-----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, RKjP1uBLCcvNoonnwVD93LcPLh1TDuDYw8hgJnIkQ0CD8ejp+F/F8WSeEzoJrzES uwKumZ0KIuiilFnDjcCiGQ== 0000950152-99-002352.txt : 19990326 0000950152-99-002352.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950152-99-002352 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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-K405 SEC ACT: SEC FILE NUMBER: 000-25980 FILM NUMBER: 99572112 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-K405 1 FIRST CITIZEN'S BANC CORP FORM 10-K405 1 FIRST CITIZENS BANC CORP Sandusky, Ohio ANNUAL REPORT December 31, 1998 2 FIRST CITIZENS BANC CORP CONTENTS INSIDE Message to Shareholders Five Year Consolidated Financial Summary Form 10-K ............................................................................................ 1 Index ............................................................................................... 2 PART I Item 1. Business.................................................................................... 3 Item 2. Properties.................................................................................. 17 Item 3. Legal Proceedings........................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders....................................................................... 17 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................................................... 18 Item 6. Selected Financial Data..................................................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 20 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................. 29 Item 8. Financial Statements and Supplementary Data Independent Auditors' Report................................................................ 32 Financial Statements........................................................................ 33 Notes to Consolidated Financial Statements ................................................. 37 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................... 55 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 56 Item 11. Executive Compensation...................................................................... 57 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................................................ 57 Item 13. Certain Relationships and Related Transactions.............................................. 57 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................................... 58 Signatures .......................................................................................... 59
First Citizens Banc Corp Directors and Officers Directors of Affiliated Companies Officers of Affiliated Companies First Citizens Banc Corp Shareholder Information 3 [FIRST CITIZENS BANC CORP LETTERHEAD] March 5, 1999 Dear Shareholder: Enclosed is the 1998 Annual Report for First Citizens Banc Corp. As discussed in previous correspondence, our major accomplishments during 1998 were the completion of the acquisition of Farmers State Bank and the sale of the SCC Resources' data processing contracts. These transactions had a significant impact on the size and earnings of your company. Looking ahead to 1999, three issues stand out. The first is our Year 2000 (Y2K) readiness. The Y2K issue has been a priority since early 1998 and has received significant time and resources within the company. We believe our Y2K efforts will result in a smooth transition into the new millenium. Our second issue for 1999 will be the conversion of our three affiliate banks to the Jack Henry & Associates data processing system. This move will provide your banks with what we believe is the most up-to-date data processing support available to community banks. The transition to the Jack Henry & Associates data processing also provides the company the opportunity to streamline operations for our three community banks without affecting the independence and customer service levels of the banks. Our third issue is the continued expansion of opportunities to increase noninterest revenue through brokerage, insurance, and trust services. We are expanding our successful LPL investment center from Citizens Bank to now include Castalia Bank and Farmers State Bank. We are also encouraged with the results of our first full year's association with Dawson Eirons Insurance. Your management and Board of Directors are committed to enhancing your investment in First Citizens Banc Corp. We feel the company's dividend policy, the Dividend Reinvestment Program, and the Stock Repurchase Program are important in that regard. By summer 1999 you will have the ability to obtain timely financial information and news releases about your company through its web site, www.FCZA.com. Thank you for your continued interest and support. Your thoughts and questions are always appreciated. Very truly yours, /s/ David A. Voight David A. Voight President & CEO 4 FIRST CITIZENS BANC CORP FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY (1)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Earnings Net income (000) $ 5,761 $ 4,441 $ 5,568 $ 5,278 $ 5,377 Per Common Share (2): Earnings $ 1.35 $ 1.04 $ 1.31 $ 1.24 $ 1.26 Book value 12.61 12.01 11.42 10.92 9.50 Dividends paid 1.11 1.07 1.02 0.71 0.41 Balances (in millions) Assets $ 508.9 $ 484.1 $ 455.9 $ 446.8 $ 431.1 Deposits 417.9 402.2 375.8 369.2 363.1 Net loans 278.8 287.7 260.0 240.4 226.8 Shareholders equity 53.7 51.2 48.7 46.6 40.5 Performance ratios Return on average assets 1.18% .95% 1.24% 1.22% 1.25% Return on average equity 10.95 8.75 11.71 12.20 13.46 Shareholders' equity to assets ratio 10.56 10.58 10.68 10.42 9.39 Net loans to deposit ratio 66.71 71.53 69.19 65.11 62.46 Allowance for loan losses to total loans 1.60 1.60 1.48 1.46 1.40
(1) Prior year amounts have been restated to include the Farmers State Bank, acquired in a pooling of interests transaction completed on April 28, 1998. (2) Per share data has been adjusted for a 300% stock split paid in April 1996 and the business combination with Farmers State Bank in April 1998. Dividends paid reflect the historical amounts paid by First Citizens Banc Corp. 5 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 1999 was $81,484,791 As of January 31, 1999, there were 4,263,401 shares of no par value common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement to be dated approximately March 19, 1999, are incorporated by reference into Item 10. Directors and Executive Officers of the Registrant; Item 11. Executive Compensation; Item 12. Security Ownership of Certain Beneficial Owners and Management; and Item 13. Certain Relationships and Related Transactions, of Part III. 1 6 INDEX PART I Item 1. Business............................................................................................ 3 Item 2. Properties.......................................................................................... 17 Item 3. Legal Proceedings................................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders................................................. 17 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters............................... 18 Item 6. Selected Financial Data............................................................................. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 20 Item 7a. Quantitative and Qualitative Disclosures About Market Risk......................................... 29 Item 8. Financial Statements and Supplementary Data Independent Auditor's Report........................................................................ 32 Financial Statements................................................................................ 33 Notes to Consolidated Financial Statements.......................................................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 55 PART III Item 10. Directors and Executive Officers of the Registrant.................................................. 56 Item 11. Executive Compensation.............................................................................. 57 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 57 Item 13. Certain Relationships and Related Transactions...................................................... 57 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 58 Signatures.................................................................................................... 59
2 7 PART I ITEM 1. BUSINESS - ---------------- (a) General Development of Business ------------------------------- First Citizens Banc Corp (the "Corporation") was organized under the laws of the State of Ohio on February 19, 1987 and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Corporation's office is located at 100 East Water Street, Sandusky, Ohio. The Corporation had total consolidated assets of $508,888,863 at December 31, 1998. 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), one branch banking office in Berlin Heights, Ohio and one branch banking office in Huron, Ohio. This subsidiary accounts for 58% of the Corporation's consolidated assets at December 31, 1998. 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 the Ohio villages of Chatfield, Tiro, Richwood and Green Camp. Farmers accounts for 31% of the Corporation's consolidated assets at December 31, 1998. THE CASTALIA BANKING COMPANY (Castalia), owned by the Corporation since 1990, was organized and chartered under the laws of the State of Ohio in 1907. Castalia is an insured bank under the Federal Deposit Insurance Act. Castalia operates from one location, 208 South Washington Street, Castalia, Ohio. Castalia, Ohio is located approximately 10 miles from Sandusky, Ohio. Castalia accounts for 10% of the Corporation's consolidated assets at December 31, 1998. SCC RESOURCES INC. (SCC) was organized under the laws of the State of Ohio. Begun as a joint venture of three local Sandusky, Ohio banks in 1966, SCC provides data processing services for financial institutions, including the Banks, and other nonrelated entities. The Corporation acquired total ownership of SCC in February 1993. This subsidiary accounts for 1% of the Corporation's consolidated assets as of December 31, 1998. R. A. REYNOLDS APPRAISAL SERVICES, 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, 1998. (b) Financial Information About Industry Segments --------------------------------------------- The Corporation is a bank holding company. Through its three 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. Reference is made to the statistical information regarding the Corporation included elsewhere herein and to items of this Form 10K for financial information about the Corporation's banking business. 3 8 (c) Narrative Description of Business --------------------------------- General ------- The Corporation's primary business is incidental to its three subsidiary banks. Citizens, Farmers and Castalia, located in Erie, Crawford, Marion and Union Counties, Ohio, conduct a general banking business which involves collecting customer deposits, making loans and purchasing securities. The subsidiary banks do not operate a trust department. Interest and fees on loans accounted for 60% of total revenue for 1998 and 63% of total revenue for 1997. The primary focus of lending is real estate mortgages. Real estate mortgages comprised 64% of the total loan portfolio in 1998 and 62% of the total loan portfolio in 1997. Citizens', Farmers' and Castalia's loan portfolios do not include any foreign-based loans, loans to lesser-developed countries or loans to the Corporation. Citizens has a loan to SCC, which is secured by real estate. On a parent company only basis, the Corporation's only 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 the Corporation for shareholder dividends. The Corporation has no debt service obligations. 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, Farmers and Castalia is Erie and Crawford counties. A secondary market includes portions of Huron, Union, Marion, Richland and Ottawa counties. Citizens, Farmers and Castalia are operated as independent commercial banks in their 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 deposit dollars comes from brokerage companies, insurance companies and direct mutual funds. Employees --------- The Corporation has no employees. The subsidiary companies employ approximately 225 full-time equivalent employees to whom a variety of benefits is provided. The Corporation and its subsidiaries are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good. 4 9 Supervision and Regulation -------------------------- The Corporation, as a registered bank holding company, is subject to the Bank Holding Company Act of 1956, as amended (the "Act"), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities in which the Corporation and its subsidiaries may engage to those activities that the Federal Reserve Board finds to be closely related to banking, managing or controlling banks. In addition, the Act requires the Corporation and its subsidiaries to obtain the prior approval of the Federal Reserve Board before engaging in any new activities and before acquiring control of more than 5% of the voting stock or substantially all the assets of any other bank. The Act also restricts certain transactions between affiliates including, loans and extensions of credit to affiliates, investments in the stock or securities of affiliates, acceptance of an affiliate's stock as collateral for loans to a borrower and acceptance of an affiliate's stock for leases, service and other contracts between affiliates. Finally, the Act prohibits bank holding companies and their subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of services. Prior to enactment of the Interstate Banking and Branch Efficiency Act of 1994, neither the Corporation 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. 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 the Corporation and its subsidiary Banks had risk-based capital ratios above minimum requirements at December 31, 1998. Regulation of Bank Subsidiaries ------------------------------- In addition to regulation of the Corporation, two of the Corporation's banking subsidiaries, Citizens and Castalia, 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, all three of the Corporation's banking subsidiaries, Citizens, Castalia and Farmers, are supervised and regulated by the Ohio Division of Financial Institutions. In addition, Citizens and Castalia are members of the Federal Reserve System. All three banks are subject to periodic examinations by the Ohio Division of Financial Institutions and Citizens and Castalia are 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. The deposits of Citizens, Castalia and Farmers are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"), and all three entities are subject to the Federal Deposit Insurance Act. Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a subsidiary of a bank holding company may be required to reimburse the FDIC for any loss incurred due to the default of another FDIC insured subsidiary of the bank holding company or for FDIC assistance provided to such a subsidiary in danger of default. 5 10 Pending Legislation ------------------- Congress is currently considering landmark financial services legislation that would have the effect of repealing Depression-era laws separating banking and securities from commerce. Under current laws, national banks may not underwrite or deal in any security other than government and government-related bonds, Federal Reserve System members may not affiliate with companies principally engaged in securities activities, and bank holding companies and their subsidiaries may engage only in activities closely related to banking. The proposed legislative reforms would repeal these restrictions on affiliations between banks, securities firms and insurance companies. Further, they would lift the limitations on bank holding companies' permissible activities and allow bank holding companies to engage in any activities that are financial in nature. A major point of contention in the legislative proposals is how to structure these additional financial services. One proposal would allow bank holding company subsidiaries to engage in the additional financial activities; the other would require a separate affiliated entity called a financial holding company to be created for the additional financial services. In either case, only those entities meeting eligibility requirements set by different regulatory agencies would be permitted to provide these combinations of financial services. In addition, the entities providing a combination of financial services would subject themselves to concurrent regulation by different authorities including state insurance authorities, the SEC and relevant state and federal banking authorities. 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. (d) Financial Information About Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales ----- The Corporation and its subsidiaries do 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) Statistical Information ----------------------- Pages 7 through 17 present various statistical disclosures required for bank holding companies. 6 11 Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential ---------------------------------------- The following table sets forth, for the years ended December 31, 1998, 1997 and 1996, the distribution of assets, liabilities and shareholders' equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities:
1998 1997 1996 ---------------------------- ----------------------------- --------------------------- Average Yield/ Average Yield/ Average Yield/ Assets balance Interest rate balance Interest rate balance Interest rate - ------ ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Interest-earning assets: Loans (1)(2)(3) $ 288,108 $24,357 8.45% $ 280,141 $ 24,015 8.57% $ 250,719 $ 21,725 8.67% Taxable securities(4) 114,099 6,752 6.07 111,485 6,821 6.19 118,414 7,340 6.19 Nontaxable securities(4)(5) 41,616 2,093 5.18 39,760 2,166 5.50 41,416 2,311 5.64 Federal funds sold 17,490 943 5.39 10,477 583 5.56 12,175 665 5.46 Interest-bearing deposits in other banks 1,271 59 4.64 1,368 64 4.68 1,263 97 7.68 --------- ------- --------- -------- --------- -------- Total interest-earning assets 462,584 34,204 7.46 443,231 33,649 7.62 423,987 32,138 7.58 ------- -------- -------- Noninterest-earning assets: Cash and due from banks 13,238 13,517 14,352 Office premises and equipment, net 7,497 7,139 6,955 Accrued interest receivable 3,682 3,517 3,498 Intangible assets 2,716 2,965 1,828 Other assets 2,668 3,024 2,410 Less allowance for possible loan losses (4,675) (3,633) (3,776) --------- --------- --------- Total $ 487,710 $ 469,760 $ 449,254 ========= ========= ========= Liabilities and Shareholders' Equity - ------------------------------------ Interest-bearing liabilities: Savings, NOW & Money Market deposit accounts $ 155,080 4,144 2.67 $ 157,745 4,302 2.73 $ 155,356 4,277 2.75 Time deposits 212,081 11,765 5.55 196,081 10,945 5.58 185,010 10,220 5.52 Federal Home Loan Bank borrowings 13,913 797 5.73 15,126 867 5.73 16,279 932 5.73 Securities sold under repurchase agreements 11,863 535 4.51 9,487 500 5.27 9,113 380 4.17 U.S. Treasury demand notes payable 1,029 54 5.25 1,195 61 5.10 1,056 47 4.45 --------- ------- --------- -------- --------- -------- Total interest- bearing liabilities 393,966 17,295 4.39 379,634 16,675 4.40 366,814 15,856 4.32 --------- ------- --------- -------- --------- -------- Noninterest-bearing liabilities: Demand deposits 36,327 35,239 30,813 Other liabilities 4,822 4,127 4,078 --------- --------- --------- 41,149 39,366 34,891 Shareholders' equity 52,595 50,760 47,549 --------- --------- --------- Total $ 487,710 $ 469,760 $ 449,254 ========= ========= ========= Net interest income $16,909 $ 16,974 $ 16,282 ======= ======== ======== Net yield on interest- earning assets 3.69% 3.84% 3.84% ==== ==== ====
(1) For purposes of these computations, the daily average loan amounts outstanding are net of unearned income. (2) Included in loan interest income are loan fees of $639,371 in 1998, $811,737 in 1997, and $687,239 in 1996. (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. 7 12 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:
1998 compared to 1997 1997 compared to 1996 Increase (decrease) Increase (decrease) due to (1) due to (1) -------------------------------------- --------------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (Dollars in thousands) Interest income: Loans $ 677 $ (335) $ 342 $ 2,524 $ (234) $ 2,290 Taxable securities 64 (133) (69) (519) (519) Nontaxable securities 56 (129) (73) (88) (57) (145) Federal funds sold 379 (19) 360 (94) 12 (82) Interest-bearing deposits in other banks (5) (5) 8 (41) (33) --------- ---------- ---------- ---------- ---------- ---------- Total interest- earning assets $ 1,171 $ (616) $ 555 $ 1,831 $ (320) $ 1,511 ========= ========== ========== ========== ========== ========== Interest expense: Savings, NOW and Money Market deposit accounts $ (72) $ (86) $ (158) $ 65 $ (40) $ 25 Time deposits 888 (68) 820 617 108 725 Federal Home Loan Bank borrowings (70) (70) (65) (65) Securities sold under repurchase agreements 114 (79) 35 16 104 120 U.S. Treasury demand notes payable (9) 2 (7) 7 7 14 --------- ---------- ---------- ---------- ---------- ---------- Total interest- bearing liabilities $ 851 $ (231) $ 620 $ 640 $ 179 $ 819 ========= ========== ========== ========== ========== ========== Net interest income $ 320 $ (385) $ (65) $ 1,191 $ (499) $ 692 ========= ========== ========== ========== ========== ==========
(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. 8 13 Security Portfolio ------------------ The following table sets forth the carrying amount of securities at December 31.
1998 1997 1996 ---- ---- ---- (Dollars in thousands) AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 70,125 $ 72,286 $ 71,588 Obligations of states and political subdivisions (1) 54,404 34,587 18,456 Other securities, including mortgage-backed securities(1) 47,424 30,344 23,777 ----------- ----------- ----------- Total $ 171,953 $ 137,217 $ 113,821 =========== =========== =========== HELD TO MATURITY U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 1,000 $ 15,898 Obligations of states and political subdivisions (1) $ 355 4,004 21,705 Other securities, including mortgage-backed securities(1) 455 1,733 6,018 ----------- ----------- ----------- Total $ 810 $ 6,737 $ 43,621 =========== =========== ===========
(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, 1998 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 Within but within but within After one year five years ten years ten years -------- ---------- --------- --------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) AVAILABLE FOR SALE (4) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 15,426 5.82% $ 51,597 5.78% $ 3,102 7.22% Obligations of states and political subdivisions (1) 4,816 6.60 27,151 5.79 22,210 5.87 $ 227 5.77% Other securities (2) 3,674 5.56 14,443 5.97 ---------- ------ ---------- ------ --------- ------ --------- ------- Total $ 23,916 5.94% $ 93,191 5.81% $ 25,312 6.03% $ 227 5.77% ========== ====== ========== ====== ========= ====== ========= =======
9 14
Maturing --------------------------------------------------------------------------------------- After one After five Within but within but within After one year five years ten years ten years -------- ---------- --------- --------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- HELD TO MATURITY Obligations of states and political subdivisions (1) $ 123 5.61% $ 232 4.54% Other securities (3) ---------- ---- ---------- ---- Total $ 123 5.61% $ 232 4.54% ========== ==========
(1) Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security. (2) Excludes $20,313,714 of mortgage-backed securities; and $4,450,911 of equity securities, $3,920,300 of Federal Home Loan Bank stock, $587,650 of Federal Reserve stock, and $35,000 of Independent State Bank of Ohio stock which have no stated maturity. (3) Excludes $455,122 of mortgage-backed securities. (4) The weighted average yield has been computed using the historical amortized cost for available-for-sale securities. 10 15 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:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Commercial and agricultural $ 55,650 $ 68,969 $ 61,997 $ 64,016 $ 63,775 Real estate mortgage 178,585 177,778 165,511 146,579 137,629 Real estate construction 3,493 3,923 3,449 1,573 302 Consumer 44,988 41,128 32,241 31,897 28,001 Leases 589 736 883 612 704 Credit card and other 1,426 1,694 1,850 1,117 1,327 ------------ ------------- ------------ ------------ ------------ $ 284,731 $ 294,228 $ 265,931 $ 245,794 $ 231,738 ============ ============= ============ ============ ============
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. These 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 90% 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. Real estate mortgage loans are made predicated on security interest in real property and secured wholly or substantially by that lien on real property. Real estate mortgage loans are primarily loans secured by one- to four-family real estate. At year-end 1998, loans secured by one- to four-family real estate represented 89% of total real estate mortgage loans (93% in 1997 and 91% in 1996). The balance of the loans is mostly for commercial purposes, secured by real estate. Real estate mortgage loans generally pose less risk to the Banks 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 Banks control disbursements. Consumer loans are made to individuals for household, family and other personal expenditures. These include the purchase of vehicles or 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. Credit card loans are made as a convenience to existing customers of the Banks. All such loans are made on an unsecured basis, lines over $5,000 require documentation on the financial strength of the borrower. As unsecured credit, they pose the greatest credit risk to the Banks. 11 16 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, 1998 and 1997, the Banks were contingently liable for $623,000 and $677,000 of letters of credit. In addition, the Banks 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, 1998 and 1997, the Banks had commitments to extend credit in the aggregate amounts of approximately $26,727,000 and $23,477,000. Of these amounts, $23,412,000 and $20,308,000 represented lines of credit and construction loans, and $3,315,000 and $3,169,000 represented credit card commitments. Such amounts represent the portion of total commitments that had not been used by customers as of December 31, 1998 and 1997. Maturities and Sensitivities of Loans to Changes in Interest Rates - ------------------------------------------------------------------ The following table shows the amount of commercial and agricultural loans outstanding as of December 31, 1998, 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 $ 18,059 $ 11,278 $ 26,313 $ 55,650 ============ ============= ============ ============
Interest Sensitivity ------------------------------- Fixed Variable rate rate ---- ---- (Dollars in thousands) Due after one but within five years $ 6,948 $ 4,330 Due after five years 12,741 13,572 ------------ ------------- $ 19,689 $ 17,902 ============ =============
The preceding maturity information is based on contract terms at December 31, 1998 and does not include any possible "rollover" at maturity date. In the normal course of business, the Banks consider and act on the borrower's request 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. 12 17 Risk Elements - ------------- The following table presents information concerning the amount of loans at December 31 that contain certain risk elements:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a nonaccrual basis (1) $ 1,693 $ 1,969 $ 921 $ 1,432 $ 1,736 Loans contractually past due 90 days or more as to principal or interest payments (2) 1,235 1,717 1,308 1,770 564 Loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (3) 305 308 ---------- --------- --------- --------- --------- Total $ 3,233 $ 3,994 $ 2,229 $ 3,202 $ 2,300 ========== ========= ========= ========= ========= Impaired loans at December 31, 1998, 1997, 1996 and 1995 include $1,196,000, $864,000, $1,745,000 and $1,920,000 of loans reported in total nonperforming loans above. $ 4,159 $ 4,435 $ 3,215 $ 3,517 ========== ========= ========= =========
There are no loans as of December 31, 1998, 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. No concentrations of loans exceeded 10% of total loans. (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 real estate 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. The amount of additional interest income that would have been recorded had all nonaccrual loans been current in accordance with their terms is shown below:
1994 ---- Interest income, full accrual $ 144,000 Actual interest income, cash basis 63,000 ----------- Interest not reported $ 81,000 ===========
1998 1997 1996 1995 ---- ---- ---- ---- Interest income on impaired loans, including interest income recognized on a cash basis $ 273,000 $ 227,000 $ 242,000 $ 316,000 =========== =========== ============ ============ Interest income on impaired loans recognized on a cash basis $ 273,000 $ 182,000 $ 141,000 $ 227,000 =========== =========== ============ ============
