $0.37 earnings per share for 2003 and $0.35 earnings per share for 2002. Page 25 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf the undersigned thereunto duly authorized. First Citizens Banc Corp /s/ David A. Voight May 10, 2004 ------------------------------ ------------ David A. Voight Date President /s/ James O. Miller May 10, 2004 ------------------------------ ------------ James O. Miller Date Executive Vice President Page 26 First Citizens Banc Corp Index to Exhibits Form 10-Q -------------------------------------------------------------------------------- EXHIBITS (3)(i) 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)(ii) 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) 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. (31.1) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99) 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. Page 27