(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. 13 18 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:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Daily average amount of loans, net of unearned income $ 288,108 $ 280,141 $ 250,719 $ 236,831 $ 219,110 ============ ============= ============= ============= ============== Allowance for possible loan losses at beginning of year $ 4,707 $ 3,935 $ 3,585 $ 3,250 $ 2,880 Loan charge-offs: Commercial and agricultural 134 53 90 95 39 Real estate mortgage 40 70 32 24 47 Real estate construction Consumer 490 387 344 188 158 Leases 3 64 19 Credit card and other 61 47 51 42 27 ------------ ------------- ------------- ------------- -------------- 725 557 520 413 290 Recoveries of loans previously charged off: Commercial and agricultural 32 48 41 161 102 Real estate mortgage 31 2 2 28 6 Real estate construction Consumer 133 132 82 75 103 Leases Credit card and other 27 18 12 27 16 ------------ ------------- ------------- ------------- -------------- 223 200 137 291 227 ------------ ------------- ------------- ------------- -------------- Net charge-offs (1) (502) (357) (383) (122) (63) Additions to allowance charged to expense (2) 362 1,129 733 457 433 ------------ ------------- ------------- ------------- -------------- Allowance for loan losses at end of year $ 4,567 $ 4,707 $ 3,935 $ 3,585 $ 3,250 ============ ============= ============= ============= ============== Allowance for loan losses as a percent of loans at year-end 1.60% 1.60% 1.48% 1.46% 1.40% ======== ======= ======== ======== ======= Ratio of net charge-offs during the year to average loans outstanding .17% .13% .15% .05% .03% ======== ======= ======== ======== =======
(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. Net charge-offs increased in 1998, 1997 and 1996 primarily due to an increase in the write-off of consumer loans. (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 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 loan losses. 14 19 Allocation of Allowance for Loan Losses - --------------------------------------- The following table allocates the allowance for possible 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:
1998 1997 ---- ---- Percentage Percentage of loans to of loans to (Dollars in thousands) Allowance total loans Allowance total loans --------- ----------- --------- ----------- Commercial and agricultural $ 932 19.5% $ 768 23.4% Real estate mortgage 1,202 62.7 1,509 60.4% Real estate construction 1.2 1.3% Consumer 784 15.8 377 14.0% Credit card and other 22 .6 15 .6% Leases 24 .2 29 .3 Unallocated 1,603 2,009 ----------- -------- ----------- ------- $ 4,567 100.0% $ 4,707 100.0% =========== ======== =========== =======
1996 1995 ---- ---- Percentage Percentage of loans to of loans to Allowance total loans Allowance total loans --------- ----------- --------- ----------- Commercial and agricultural $ 1,152 23.3% $ 1,162 26.0% Real estate mortgage 308 62.3 534 59.6 Real estate construction 1.3 .7 Consumer 235 12.1 313 13.0 Credit card and other 11 .7 11 .5 Leases 35 .3 34 .2 Unallocated 2,194 1,531 ----------- -------- ----------- ------- $ 3,935 100.0% $ 3,585 100.0% =========== ======== =========== =======
1994 ---- Percentage of loans to Allowance total loans --------- ----------- Commercial and agricultural $ 459 27.5% Real estate mortgage 396 59.4 Real estate construction .1 Consumer 300 12.1 Credit card and other 67 .6 Leases 28 .3 Unallocated 2,000 ----------- -------- $ 3,250 100.0% =========== ========
15 20 The adequacy of the allowance for loan losses is determined based on an analysis of specific credits which are generally selected based on size and relative risk, portfolio trends, current and historical loss experience, prevailing economic conditions and other relevant factors. While the allocation of the allowance has been based on the results of specific credit analysis and historical charge-off experience, the allowance is available to absorb losses from any segment of the portfolio. The increase in the allowance since 1994 resulted from average total loans increasing 31% from $219,110 in 1994 to $288,108 in 1998 and an increasing trend of consumer loan losses. Deposits - -------- The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated:
1998 1997 1996 ------------------------ -------------------------- -------------------------- Average Average Average Average Average Average balance rate paid balance rate paid balance rate paid ------- --------- ------- --------- ------- --------- (Dollars in thousands) Noninterest-bearing demand deposits $ 36,327 N/A $ 35,239 N/A $ 30,813 N/A Interest-bearing demand deposits 40,798 2.12% 45,533 2.18% 36,372 1.99% Savings, including Money Market deposit accounts 114,282 2.87 112,212 2.95 118,984 2.99 Time deposits 212,081 5.55 196,081 5.58 185,010 5.53 ------------ ------------ ------------ $ 403,488 $ 389,065 $ 371,179 ============ ============ ============
Maturities of certificates of deposits and individual retirement accounts of $100,000 or more outstanding at December 31, 1998 are summarized as follows:
Individual Certificates Retirement of Deposits Accounts Total ----------- -------- ----- (Dollars in thousands) 3 months or less $ 15,566 $ 530 $ 16,096 Over 3 through 6 months 6,951 110 7,061 Over 6 through 12 months 9,544 518 10,062 Over 12 months 3,392 1,463 4,855 ----------- ---------- ----------- $ 35,453 $ 2,621 $ 38,074 =========== ========== ===========
Short-term Borrowings - --------------------- No short-term borrowings were outstanding in 1998, 1997 or 1996 for which the average balance exceeded thirty percent of shareholders' equity at the end of any year. 16 21 Return on Equity and Assets - --------------------------- The ratio of net income to daily average total assets, average shareholders' equity and certain other ratios, are as follows:
December 31, ---------------------------------- 1998 1997 1996 ---- ---- ---- Percentage of net income to: Average total assets 1.18% .95% 1.24% Average shareholders' equity 10.95 8.75 11.71 Dividends declared as a percentage of net income 77.50 79.84 61.06 Percentage of average shareholders' equity to average total assets 10.78 10.81 10.58
ITEM 2. PROPERTIES - ----------------- The Corporation neither owns nor leases any properties. The Citizens Banking Company maintains its main office at 100 East Water Street, Sandusky, Ohio, which is also the office of the Corporation. Citizens also owns and operates three branch banking offices in Perkins Township (Sandusky, Ohio), and a branch banking office in the Ohio communities of Berlin Heights and Huron. The Farmers State Bank 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. The Castalia Banking Company owns its main office located at 208 South Washington Street, Castalia, Ohio. SCC Resources, Inc. owns its processing center located at 1845 Superior Street, Sandusky, Ohio and leases offices in downtown Sandusky, Ohio. R. A. Reynolds Appraisal Services, Inc. leases offices in downtown Sandusky, Ohio. The Corporation has three wholly owned subsidiary banks, a wholly owned data processing company subsidiary and a wholly owned real estate appraisal company subsidiary. ITEM 3. LEGAL PROCEEDINGS - ------------------------- Corporation management is aware of no pending or threatened litigation in which the Corporation or its subsidiaries face 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. 17 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- The Corporation has no established public trading market for its common stock. The brokerage firms of Everen Securities, Merrill Lynch, McDonald & Company and The Ohio Company handle the sale and purchase of the Corporation's stock. However, such firms are not "market makers" of such stock since they do not purchase and hold for investment purposes any such shares. Information below is the range of sale prices as reported by the brokerage firms. 1998 ----
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- $38.81 to $40.00 $38.00 to $28.75 $30.25 to $27.31 $25.00 to $24.31
1997 ----
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- $30.11 to $33.56 $34.31 to $35.50 $35.75 to $37.19 $38.00 to $39.16
The Corporation has no outstanding options or warrants to purchase shares of its common stock or securities convertible into shares of common stock. The number of holders of record of the Corporation's common stock at December 31, 1998 was 886. Dividends per share declared by the Corporation on common stock were as follows:
1998 1997 ---- ---- February $ .15 $ .14 May .15 .14 August .15 .14 November .66 .65 -------- ------- $ 1.11 $ 1.07 ======== =======
18 23 ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- Five-Year Selected Consolidated Financial Data - ---------------------------------------------- The following table sets forth certain selected consolidated financial information of First Citizens Banc Corp and subsidiaries, and is qualified in its entirety by reference to the detailed information and financial statements of the Corporation included in Item 8 hereof. All information presented has been restated for the 1998 acquisition of Farmers by the Corporation.
Year ended December 31, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands, except per share data) Statements of income: Total interest income $ 34,204 $ 33,649 $ 32,138 $ 31,195 $ 29,072 Total interest expense 17,295 16,675 15,856 15,122 12,832 ------------ ------------- ------------ ------------ ------------ Net interest income 16,909 16,974 16,282 16,073 16,240 Provision for loan losses 362 1,129 733 457 433 ------------ ------------- ------------ ------------ ------------ Net interest income after provision for loan losses 16,547 15,845 15,549 15,616 15,807 Security gains (losses) (1) 575 107 59 (223) 38 Other noninterest income 5,651 4,238 3,787 3,172 2,542 ------------ ------------- ------------ ------------ ------------ Total noninterest income 6,226 4,345 3,846 2,949 2,580 Total noninterest expenses 14,679 14,190 11,900 11,573 11,220 ------------ ------------- ------------ ------------ ------------ Income before federal income taxes 8,094 6,000 7,495 6,992 7,167 Federal income tax expense 2,333 1,559 1,927 1,715 1,790 ------------ ------------- ------------ ------------ ------------ Net income $ 5,761 $ 4,441 $ 5,568 $ 5,277 $ 5,377 ============ ============= ============ ============ ============ Per share of common stock (2): Net income $ 1.35 $ 1.04 $ 1.31 $ 1.24 $ 1.26 Dividends 1.11 1.07 1.02 .71 .41 Book value 12.61 12.01 11.42 10.92 9.50 Average common shares outstanding (2) 4,263,401 4,263,401 4,263,401 4,263,401 4,263,401 Year-end balances: Loans, net $ 278,782 $ 287,738 $ 260,023 $ 240,359 $ 226,757 Securities 172,763 143,954 157,442 160,350 158,531 Total assets 508,889 484,118 455,909 446,819 431,059 Deposits 417,899 402,183 375,810 369,241 363,136 Borrowings 30,576 25,643 27,406 26,461 25,973 Shareholders' equity 53,741 51,199 48,688 46,563 40,496 Average balances: Loans, net $ 283,433 $ 276,508 $ 246,943 $ 234,324 $ 217,063 Securities 155,715 151,245 159,830 158,402 170,412 Total assets 487,710 469,760 449,254 433,261 430,710 Deposits 403,488 389,065 371,179 356,213 360,739 Borrowings 26,805 25,808 26,448 25,931 24,891 Shareholders' equity 52,595 50,760 47,549 43,256 39,952
19 24
Year ended December 31, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Selected ratios: Net yield on average interest- earning assets 3.69% 3.84% 3.84% 3.91% 4.00% Return on average total assets 1.18 .95 1.24 1.22 1.25 Return on average shareholders' equity 10.95 8.75 11.71 12.20 13.46 Average shareholders' equity as a percent of average total assets 10.78 10.81 10.58 9.98 9.28 Net loan charge-offs as a percent of average loans .17 .13 .15 .05 .03 Allowance for possible loan losses as a percent of loans at year-end 1.60 1.60 1.48 1.46 1.40 Shareholders' equity as a percent of total year-end assets 10.56 10.58 10.68 10.42 9.39
(1) Other-than-temporary declines in the values of a security of $226,000 was recorded during 1995. Partial recoveries of $25,000, $214,000 and $39,000 were received in 1998, 1997 and 1996. (3) Restated for 1996 stock split and merger with Farmers ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------------------------------------------------------------------- AND RESULTS OF OPERATIONS - AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 ------------------------------------------------------------------------- AND FOR THE YEARS ENDING DECEMBER 31, 1998, 1997 AND 1996 --------------------------------------------------------- General - ------- At December 31, 1998, total assets were $508,889,000 compared to $484,118,000 at December 31, 1997. Net income for the year ended December 31, 1998 totaled $5,761,000 or $1.35 per common share. This is a 29.7% increase compared to 1997 net income of $4,441,000 or $1.04 per common share. Earnings for 1996 were $5,568,000 or $1.31 per common share. 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, 1998 and 1997, and during the three-year period ended December 31, 1998. This discussion should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements, which are included elsewhere in this report. Loans, Deposits, Borrowings, Securities and Stockholders' Equity - ---------------------------------------------------------------- Total loans decreased $8,956,000, or 3.1%, from 1997 to 1998. Commercial and agricultural loans decreased $13,319,000, or 19.3%, from 1997 to a total of $55,650,000. Real estate mortgages increased by $806,000, or 0.5%, from 1997 to 1998 to a total of $178,585,000. Consumer loans experienced the greatest growth, increasing $3,860,000, or 9.4%, over 1997 to a total of $44,988,000. No significant changes were experienced in credit card and other loans and leases. 20 25 After two years of heavy demand, the market for conventional real estate mortgages softened through most of 1998, then began to increase at the end of the year. In 1998, the Banks became involved in selling mortgages on the secondary market. In addition to the $806,000 increase in real estate mortgages in 1998, the Banks sold newly originated mortgages totaling $9,463,000. In general, fixed-rate real estate loans are being sold in order to reduce interest rate risk. Many commercial loans and lines of credit are cyclical, depending on the type of business. However, additional calling and marketing efforts have been made in the commercial loan area to increase the Corporation's share of the commercial market. Increased consumer demand coupled with the Corporation's increased competitiveness on rates for new cars and home improvement lending resulted in consumer lending growth of $3,860,000, or 9.4%, from 1997 to 1998 resulting in total consumer loans of $44,988,000 at December 31, 1998. Average deposit balances for 1998 were $403,488,000, compared to $389,065,000 for 1997, an increase of $14,423,000, or 3.7%. The deposit growth is mainly attributed to competitive pricing of interest bearing deposits. Deposit growth has been limited as a result of increased competition for deposit dollars from traditional and nontraditional financial service providers and increasingly sophisticated consumers utilizing alternatives to traditional banking deposits. Noninterest-bearing deposits averaged $36,327,000 for 1998 compared to $35,239,000 for 1997, increasing $1,088,000, or 3.1%. Savings, NOW, and MMIA accounts averaged $155,080,000 for 1998 compared to $157,745,000 for 1997. Average time deposits increased $16,000,000 to a total average balance of $212,081,000 for 1998. Borrowings from the Federal Home Loan Bank of Cincinnati decreased from $14,488,000 at December 31, 1997 to $13,235,000 at December 31, 1998. This decrease of $1,253,000 was a result of scheduled paydowns on previous advances. The Corporation had no new advances from the Federal Home Loan Bank in 1998. The Banks offer repurchase agreements in the form of sweep accounts to commercial checking account customers. At December 31, 1998, total repurchase agreements in the form of sweep accounts totaled $16,370,000. This compares to $7,779,000 at December 31, 1997. United States Treasury Notes maintained under the Banks' control are pledged as collateral for the repurchase agreements. Securities increased $28,809,000, or 20.0%, from $143,954,000 on December 31, 1997 to $172,763,000 on December 31, 1998. Municipal securities increased $16,168,000 or 41.9% from 1997 to 1998. Other securities increased $15,803,000 or 49.3% from 1997 to 1998. The growth in securities is an effort to try to maximize yield on interest earning assets. The Corporation attempts to limit the accumulation of excess fed funds sold, therefore, in periods of increased deposit growth and slow loan demand, additional securities are purchased. Securities held to maturity at December 31, 1998, had unrealized gains of approximately $14,000 and unrealized losses of less than $1,000. Since management intends to hold this portion of the portfolio to maturity, the unrealized gains and losses have no impact on operations of the Corporation. Securities available for sale had an estimated fair value at December 31, 1998 of $171,953,000. This fair value includes unrealized gains of approximately $5,719,000 and unrealized losses of approximately $155,000. Equity securities consisting of common stock accounted for $2,583,000 or 45.1% of the total net unrealized gains on securities. The net effect of the unrealized gains and losses on securities available for sale, net of deferred taxes, was a positive adjustment to shareholders' equity of $3,672,000. 21 26 Mortgage-backed securities totaled $20,769,000 at December 31, 1998 and none are considered unusual or "high risk" securities as defined by regulating authorities. Of this total, $6,292,000 are pass-through securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC); $14,430,000 are CMOs and REMICs issued by FNMA and FHLMC; and $47,000 are privately issued and are collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA. The average interest rate of the portfolio at December 31, 1998 was 6.21%. Also, 1.04% of the December 31, 1998 portfolio, or $217,000, are floating rate securities adjusting at least quarterly. The average maturity at December 31, 1998 was approximately 1.7 years. The Corporation has not invested in any derivative securities such as step-ups, multi-steps or dual index floaters. Total shareholders' equity increased $2,541,000, or 5.0%, during 1998 to $53,741,000. The ratio of total shareholders' equity to total assets was 10.6% in 1998 and in 1997 Net Interest Income - ------------------- Net interest income for 1998 was $16,909,000, a decrease of $65,000, or 0.4%, from 1997. Net interest income was $16,974,000 in 1997, an increase of $692,000, or 4.3%, over 1996. The change in the net interest income for 1998 was the net result of an increase in interest income of $555,000 and an increase in interest expense of $620,000. Total interest income increased $555,000, or 1.6% for 1998 compared to an increase of $1,511,000, or 4.7%, for 1997. This increase in the growth of interest income can be attributed to an increase in average interest earning assets from $443,231,000 to $462,584,000, or 4.4% between 1997 and 1998. The increase in volume of average interest earning assets offset a decrease in the average yield on earning assets of sixteen basis points, from 7.62% in 1997 to 7.46% in 1998. Total interest expense increased $620,000, or 3.7%, for 1998 compared to an increase of $819,000, or 5.2%, in 1997. The increase in interest expense can be attributed to an increase in average interest-bearing liabilities from $379,634,000 to $393,966,000, or $14,332,000 from 1997 to 1998. Interest expense for 1997 compared to 1996 increased due to an increase in average interest bearing liabilities from $366,814,000 to $379,634,000, or $12,820,000 and an increase in the rate paid on interest bearing liabilities of eight basis points. 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" for further analysis of the impact of changes in interest-bearing assets and liabilities on the Corporation's net interest income. 22 27 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 for the three-year period ended December 31, 1998:
As of and for the year ended December 31, ----------------------------------------- 1998 1997 1996 ---- ---- ---- Net loan charge-offs $ 502,000 $ 357,000 $ 383,000 Provision for loan losses charged to expense 362,000 1,129,000 733,000 Net loan charge-offs as a percent of average outstanding loans .17% .13% .15% Allowance for loan losses $ 4,567,000 $ 4,707,000 $ 3,935,000 Allowance for loan losses as a percent of year-end outstanding loans 1.60 1.60% 1.48% Allowance for loan losses as a percent of impaired loans 109.81 106.13 122.40 Impaired loans $ 4,159,000 $ 4,435,000 $ 3,215,000 Impaired loans as a percent of gross year-end loans 1.46% 1.51% 1.21% Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans 1.03 1.25 .84
The Corporation's policy is to maintain the allowance for loan losses at a level to provide for probable 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 declined by $767,000 in 1998 to a total of $362,000 compared to a provision of $1,129,000 in 1997 and $773,000 in 1996. The larger provisions in prior years were primarily related to Farmers. In both 1996 and 1997, Farmers experienced significant growth in the balance of loans outstanding. During this period, Farmers operated without the benefit of a formal loan policy and credit underwriting decisions and loan collateral perfection was not always well documented. As a part of the Corporation's due diligence procedures related to the acquisition of Farmers and also as a part of regulatory examinations conducted at Farmers concerns were raised regarding certain lending procedures. Farmers management responded by retaining an outside consultant to assist in reviewing and risk-grading a significant volume of new loan originations. Based on the results of this evaluation Farmers increased its provision for loan losses. Since that time management of Farmers has implemented a new loan policy that provides credit underwriting criteria and has aggressively worked to improve the loan file documentation and the Banks collateral position for many of the loans originated in 1996 and 1997. As a result of these improvement efforts the 1998 provision for loan losses declined. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of collateral if the loan is collateral dependent. A portion of allowance for loan losses is allocated to impaired loans. 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 23 28 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 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 $6,226,000 in 1998 compared to $4,345,000 in 1997 and $3,846,000 in 1996. Income from the data processing and computer services division totaled $3,174,000 for 1998, a 44.9% increase over 1997 income of $2,191,000. Income from data processing and computer services totaled $1,640,000 for 1998, a decrease from 1997 income of $2,191,000. The loss in revenue is attributed to discontinued PC sales and service to non-bank customers in 1998. Income for SCC Resources during 1996 was $2,092,000. The Corporation recognized a gain of $1,534,000 from the sale of SCC Resources' data processing contracts in 1998, which offset the decreased data processing fees. Service charges on deposit accounts totaled $958,000 in 1998, an increase of $34,000, or 3.6%, over 1997 income of $924,000. This compares to service charge income of $855,000 in 1996. Additional services and account features have been introduced to generate increased noninterest income from the deposit accounts of the Banks. In addition, service charges are reviewed annually to ensure reasonable compensation for the services provided. 1997 also included service charges on the accounts acquired from EST National Bank. Other noninterest income totaled $1,284,000 in 1998 compared to $1,062,000 in 1997 and $841,000 in 1996. Increases in other noninterest income are a result of additional products and services introduced to generate noninterest income. 1998 noninterest income increased $222,000, or 20.9%, from 1997. The increase is mainly attributed to three areas: Brokerage fees, ATM fee income and Credit Card Merchant fees. Brokerage fees increased $29,000 in 1998 due to increased volume. The Corporation added two additional ATMs in 1998. The additional volume of the new ATMs, combined with an ATM surcharge originally instituted in January of 1997, led to an increase in fee income of $26,000. Also, in 1998, fees charged to credit card merchants were increased. The increase in fees, coupled with an increase in the number of credit card merchants, led to an increase in fee income of $66,000. For 1998, the Corporation received $25,000 in payments against a previously written off investment security. As a result of the filing of bankruptcy by the Towers Financial Corporation (parent company) in 1993, the Corporation determined that an other than temporary decline in the value of Tower Healthcare Receivables Corp. bonds had occurred. Accordingly, a $700,000 writedown in the cost of those bonds was made in 1993, and a writedown of $226,000 was made in 1995. The carrying value of these securities was $ -0- at December 31, 1998 and 1997. In addition, the Corporation recognized capital gains of $542,000 from the sale of equity securities at Farmers during 1998. The Corporation decided to take advantage of significant increases in the market values, by selling a portion of the portfolio. At December 31, 1998 the fair market value of Farmers' equity portfolio totaled $4,452,000 with an amortized cost of $1,868,000. 24 29 Noninterest Expense - ------------------- Noninterest expense totaled $14,679,000 in 1998, an increase of $489,000, or 3.3%, over 1997. Noninterest expense increased $2,290,000, or 19.2%, in 1997 as compared to 1996. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense. Salaries, wages and benefits totaled $7,167,000 in 1998, compared to $7,074,000 in 1997 and $6,383,000 in 1996. Salary increases totaled $254,000 in 1998 compared to 1997, and $430,000 in 1997 compared to 1996. Decreases in benefits totaled $161,000 in 1998 compared to 1997. Benefits increased $261,000 in 1997 compared to 1996. The increase for 1997 relates primarily to employees of the two branches purchased in early 1997. Net occupancy expense totaled $933,000 in 1998, compared to $661,000 in 1997 and $629,000 in 1996. The increase in occupancy expense in 1997 was also due to the acquisition of two branches from EST First Merit. Equipment expense totaled $784,000 in 1998, compared to $861,000 in 1997 and $704,000 in 1996. Increases in 1997 of $157,000 are attributed to additional equipment at the two acquired branches, as well as additional image processing equipment at SCC Resources. The increase in occupancy expense and the decrease in equipment expense can be attributed to two factors. First, in 1998, the Corporation reclassified certain assets from equipment to building. Also in 1998, Farmers made adjustments to their building depreciation and equipment depreciation to more accurately reflect the life of these assets. FDIC premiums totaled $161,000 in 1998, compared to $48,000 in 1997 and $5,000 in 1996. The increase in FDIC premiums of $113,000 from 1997 to 1998 is a result of a change made by the FDIC in the rating of Farmers for a six-month period in 1998. The increase in FDIC premiums of $43,000 from 1996 to 1997 is a result of changes in the assessment calculation in the Deposit Insurance Fund Act of 1996 as well as higher deposit balances. State of Ohio Franchise taxes were $657,000 in 1998, compared to $631,000 in 1997 and $594,000 in 1996. The franchise taxes are based on the capital positions of the Banks. The current dividend policy of the Banks, combined with a lack of growth, results in a relatively constant capital position of the Banks and hence little changes in the amount of the franchise tax. Professional fees represent legal, audit and outside consulting fees paid by the Corporation. Professional fees totaled $911,000 in 1998, compared to $1,110,000 in 1997 and $340,000 in 1996. Increases in these fees represent the additional consulting costs involved in the Citizens' acquisition of the EST First Merit branches in January, 1997, and the acquisition of The Farmers State Bank of New Washington, completed in April of 1998. Amortization of intangible assets remained almost constant from 1997 to 1998 at increasing from $326,000 to $336,000. Amortization increased from 1996 to 1997 as a result of the deposit premium paid to EST National Bank in the acquisition of two branches. The premium paid was $1,494,000 and is being amortized on a straight-line method over 12 years. Other operating expenses totaled $3,729,000 in 1998 compared to $3,479,000 in 1997 and $3,044,000 in 1996. Increases represent increased expenditures in advertising, marketing, and employee education and training in customer service and cross selling. 25 30 Income Tax Expense - ------------------ Income before federal income taxes amounted to $8,094,000 in 1998, $5,999,000 in 1997 and $7,495,000 in 1996. The Corporation's effective income tax rate was 28.8% in 1998 compared to 26.0% in 1997 and 25.7% in 1996. The effective tax rate has increased since 1996 due to the Banks having less tax-exempt income on state and municipal securities and political subdivision loans. Liquidity and Capital Resources - ------------------------------- The Banks maintain a conservative liquidity position. Liquidity is evidenced by 1998 year-end balances of $19,950,000 in federal funds sold and by approximately $171,953,000 in securities available for sale. 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 provided by operations for 1998 was $3,586,000. This includes earnings of $5,761,000 plus net adjustments of $2,175,000 to reconcile net earnings to net cash provided by operations. Cash used in investing activities was $21,023,000 in 1998 which includes net principal repayments on loans and purchases of securities available for sale. Cash from financing activities for 1998 totaled $16,185,000. This includes the net change in deposits, repayments of FHLB borrowings and the payments of dividends. Cash used by investing activities exceeded cash generated by operating activities and financing activities by $1,252,000, which resulted in an decrease in cash and due from banks to $16,444,000. Future loan demand of the Banks can be funded by proceeds from payments on existing loans, the maturity of securities, the sale of securities classified as available for sale and the use of excess funds invested in the federal funds market. Additional sources of funds may also come from borrowing in the federal funds market and/or borrowing from the Federal Home Loan Bank. On a separate entity basis, the Corporation's only 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 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 1998, Castalia paid a special $2,500,000 dividend to The Corporation. This dividend was paid with the approval of the State of Ohio Division of Financial Institutions and The Federal Reserve Bank. Also in 1998, Farmers paid a special $2,000,000 dividend to the Corporation. Farmers special dividend was not subject to any approval because payment of such did not fall outside of the requirements described above. The purpose of these special dividends was to accumulate cash at the Corporation to be used for general corporate purposes including the possible repurchase of its common stock. The amount of unrestricted dividends available to be paid by the Banks to the Corporation was approximately $2,414,000 at December 31, 1998. 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 dividends at their current level. Capital Adequacy - ---------------- The Corporation's policy is, and always has been, to maintain its capital levels above the minimum 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 tier II capital includes the allowance for possible loan losses. The definition of 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% of 26 31 risk adjusted assets, with at least 4% being in tier I capital. The Corporation's ratios as of December 31, 1998 and 1997 were 17.0% and 19.1% respectively for total capital, and 15.7% and 17.2% respectively for tier I capital. 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% of total average assets for high rated entities such as the Corporation. The Corporation's leverage ratio was 9.5% at December 31, 1998 and 1997. On April 28, 1998, the Corporation completed its agreement to acquire The Farmers State Bank of New Washington, Ohio. This was accomplished by issuing 6.06 shares of the Corporation's common stock for each of the 200,000 shares of Farmers outstanding. The transaction was accounted for using the pooling of interests method of accounting. See Note 16 of the consolidated financial statements for further information regarding the merger. 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 disclosed the estimated fair value of its financial instruments at December 31, 1998 and 1997 in Note 15 to the consolidated financial statements. The fair value of the Corporation's financial instruments generally increased relative to their carrying values during 1998 compared to 1997 as a result of a decline in the general level of interest rates . The fair value of loans at December 31, 1998 was 101.3% of the carrying value compared to 100.2% at December 31, 1997. The fair value of deposits at December 31, 1998 was 99.2% of the carrying value, compared to 100.3% at December 31, 1997. Year 2000 - --------- The Corporation has been aware of the potential impact of the Year 2000 on data processing and technology. The Corporation's data processing subsidiary, SCC, is totally dependent on its ability to process for the Corporation's subsidiary banks and other banking customers. SCC developed a Year 2000 plan, which was introduced in May 1997. The Year 2000 Plan is broken into 5 separate parts. Each part is important to the end result of being 2000 compliant. Upon completion of the plan all items will have been examined and corrected (or documented as an exception). The phases are as follows: awareness, assessment, renovation, validation, and implementation. 27 32 The awareness phase involves identifying the Year 2000 problem, gaining executive level support for recognizing the importance of the problem, and developing a team and strategy for handling the problem. First Citizens Banc Corp has appointed an Executive Y2K Committee. Each of the Banks; Citizens, Castalia and Farmers, have named Year 2000 coordinators. To help inform our customer and our community of the Year 2000 issue we have sent brochures out to our customers and held information seminars that were open to the public. The awareness phase is an ongoing phase, as all the phases are. We continue to keep the board informed of the banks progress and continued to inform our customers with mailers in their checking statements and notices in our branch lobbies. The assessment phase involves identifying the size and complexity of the problem as it relates to First Citizens Banc Corp, including identifying all software, hardware, systems, and internal and external interdependencies that are affected by the century change. From the regulatory perspective, this also includes identifying the resources needed the time frames, and the processes necessary to handle the Year 2000 problem. Assessment lists have been completed listing those items that are Year 2000 susceptible, prioritizing them as to their importance. Maintaining this list and contact with all necessary vendors is an ongoing process. In addition to the impact on its own systems by the Year 2000, the Banks have recognized that borrowing customers could be impacted by the Year 2000 and that impact could impair the customers' ability to meet their obligations. Questionnaires were sent out to loan and deposit customers to help address our credit and liquidity risks. As a part of the assessment phase, we sent questionnaires to our customers and analyzed the potential risk on the deposit and loan portfolios. The Corporation has also developed a plan to increase liquidity to prepare for a potential cash out flow at the end of the year. The Corporation will continue to monitor Year 2000 risks throughout 1999. The renovation phase involves programming or reprogramming systems, hardware and software upgrades, system replacements, and related changes that we will have to make to prepare all systems for the turn of the century. This includes ongoing contact with any third-party services or software providers that the bank may be using. First Citizens Banc Corp is having all incompliant hardware and software either updated or replaced. As part of the renovation phase, we are updating our computers and software so they will be ready for the Year 2000. A completion date of June, 1999 is set for all software to be compliant. The validation phase is essentially the testing phase to determine that all upgrades or reprogrammed systems, as well as other systems that are believed to be Year 2000 compliant, are truly ready for the date change to January 1, 2000. First Citizens Banc Corp is developing a test plan to verify that all hardware and software in use will be ready for the Year 2000. Testing of the Fannie Mae system was conducted February 1999 with 90% of the test passing. A third party evaluation of the proxy testing results of the jack Henry 20/20 system was received in February 1999. Jack Henry is a Year 2000 compliant system. Conversion to the Jack Henry 20/20 system from our current core products system will begin in March, 1999. The implementation phase involves certification that existing systems are ready to go, and that any new systems or changes to existing systems are compliant with the turn of the century requirements. Active involvement of all departments and teams will monitor new and existing items to insure that a smooth transition into the Year 2000 and beyond is achieved. As systems are tested to be Year 2000 compliant or new compliant software is purchased it is implemented into the current system. In anticipation of potential Year 2000 problems, the Corporation has addressed both preventative measures and corrective actions. Management has set a budget of $281,100 for Year 2000 related issues. Year-to-date through December 31, 1998, $176,900 has been spent on solutions for possible problems. In addition to the dollars spent, specific contingency plans are in place for all mission critical items. Mission critical items are the programs that must be in place in order for the Corporation to continue operations with minimal business disruptions. The contingency plans vary widely and range from 28 33 manual report preparation to telephone authorization of funds transfer to reliance on vendor's contingencies where no other alternative exists ITEM 7a. 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 institutions 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 either have 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 29 34 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 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, 1998, based on the information and assumptions set forth in the notes. The Corporation believes that the assumptions utilized, which are based on statistical data provided by a federal regulatory agency in the Corporation's market area, are reasonable. The Corporation had no derivative financial instruments or trading portfolio as of December 31, 1998. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding as set forth in the notes. 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. 30 35 On-Balance-Sheet Financial Instruments (Dollars in thousands)
1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Interest-earning assets: Loans receivable(1)(2) Fixed rate $ 24,549 $ 17,327 $ 14,705 $ 14,533 $ 8,895 $ 57,471 $ 137,480 $ 137,825 Avg. int. rate 8.79% 8.74% 8.49% 8.21% 8.37% 7.83% 8.26% Adj. rate $ 8,524 $ 3,937 $ 1,157 $ 1,530 $ 1,656 $130,447 $ 147,251 $ 150,477 Avg. int. rate 8.61% 8.27% 8.10% 8.11% 7.89% 7.59% 7.68% Mortgage-backed securities(3) Fixed rate $ 197 $ 1,959 $ 658 $ 17,743 $ 20,557 $ 20,563 Avg. int. rate% 6.63% 5.50% 6.00% 6.03% 5.27% Adj. rate $ 217 $ 217 $ 217 Avg. int. rate 6.29% 6.29% Securities(4) $ 27,140 $ 24,911 $ 26,078 $ 19,298 $ 17,608 $ 36,954 $ 151,989 $ 151,997 Avg. int. rate 6.39% 6.33% 6.33% 6.29% 5.51% 5.44% 6.02% Fed funds sold $ 19,950 $ 19,950 $ 19,950 Avg. int. rate 5.40% 5.40% Total $ 80,360 $ 46,175 $ 41,940 $ 37,320 $ 28,817 $242,832 $ 477,444 $ 481,029 Interest-bearing liabilities: Interest-bearing deposits and escrows(5) $ 213,024 $ 58,972 $ 42,072 $ 20,189 $ 744 $ 44,324 $ 379,325 $ 376,038 Avg. int. rate 4.63% 3.95% 3.31% 3.80% 5.81% 1.77% 4.00% Borrowings $ 28,618 $ 559 $ 591 $ 625 $ 183 $ 30,576 $ 30,576 Avg. int. rate 4.73% 5.74% 5.81% 6.15% 7.46% 4.81% Total $ 241,642 $ 59,531 $ 42,663 $ 20,814 $ 927 $ 44,324 $ 409,901 $ 406,614
Market Risk Disclosure Footnotes (1) Net of undisbursed loan proceeds and does not include net deferred loan fees or allowance for loan losses. (2) Substantially all of the Corporation's adjustable rate loans reprice on an annual basis based on either the National Average Contract Rate for Major Lenders on Previously Occupied Homes or Federal National Mortgage Association's 6/2 rate capped one-year adjustable rate. (3) Substantially all of the Corporation's adjustable rate mortgage-backed securities reprice on a monthly basis based on changes in the three-month LIBOR index. (4) Totals include the Corporation's investment in Federal Home Loan Bank stock. (5) For passbook and statement savings accounts, assumes an annual decay rate of 31% for year one, 29% for year two, 23% for year three and 17% for year four. 1997 information has not been presented because it is cost prohibitive to restate for the values of the pooled affiliate. 31 36 [CROWE CHIZEK LOGO] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- 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, 1998 and 1997, 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, 1998. 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 generally accepted auditing standards. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Columbus, Ohio January 29, 1999 32 37 FIRST CITIZENS BANC CORP CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 - --------------------------------------------------------------------------------
1998 1997 ---- ---- ASSETS Cash and due from financial institutions $ 16,443,613 $ 17,695,634 Federal funds sold 19,950,000 17,600,000 Interest-bearing deposits 248,282 347,282 Securities available for sale 171,952,700 137,217,076 Securities held to maturity (Estimated fair values of $823,632 in 1998 and $6,796,389 in 1997) 810,122 6,737,206 Loans held for sale 2,273,509 690,998 Loans, net 278,782,075 287,738,058 Premises and equipment, net 7,363,513 7,562,988 Accrued interest receivable 3,717,568 3,351,947 Intangible assets 2,533,963 2,870,011 Other assets 4,813,518 2,307,172 ----------------- ----------------- Total assets $ 508,888,863 $ 484,118,372 ================= ================= LIABILITIES Deposits Noninterest bearing $ 38,574,055 $ 36,836,226 Interest bearing 379,325,190 365,347,015 ----------------- ----------------- Total deposits 417,899,245 402,183,241 Federal Home Loan Bank advances 13,235,165 14,488,034 Securities sold under repurchase agreements 16,369,681 7,779,346 U.S. Treasury interest-bearing demand note payable 971,558 3,375,458 Accrued expenses and other liabilities 6,672,283 5,092,858 ----------------- ----------------- Total liabilities 455,147,932 432,918,937 ----------------- ----------------- SHAREHOLDERS' EQUITY Common stock, no par value, 10,000,000 shares authorized, 4,263,401 shares issued and outstanding 23,257,520 23,257,520 Retained earnings 26,811,264 25,514,853 Accumulated other comprehensive income 3,672,147 2,427,062 ----------------- ----------------- Total shareholders' equity 53,740,931 51,199,435 ----------------- ----------------- Total liabilities and shareholders' equity $ 508,888,863 $ 484,118,372 ================= =================
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 33 38 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
1998 1997 1996 ---- ---- ---- INTEREST AND DIVIDEND INCOME Loans, including fees $ 24,357,161 $ 24,015,061 $ 21,725,418 Securities: taxable 6,751,399 6,820,602 7,339,820 tax-exempt 2,093,206 2,166,143 2,310,941 Federal funds sold 943,431 582,845 664,401 Other 58,739 64,361 97,220 --------------- --------------- ---------------- 34,203,936 33,649,012 32,137,800 INTEREST EXPENSE Deposits 15,909,096 15,247,451 14,497,410 Federal Home Loan Bank advances 797,265 866,482 931,866 Other 588,874 561,067 426,288 --------------- --------------- ---------------- 17,295,235 16,675,000 15,855,564 --------------- --------------- ---------------- NET INTEREST INCOME 16,908,701 16,974,012 16,282,236 Provision for loan losses 361,886 1,129,468 733,350 --------------- --------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,546,815 15,844,544 15,548,886 --------------- --------------- ---------------- NONINTEREST INCOME Computer center data processing fees 1,640,275 2,191,004 2,091,847 Gain on sale of data processing contracts 1,534,120 Service charges 957,573 923,957 854,551 Net gains on sale of securities 574,981 107,057 58,771 Net gains on sale of loans 234,973 61,317 Other 1,284,273 1,062,015 841,154 --------------- --------------- ---------------- 6,226,195 4,345,350 3,846,323 NONINTEREST EXPENSE Salaries, wages and benefits 7,167,285 7,074,025 6,383,207 Net occupancy expense 933,377 661,157 628,562 Equipment expense 784,206 860,983 703,744 Federal deposit insurance premiums 160,812 47,950 5,000 State franchise tax 657,283 631,061 593,917 Professional services 910,867 1,109,808 339,827 Amortization of intangible assets 336,048 326,048 201,528 Other operating expenses 3,729,109 3,479,379 3,044,268 --------------- --------------- ---------------- 14,678,987 14,190,411 11,900,053 --------------- --------------- ---------------- Income before taxes 8,094,023 5,999,483 7,495,156 Income tax expense 2,333,356 1,558,939 1,926,918 --------------- --------------- --------------- NET INCOME $ 5,760,667 $ 4,440,544 $ 5,568,238 --------------- --------------- --------------- EARNINGS PER COMMON SHARE $ 1.35 $ 1.04 $ 1.31 =============== =============== ===============
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 34 39 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
Unrealized Gain on Securities Total Common Stock Retained Available Shareholders' Shares Amount Earnings for Sale Equity ------ ------ -------- -------- ------ Balance, January 1, 1996 1,974,773 $ 23,257,520 $ 22,451,345 $ 853,740 $ 46,562,605 Comprehensive income: Net income 5,568,238 5,568,238 Change in unrealized gain on securities available for sale (42,341) (42,341) ---------------- Total 5,525,897 Cash dividends ($1.02 per share) (3,120,164) (3,120,164) Cash dividends declared Farmers, prior to merger (280,000) (280,000) Four-for-one stock split effected in the form of a 300% stock dividend 2,288,628 ----------- -------------- -------------- ----------- --------------- Balance, December 31, 1996 4,263,401 23,257,520 24,619,419 811,399 48,688,338 Comprehensive income: Net income 4,440,544 4,440,544 Change in unrealized gain on securities available for sale 1,615,663 1,615,663 --------------- Total 6,056,207 Cash dividends ($1.07 per share) (3,265,110) (3,265,110) Cash dividends declared Farmers, prior to merger (280,000) (280,000) ----------- -------------- -------------- ----------- --------------- Balance, December 31, 1997 4,263,401 23,257,520 25,514,853 2,427,062 51,199,435 Comprehensive income: Net income 5,760,667 5,760,667 Change in unrealized gain on securities available for sale 1,245,085 1,245,085 --------------- Total 7,005,752 Cash paid for fractional shares (3,451) (3,451) Cash dividends ($1.11 per share) (4,368,805) (4,368,805) Cash dividends declared Farmers, prior to merger (92,000) (92,000) ----------- -------------- -------------- ----------- --------------- Balance, December 31, 1998 4,263,401 $ 23,257,520 $ 26,811,264 $ 3,672,147 $ 53,740,931 =========== ============== ============== =========== ===============
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 35 40 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,760,667 $ 4,440,544 $ 5,568,238 Adjustments to reconcile net income to net cash from operating activities Security amortization, net of accretion 371,550 156,086 151,113 Depreciation 577,239 886,933 722,330 Write-down of obsolete property and equipment 437,501 Amortization of intangible assets 336,048 336,065 213,372 Security (gains) losses (574,981) 106,629 (19,772) Provision for loan losses 361,886 1,129,468 733,350 Loans originated for sale (10,921,465) (2,892,410) Proceeds from sale of loans 9,463,171 2,262,728 Gain on sale of loans (234,973) (61,317) Amortization of mortgage servicing rights 11,405 Deferred income taxes 726,990 (257,542) 7,028 Change in Net deferred loan fees (162,502) (61,927) 30,874 Accrued interest receivable (365,621) (107,378) 416,771 Other assets (2,411,988) (314,271) (42,941) Accrued interest, taxes and other expenses 211,028 402,027 (681,604) --------------- -------------- --------------- Net cash from operating activities 3,585,955 6,025,635 7,098,759 --------------- -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Securities held to maturity Proceeds from maturities and repayments 5,919,787 5,557,254 8,311,273 Purchases (4,904,789) (1,406,858) Sales 1,329,289 Securities available for sale Proceeds from calls, maturities and repayments 51,168,709 22,940,951 18,155,274 Purchases (85,220,103) (19,676,447) (22,507,163) Sales 1,412,990 10,427,598 158,857 Loan originations, net of loan payments 8,761,592 (28,782,920) (20,428,556) Proceeds from the sale of property and equipment 32,350 328,094 Property and equipment expenditures (815,265) (550,268) (1,055,402) Change in federal funds sold (2,350,000) (8,179,000) 294,000 Maturity on interest bearing deposit 99,000 686,000 588,749 --------------- -------------- --------------- Net cash from investing activities (21,023,290) (21,119,982) (17,561,732) --------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Branch acquisition 12,153,945 Net change in deposits 15,716,004 11,797,095 6,568,364 Repayment of Federal Home Loan Bank borrowings (1,252,869) (1,183,652) (1,118,267) Net change in securities sold under repurchase agreements 8,590,335 (2,177,686) 822,982 Cash dividends paid (4,464,256) (3,545,110) (3,360,164) Change in U.S. Treasury interest-bearing notes payable (2,403,900) 1,598,957 1,238,721 --------------- -------------- --------------- Net cash from financing activities 16,185,314 18,643,549 4,151,636 --------------- -------------- --------------- Net change in cash and cash equivalents (1,252,021) 3,549,202 (6,311,337) Cash and cash equivalents at beginning of year 17,695,634 14,146,432 20,457,769 --------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,443,613 $ 17,695,634 $ 14,146,432 =============== ============== ===============
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 36 41 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- 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 (Corporation) and its wholly-owned subsidiaries, The Citizens Banking Company (Citizens), The Farmers State Bank (Farmers), The Castalia Banking Company (Castalia), SCC Resources, Inc. (SCC), and R. A. Reynolds Appraisal Services, Inc. (Reynolds). All significant intercompany balances and transactions have been eliminated in consolidation. As more fully discussed in a separate note, the Corporation acquired Farmers in a business combination which was consummated on April 28, 1998. The acquisition was accounted for as a pooling of interests and prior year amounts have been restated to include Farmers for all periods presented NATURE OF OPERATIONS: The Corporation provides financial services through its offices in the Ohio counties of Erie, Crawford, Marion 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 which potentially represent concentrations of credit risk include deposit accounts in other financial institutions. In 1998, SCC provided data processing for 12 financial institutions in addition to the three subsidiary banks. SCC accounted for 7.9% 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% of total Corporation revenues. Management considers the Company to operate primarily in one segment, banking. USE OF ESTIMATES: To prepare financial statements in conformity with generally accepted accounting principles, 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: For purposes of reporting cash flows, the Corporation considers "cash and cash equivalents" to include cash on hand and demand deposits with financial institutions. The Corporation reports net cash flows for federal funds sold, customer loan transactions, deposit transactions, securities sold under agreements to repurchase and other short-term borrowings. For the years ended December 31, 1998, 1997 and 1996, the Corporation paid interest of $17,527,000, $16,594,000 and $15,980,000, and income taxes of $1,415,000, $2,034,000 and $1,997,000. SECURITIES: 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. Securities are classified as available for sale when they might be sold before maturity. 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 stock are carried at cost. - -------------------------------------------------------------------------------- (Continued) 37 42 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days (180 days for residential mortgages). Payments received on such loans are reported as principal reductions. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for probable 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, known and inherent 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. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. 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. PREMISES AND EQUIPMENT: Premises 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. SERVICING RIGHTS: Servicing rights are recognized as assets for the allocated value of retained serving 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. Any impairment of a grouping is reported as a valuation allowance. INTANGIBLE ASSETS: Amounts as reported on the consolidated balance sheets represent goodwill that arose from the purchase of Castalia in 1990 and core deposit intangibles that arose from the purchase of two branch offices and assumption of related deposits in 1997. Goodwill is being amortized on the straight-line method over 15 years and core deposits are being amortized on the straight-line method over 12 years. The Corporation assesses the recoverability of intangible assets by determining whether the balance can be recovered through undiscounted future operating cash flows of Castalia and the branches. At December 31, 1998, the remaining balances of goodwill and core deposit intangibles totaled $1,276,000 and $1,258,000, respectively. - -------------------------------------------------------------------------------- (Continued) 38 43 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) OTHER REAL ESTATE: Real estate owned, other than that used in the normal course of business, is included in other assets at fair value less estimated costs to sell. 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 charges to income. Other real estate owned included in other assets totaled approximately $456,000 at December 31, 1998 and $108,000 at December 31, 1997. LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. INCOME TAXES: The Corporation follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded at enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as "temporary differences." A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. RETIREMENT PLANS: The Corporation and its subsidiaries sponsor a noncontributory defined benefit retirement plan for all full-time employees who have attained the age of 21 and have a minimum of six months of service. Accrued pension costs are funded to the extent deductible for federal income tax purposes. The Corporation and its subsidiaries also provide a savings and retirement 401(k) plan for all full-time eligible employees who elect to participate. The decision to make contributions to the plan, which represent 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. FINANCIAL INSTRUMENTS: Financial instruments include credit instruments, such as commitments to make loans and standby 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. 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 which are also recognized as a separate component of equity. The accounting standard that requires reporting comprehensive income first applies for 1998, with prior information restated to be comparable. 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. DIVIDEND RESTRICTION: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to the Corporation or by the Corporation to shareholders. - -------------------------------------------------------------------------------- (Continued) 39 44 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- 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 SHARE: A 4-for-1 stock split effected in the form of a 300% stock dividend was paid to shareholders of record as of April 16, 1996. Earnings per share is computed based on the weighted average number of shares of capital stock outstanding during each year as restated for the stock split, which totaled 4,263,401 shares in 1998, 1997 and 1996. Dividends per share are based on the number of shares outstanding at the declaration date giving retroactive effect to the stock split. FINANCIAL STATEMENT PRESENTATION: Certain items in the 1997 and 1996 financial statements have been reclassified to correspond with the 1998 presentation. NOTE 2 - SECURITIES Year-end securities are as follows:
_______________________________1 9 9 8______________________________ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 69,024,266 $ 1,198,600 $ (98,129) $ 70,124,737 Obligations of state and political subdivisions 52,759,051 1,661,950 (17,364) 54,403,637 Other securities, including mortgage- backed and equity securities 44,605,521 2,858,743 (39,938) 47,424,326 --------------- -------------- ------------- ---------------- Total securities available for sale $ 166,388,838 $ 5,719,293 $ (155,431) $ 171,952,700 =============== ============== ============= ================ HELD TO MATURITY Obligations of state and political subdivisions $ 355,000 $ 7,564 $ 362,564 Other securities, including mortgage- backed securities 455,122 6,054 $ (108) 461,068 --------------- -------------- ------------- ---------------- Total securities held to maturity $ 810,122 $ 13,618 $ (108) $ 823,632 =============== ============== ============= ================
- -------------------------------------------------------------------------------- (Continued) 40 45 NOTE 2 - SECURITIES (Continued)
_______________________________1 9 9 7______________________________ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 72,157,416 $ 308,423 $ (179,531) $ 72,286,308 Obligations of state and political subdivisions 33,328,474 1,274,319 (16,135) 34,586,658 Other securities, including mortgage- backed and equity securities 27,878,862 2,528,087 (62,839) 30,344,110 --------------- -------------- ------------- ---------------- Total securities available for sale $ 133,364,752 $ 4,110,829 $ (258,505) $ 137,217,076 =============== ============== ============= ================ HELD TO MATURITY U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,000,000 $ 2,500 $ 1,002,500 Obligations of state and political subdivisions 4,004,519 50,389 $ (5,613) 4,049,295 Other securities, including mortgage- backed securities 1,732,687 13,974 (2,067) 1,744,594 --------------- -------------- ------------- ---------------- Total securities held to maturity $ 6,737,206 $ 66,863 $ (7,680) $ 6,796,389 =============== ============== ============= ================
The contractual maturities of debt securities at year-end 1998 were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, and equity securities are shown separately.
Held-to-maturity Available for sale Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Due in one year or less $ 122,500 $ 124,847 $ 23,731,550 $ 23,915,790 Due from one to five years 232,500 237,717 91,351,783 93,190,872 Due from five to ten years 24,443,595 25,311,726 Due after ten years 213,905 226,737 Mortgage-backed 455,122 461,068 20,262,536 20,313,714 Equity securities 6,385,469 8,993,861 ------------- ------------ -------------- --------------- Total $ 810,122 $ 823,632 $ 166,388,838 $ 171,952,700 ============= ============ ============== ===============
- -------------------------------------------------------------------------------- (Continued) 41 46 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) During 1995, management concluded that the remaining bonds of Tower Healthcare Receivables Corp. had no market value. Therefore, the Corporation eliminated the remaining carrying value of the bonds which was $226,000 after cash payments received during 1995. These securities had previously been written down by $700,000 when Towers Financial Corp. (parent company) filed bankruptcy in 1993. The Corporation received $25,000, $214,000 and $39,000 in recoveries from Tower Financial Corp. in 1998, 1997, and 1996. Proceeds from sales of securities, gross realized gains and gross realized losses for the years ended December 31, 1998, 1997 and 1996 are as follows:
Gross Gross Realized Realized Sales Proceeds Gains Losses -------------- ----- ------ Year ended December 31, 1998 $ 1,412,000 $ 542,000 Year ended December 31, 1997 11,757,000 63,000 $ 170,000 Year ended December 31, 1996 159,000 6,000
During 1997, Farmers sold securities classified as held to maturity for interest rate risk management purposes. As a result, all remaining held-to-maturity securities at Farmers were transferred to the available-for-sale portfolio as of December 31, 1997. Proceeds from these sales totaled $1,329,289, resulting in gross realized gains of $45,289. These sales are included in the above totals. The amortized cost of the remaining held-to-maturity portfolio transferred to available for sale was $34,998,000. The net unrealized gain on these securities was $720,000 on the date of transfer. Securities called or settled by the issuer resulted in gains of $8,000 and $14,000 in 1998 and 1996. Securities with a carrying value of $60,960,000 and $48,318,000 were pledged as of December 31, 1998 and 1997, to secure public deposits and other deposits and liabilities as required or permitted by law. NOTE 3 - LOANS Loans at year-end were as follows:
1998 1997 ---- ---- Commercial and agricultural $ 55,650,059 $ 68,969,554 Real estate mortgage 178,584,805 177,778,532 Real estate construction 3,492,928 3,922,768 Consumer 44,987,536 41,127,582 Credit card and other 1,426,312 1,693,798 Leases 589,015 736,042 ---------------- ----------------- Total loans 284,730,655 294,228,276 Allowance for loan losses (4,567,126) (4,707,051) Deferred loan fees (1,140,518) (1,303,020) Unearned interest (240,936) (480,147) ---------------- ----------------- Net loans $ 278,782,075 $ 287,738,058 ================ =================
- -------------------------------------------------------------------------------- (Continued) 42 47 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 3 - LOANS (Continued) Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan customers of the subsidiary banks. The following is a summary of activity during 1998 for such loans. Balance - January 1, 1998 $ 4,963,015 New loans and advances 2,816,748 Repayments (2,502,445) -------------- Balance - December 31, 1998 $ 5,277,318 ==============
NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses was as follows:
1998 1997 1996 ---- ---- ---- Balance - January 1 $ 4,707,051 $ 3,935,038 $ 3,584,569 Provision for loan losses 361,886 1,129,468 733,350 Loans charged off (724,739) (557,701) (519,932) Recoveries 222,928 200,246 137,051 --------------- -------------- -------------- Balance - December 31 $ 4,567,126 $ 4,707,051 $ 3,935,038 =============== ============== ==============
Information with respect to impaired loans is as follows:
1998 1997 ---- ---- Year-end loans with no allocated allowance for loan losses $ -- $ -- Year-end loans with allocated allowance for loan losses 4,159,000 4,435,000 Amount of allowance for loan losses allocated 1,173,000 1,253,000 Average balance of impaired loans during year 3,915,000 3,264,000 Interest income recognized during impairment 273,000 227,000 Interest income recognized on a cash basis 273,000 182,000
NOTE 5 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows:
1998 1997 ---- ---- Land and improvements $ 807,232 $ 807,232 Buildings and improvements 6,854,051 6,783,708 Furniture and equipment 7,132,152 6,660,772 --------------- ---------------- Total 14,793,435 14,251,712 Accumulated depreciation 7,429,922 6,688,724 --------------- ---------------- Premises and equipment, net $ 7,363,513 $ 7,562,988 =============== ================
The Corporation has no material future-lease commitments. - -------------------------------------------------------------------------------- (Continued) 43 48 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 6 - INTEREST-BEARING DEPOSITS Interest-bearing deposits as of December 31, 1998 and 1997 were as follows:
1998 1997 ---- ---- Demand $ 58,453,216 $ 50,207,130 Statement and passbook savings 108,492,369 106,420,018 Certificates of deposit: In excess of $100,000 35,453,288 30,795,165 Other 152,538,800 160,396,499 Individual Retirement Accounts 24,387,517 17,528,203 ----------------- ----------------- Total $ 379,325,190 $ 365,347,015 ================= =================
At December 31, 1998, the scheduled maturities of certificates of deposit were as follows: 1999 $ 148,727,914 2000 22,381,966 2001 8,899,574 2002 6,975,525 2003 744,081 2004 263,028 ---------------- Total $ 187,992,088 ================
NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS The Corporation has fixed-rate and 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, 1998 and 1997, Federal Home Loan Bank borrowings were as follows:
1998 1997 ---- ---- 5.95 percent secured note $ 7,731,782 $ 8,263,827 5.80 percent secured note 487,630 588,182 5.60 percent secured note 1,234,451 1,484,733 5.55 percent secured note 765,362 914,167 5.25 percent secured note 3,015,940 3,237,125 --------------- ---------------- $ 13,235,165 $ 14,488,034 =============== ================
- -------------------------------------------------------------------------------- (Continued) 44 49 NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS (Continued) The notes outstanding at December 31, 1998 had required annual principal payments as follows: 1999 $ 11,276,205 2000 558,991 2001 591,261 2002 625,392 2003 183,316 --------------- $ 13,235,165 ===============
Federal Home Loan Bank borrowings are collateralized by the subsidiary Banks' Federal Home Loan Bank stock and a blanket pledge of the Banks' residential mortgage loan portfolios. NOTE 8 - OTHER BORROWINGS Securities sold under agreements to repurchase and treasury tax and loan deposits are financing arrangements. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase and treasury tax and loan deposits was as follows:
1998 1997 ---- ---- Average balance during the year $ 12,892,000 $ 10,682,000 Average interest rate during the year 4.58% 5.25% Maximum month-end balance during the year 17,341,000 $ 12,697,000
Securities underlying repurchase agreements at year-end were as follows.
1998 1997 ---- ---- Carrying value of securities $ 24,351,000 $ 15,683,000 Fair Value $ 24,351,000 $ 15,683,000
NOTE 9 - INCOME TAXES Income tax expense was as follows:
1998 1997 1996 ---- ---- ---- Current $ 1,606,366 $ 1,816,481 $ 1,919,890 Deferred 726,990 (257,542) 7,028 --------------- -------------- -------------- Income tax expense $ 2,333,356 $ 1,558,939 $ 1,926,918 =============== ============== ==============
- -------------------------------------------------------------------------------- (Continued) 45 50 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (Continued) The differences between the financial statement income tax expense and amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes were as follows:
1998 1997 1996 ---- ---- ---- Income taxes computed at the statutory federal tax rate $ 2,751,968 $ 2,039,824 $ 2,548,353 Add (subtract) tax effect of Nontaxable interest income, less related nondeductible interest expense (608,005) (641,403) (688,488) Dividends received deduction (45,306) (47,588) (41,625) Amortization of goodwill 68,522 68,522 68,522 Nondeductible reorganization costs 89,879 105,992 Other 76,298 33,592 40,156 --------------- -------------- -------------- Total income tax provision $ 2,333,356 $ 1,558,939 $ 1,926,918 =============== ============== ==============
The tax effects of principal temporary differences and the resulting deferred tax assets and liabilities at December 31, 1998 and 1997 were as follows:
1998 1997 ---- ---- Allowance for loan losses $ 1,180,970 $ 1,228,231 Deferred loan fees 325,291 381,070 Other 76,852 64,200 -------------- -------------- Deferred tax asset 1,583,113 1,673,501 -------------- -------------- Tax depreciation in excess of book depreciation (267,057) (425,930) Discount accretion on investment securities (10,726) (18,800) Pension costs (79,502) (96,100) Undistributed equity earnings of computer center (269,700) (269,700) Federal Home Loan Bank stock dividends (364,310) (272,254) Unrealized gain on securities available for sale (1,891,712) (1,250,215) Intangible asset amortization (133,822) (135,400) Leases (80,740) (44,320) Deferred installment gain (654,881) Other (47,168) (8,800) -------------- -------------- Deferred tax liability (3,799,618) (2,521,519) -------------- --------------- Net deferred tax liability $ (2,216,505) $ (848,018) ============== ==============
- -------------------------------------------------------------------------------- (Continued) 46 51 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 10 - RETIREMENT PLANS The Corporation and its subsidiaries sponsor 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 $67,000, $59,000 and $44,000 in 1998, 1997 and 1996. 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 21, 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. No contributions were allowable in 1998, 1997 or 1996. Information about pension plan was as follows:
1998 1997 ---- ---- Change in benefit obligation: Beginning benefit obligation $ 3,633,341 $ 3,440,946 Service cost 234,494 253,096 Interest cost 239,789 259,514 Actuarial (gain) loss 909,770 (174,683) Benefits paid (929,373) (95,922) Expenses paid (48,850) (49,610) ----------- ----------- Ending benefit obligation 4,039,171 3,633,341 Change in plan assets, at fair value: Beginning plan assets 4,935,505 4,450,990 Actual return (35,599) 630,047 Employer contribution Benefits paid (929,373) (95,922) Expenses paid (48,850) (49,610) ----------- ----------- Ending plan assets 3,921,683 4,935,505 ----------- ----------- Funded status (117,488) 1,302,164 Unrecognized net actuarial loss (gain) 827,453 (534,344) Unrecognized prior service cost 116,363 129,421 Unrecognized net transition asset at January 1, 1989 being recognized over 17 years (574,961) (654,266) ----------- ----------- Prepaid benefit cost $ 251,367 $ 242,975 =========== ===========
The components of pension expense and related actuarial assumptions were as follows:
1998 1997 1996 ---- ---- ---- Service cost $ 234,494 $ 253,096 $ 210,335 Interest cost 239,789 259,514 216,600 Expected return on plan assets 84,449 (580,437) (265,410) Net amortization and deferral (567,124) 120,351 (105,368) ------------ ------------ ------------ Net $ (8,392) $ 52,524 $ 56,157 ============ ============ ============ Discount rate on benefit obligation 7.27% 7.71% 7.71% Long-term rate of return on plan assets 9.00 9.00 9.00 Rate of compensation increase 4.00 5.00 5.00
- -------------------------------------------------------------------------------- (Continued) 47 52 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 10 - RETIREMENT PLANS (Continued) During 1997 and the first seven months of 1998, Farmers maintained a fully insured defined benefit pension plan covering substantially all employees. Pension costs were funded through the purchase of retirement income insurance and retirement annuity policies. The plan was terminated on July 31, 1998. The plan assets will be distributed to the participants in 1999. The employees affected by the termination were included in the existing retirement plans sponsored by the Corporation beginning April 30, 1998. Due to the nature of the Farmers plan, no gain or loss is expected as a result of the termination. NOTE 11 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK The Bank subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of their customers. These include commitments to make or purchase loans, undisbursed lines of credit, undisbursed credit card balances and letters of credit. The Banks' exposure to credit loss in case of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Banks follow the same credit policy to make such commitments as they use for loans recorded on the balance sheet. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained relating to the commitments is determined using management's credit evaluation of the borrower and may include real estate, vehicles, business assets, deposits and other items. The Banks do make fixed rate loan commitments for short periods of time. However, such commitments were immaterial as of December 31, 1998 and 1997. Commitments to extend credit and letters of credit approximated the following amounts at December 31, 1998 and 1997:
Contract Amount --------------- 1998 1997 ---- ---- Commitments to extend credit: Lines of credit and construction loans $ 23,412,000 $ 20,308,000 Credit cards 3,315,000 3,169,000 Letters of credit 623,000 677,000 --------------- ---------------- $ 27,350,000 $ 24,154,000 =============== ================
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, 1998 and 1997 approximated $2,326,000 and $2,059,000. In the normal course of business, the Corporation and its subsidiaries are involved in various legal actions but, in the opinion of management and its legal counsel, ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements. - -------------------------------------------------------------------------------- (Continued) 48 53 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 12 - RESTRICTIONS ON RETAINED EARNINGS The Corporation'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 the Corporation is subject to restrictions by their 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 the Corporation approximates $2,414,000 and $3,554,000 at December 31, 1998 and 1997. NOTE 13 - REGULATORY MATTERS Prior to its merger with the Corporation, Farmers entered into a Memorandum of Understanding (the "MOU") dated October 31, 1997, by and among Farmers, the Ohio Department of Commerce, Division of Financial Institutions (ODFI) and the FDIC, whereby Farmers has agreed to comply with certain directives which are intended to correct operational deficiencies identified in the ODFI's March 14, 1997 Examination Report (the "Examination Report") and improve Farmers' overall financial condition. The MOU requires Farmers to, among other things: i. Achieve and maintain an adequate valuation reserve for loan losses; conduct a quarterly assessment of the loan loss reserve and nonperforming loans; maintain documentation in support of the foregoing; and, submit to the ODFI and the FDIC a record of the methodology used for determining loan loss reserves. ii. Develop a written plan designed to improve Farmers' position on certain loans more than $100,000 that are past due on principal or interest by 90 days or more. iii. Prepare and submit to the ODFI and the FDIC for review and approval (a) a management plan describing actions to be taken by the Bank's Board of Directors to strengthen management and improve the Board's supervision of the Bank's affairs, (b) an amended written loan policy including the recommendations detailed in the Examination Report, (c) written loan review procedures designed to identify and categorize problem credit and assess the overall quality of the loan portfolio, (d) an amended approval policy and procedures consistent with the Examination Report and regulatory guidelines (e) an amended written investment policy consistent with regulatory guidelines (f) an amended interest risk policy and procedures consistent with the Examination Report and regulatory guidelines and (g) quarterly progress reports detailing the actions taken to secure compliance with the MOU and the results thereof. iv. Refrain from (a) declaring or paying dividends without prior written approval of the ODFI and the FDIC when the Bank's tier one leverage ratio is below 7.5%. Farmers has implemented corrective actions to comply with the provisions of the MOU and management believes they are operating within substantial compliance with the provisions of the MOU. - -------------------------------------------------------------------------------- (Continued) 49 54 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 13 - REGULATORY MATTERS (Continued) The Corporation and its subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and the Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). As of December 31, 1998, the most recent notification from the Federal Reserve categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. At December 31, 1998 and 1997, the Corporation's actual capital levels (in millions) and minimum required levels were:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 1998 ---- Total capital $51.3 17.0% $24.1 8.0% $30.1 10.0% (to risk weighted assets) Tier I capital $47.5 15.7% $12.1 4.0% $18.2 6.0% (to risk weighted assets) Tier I capital $47.5 9.5% $20.0 4.0% $25.0 5.0% (to average assets) 1997 ---- Total capital $50.9 19.1% $21.3 8.0% $26.6 10.0% (to risk weighted assets) Tier I capital $45.9 17.2% $10.7 4.0% $16.0 6.0% (to risk weighted assets) Tier I capital $45.9 9.5% $19.3 4.0% $24.2 5.0% (to average assets)
The regulatory capital ratios of the Banks are similar to the Corporation's ratios. - -------------------------------------------------------------------------------- (Continued) 50 55 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION A summary of condensed financial information of the parent company at December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 were as follows:
CONDENSED BALANCE SHEETS 1998 1997 ---- ---- Assets: Cash $ 6,876,368 $ 3,937,595 Investment in subsidiaries 46,874,805 47,230,090 Other assets 426,322 426,322 --------------- ---------------- Total assets $ 54,177,495 $ 51,594,007 =============== ================ Liabilities and Shareholders' Equity: Deferred income taxes and other liabilities $ 436,564 $ 394,572 Common stock 23,257,520 23,257,520 Retained earnings 26,811,264 25,514,853 Unrealized gain on securities available for sale 3,672,147 2,427,062 --------------- ---------------- Total liabilities and shareholders' equity $ 54,177,495 $ 51,594,007 =============== ================
CONDENSED STATEMENTS OF INCOME 1998 1997 1996 ---- ---- ---- Dividends from subsidiaries $ 7,511,664 $ 3,693,249 $ 4,244,820 Other income 31,000 24,417 7,448 Other expense, net (273,627) (297,824) (154,283) -------------- -------------- --------------- Earnings before equity in undistributed net earnings of subsidiaries 7,269,037 3,419,842 4,097,985 (Distributions in excess of earnings of subsidiaries)/ equity in undistributed net earnings of subsidiaries (1,508,370) 1,020,702 1,470,253 -------------- -------------- --------------- Net income $ 5,760,667 $ 4,440,544 $ 5,568,238 ============== ============== ===============
- -------------------------------------------------------------------------------- (Continued) 51 56 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996 ---- ---- ---- Operating activities: Net income $ 5,760,667 $ 4,440,544 $ 5,568,238 Adjustment to reconcile net income to net cash provided by operating activities: Change in other assets and other liabilities 41,992 (121,031) 232,720 Distributions in excess of/(equity in undistributed) net earnings of subsidiaries 1,508,370 (1,020,702) (1,470,253) -------------- -------------- --------------- Net cash from operating activities 7,311,029 3,298,811 4,330,705 -------------- -------------- --------------- Investing activities: Loan to subsidiary (300,000) 50,000 -------------- -------------- --------------- Net cash from investing activities (300,000) 50,000 -------------- -------------- --------------- Financing activities: Cash paid for fractional shares (3,451) Cash dividends paid (4,368,805) (3,545,110) (3,360,164) -------------- -------------- --------------- Net cash from financing activities (4,372,256) (3,545,110) (3,360,164) -------------- -------------- ---------------- Net increase in cash 2,938,773 (546,299) 1,020,541 Cash at beginning of year 3,937,595 4,483,894 3,463,353 -------------- -------------- --------------- Cash at end of year $ 6,876,368 $ 3,937,595 $ 4,483,894 ============== ============== ===============
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair values of financial instruments are as follows at December 31, 1998 and 1997:
December 31, 1998 December 31, 1997 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Financial assets: Cash and due from banks $ 16,443,613 $ 16,444,000 $ 17,695,634 $ 17,696,000 Federal funds sold 19,950,000 19,950,000 17,600,000 17,600,000 Interest bearing deposits 248,282 248,000 347,282 347,000 Securities available for sale 171,952,700 171,953,000 137,217,076 137,217,000 Securities held to maturity 810,122 824,000 6,737,206 6,796,000 Loans held for sale 2,273,509 2,274,000 690,998 691,000 Loans, net of allowance for loan losses 278,782,075 282,353,000 287,738,058 288,180,000 Accrued interest receivable 3,717,568 3,718,000 3,351,947 3,352,000
- -------------------------------------------------------------------------------- (Continued) 52 57 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
December 31, 1998 December 31, 1997 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Financial liabilities: Deposits $ (417,899,245) $ (414,612,000) $ (402,183,241) $ (403,316,000) Federal Home Loan Bank borrowings (13,235,165) (13,235,000) (14,488,034) (14,488,000) Securities sold under repurchase agreements and other borrowings (17,341,239) (17,341,000) (11,154,804) (11,155,000) Accrued interest payable (1,924,373) (1,924,000) (2,155,731) (2,156,000)
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. Estimated fair value for loans is based on the rates charged at year end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. Estimated fair value for time deposits is based on the rates paid at year end for new deposits, applied until maturity. Estimated fair value for other financial instruments and off-balance-sheet loan commitments are considered nominal. NOTE 16 - ACQUISITION Effective April 28, 1998, the Corporation acquired Farmers of New Washington, Ohio. The transaction was accounted for as a pooling of interests. The Corporation issued approximately 1.2 million shares of common stock to the shareholders of Farmers based upon an exchange ratio of 6.06 shares of the Corporation for each outstanding share of Farmers common stock. The historical financial statements have been restated to show the Corporation and Farmers on a combined basis. Separate results of operations for the Corporation and Farmers are as follows for the periods prior to the acquisition:
(Unaudited) Three months ended March 31, Dec. 31, Dec. 31, 1998 1997 1996 ---- ---- ---- Net Interest Income Corporation $ 3,229,420 $ 12,728,952 $ 12,315,665 Farmers 1,030,436 4,245,060 3,966,571 ------------ ------------ ------------ Combined $ 4,259,856 $ 16,974,012 $ 16,282,236 ============ ============ ============ Net Income Corporation $ 899,232 $ 3,434,353 $ 3,964,886 Farmers 361,187 1,006,191 1,603,352 ------------ ------------ ------------ Combined $ 1,260,419 $ 4,440,544 $ 5,568,238 ============ ============ ============
- -------------------------------------------------------------------------------- (Continued) 53 58 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------- NOTE 17 - OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes were as follows.
1998 1997 1996 ---- ---- ---- Unrealized holding gains and (losses) on available for sale securities $ 2,428,492 $ 2,341,345 $ (57,981) Less reclassification adjustments for (gains) and losses later recognized in income (542,000) 106,629 (6,172) ------------ ------------ ------------ Net unrealized gains and losses 1,886,492 2,447,974 (64,153) Tax effect (641,407) (832,311) 21,812 ------------ ------------ ------------ Other comprehensive income $ 1,245,085 $ 1,615,663 $ (42,341) ============ ============ ============
NOTE 18 - SCC RESOURCES, INC., SALE OF DATA PROCESSING CONTRACTS On June 19, 1998, 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, 1999. The Corporation recognized $2,966,692 of income as a result of the sale of contracts in 1998. Expenses of $1,432,572 relating primarily to the write down of software and intangible assets, lease termination costs and employee severance costs were also recorded. The net gain of $1,534,120 has been reflected in other income for the year ended December 31, 1998. - -------------------------------------------------------------------------------- 54 59 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. - -------------------------------------------------------------------------------- 55 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The following information is furnished with respect to directors and executive officers of the Corporation as of December 31, 1998:
Director Name Age Position since (1) ---- --- -------- -------- DIRECTORS - --------- John L. Bacon 73 Chairman Emeritus 1973 Mack Iron Works Company Robert L. Bordner 62 President, Herald Printing Co. 1998 Mary Lee G. Close 83 Personal Investments 1983 Blythe A. Friedley 49 Owner, Friedley Insurance Co. 1998 Richard B. Fuller 77 Retired, former President of Universal 1960 Clay Products, Inc. H. Lowell Hoffman, M.D. 75 Retired, former Surgeon 1980 Lowell W. Leech 72 Chairman of the Board, 1975 First Citizens Banc Corp The Citizens Banking Company The Castalia Banking Company Dean S. Lucal 61 Attorney, Lucal & McGookey 1973 W. Patrick Murray 58 Attorney, Murray and Murray 1983 Company, L.P.A. George L. Mylander 66 Retired Educator 1965 Chairman, Firelands Community Hospital Paul H. Pheiffer 73 Chairman of the Board, 1968 Sandusky Bay Development Company (operates the Battery Park Marina in Sandusky, Ohio) David A. Voight 56 President, First Citizens Banc Corp 1989 President, Chief Executive Officer The Citizens Banking Company Richard O. Wagner 85 Retired, former Chairman of First Citizens 1968 Bank Corp and former President of The Citizens Banking Company
- -------------------------------------------------------------------------------- 56 61
Name Age Position ---- --- -------- EXECUTIVE OFFICERS - ------------------ James O. Miller 46 Executive Vice President First Citizens Banc Corp The Citizens Banking Company LeRoy C. Link 50 Senior Vice President First Citizens Banc Corp President, SCC Resources, Inc. Charles C. Riesterer 44 Senior Vice President First Citizens Banc Corp The Citizens Banking Company
(1) Directorships were with The Citizens Banking Company alone until 1984 and with the Corporation since such date. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- The information contained under the caption "Executive Compensation" in the Proxy Statement, to be dated approximately March 19, 1999 utilized in connection with the Company's Annual Shareholders' Meeting is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------ The information contained under the caption "Nominees for Election as Directors" and "Directors Continuing in Office" in the Proxy Statement, to be dated approximately March 19, 1999 utilized in connection with the Company's Annual Shareholders' Meeting is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement, to be dated approximately March 19, 1999 used concerning the Company's Annual Shareholders' Meeting is incorporated herein by reference. - -------------------------------------------------------------------------------- 57 62 PART IV ITEM 14. 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 on this Form 10-K. 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 (3)(i) The Articles of Incorporation, as amended, of First Citizens Banc Corp are incorporated by reference to Exhibit 1 to First Citizens Banc Corp's Form 10-K for the year ended December 31, 1994. (3)(ii) The Code of Regulations of First Citizens Banc Corp is incorporated by reference to Exhibit 2 to First Citizens Banc Corp's Form 10-K for the year ended December 31, 1994. (4) The Certificate for Registrant's Common Stock is incorporated by reference to Exhibit 3 to First Citizens Banc Corp's Form 10-K for the year ended December 31, 1994. (10)(i) The Supplemental Retirement Benefit Agreement for Donald E. Gosser is incorporated by reference to Exhibit 4 to First Citizens Banc Corp's Form 10-K for the year ended December 31, 1994. (21) The Subsidiaries of the Registrant are incorporated by reference to Exhibit 5 to First Citizens Banc Corp's Form 10-K for the year ended December 31, 1994. (27) Financial Data Schedule (99) Safe Harbor Under the Private Securities Litigation Reform Act of 1995 (b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during the fourth quarter of the year ended December 31, 1998. - -------------------------------------------------------------------------------- 58 63 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/ James O. Miller ------------------------------------------------------------------------------ James O. Miller, Executive Vice President and Controller (Principal Financial Officer) ------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on this second day of March 1999 by the following persons (including a majority of the Board of Directors of the Registrant) in the capacities indicated: /s/ Lowell W. Leech /s/ David A. Voight - ---------------------------------- ----------------------------------- Lowell W. Leech David A. Voight Chairman of the Board President, Director /s/ John L. Bacon /s/ Dean S. Lucal - ---------------------------------- ----------------------------------- John L. Bacon Dean S. Lucal Director Director /s/ Robert L. Bordner /s/ W. Patrick Murray - ---------------------------------- ----------------------------------- Robert L. Bordner W. Patrick Murray Director Director /s/ Mary Lee G. Close /s/ George L. Mylander - ---------------------------------- ----------------------------------- Mary Lee G. Close George L. Mylander Director Director /s/ Blythe A. Friedley /s/ Paul H. Pheiffer - ---------------------------------- ----------------------------------- Blythe A. Friedley Paul H. Pheiffer Director Director /s/ Richard B. Fuller /s/ Richard O. Wagner - ---------------------------------- ----------------------------------- Richard B. Fuller Richard O. Wagner Director Director /s/ H. Lowell Hoffman, M.D. - ---------------------------------- H. Lowell Hoffman, M.D. Director - -------------------------------------------------------------------------------- 59 64 FIRST CITIZENS BANC CORP DIRECTORS --------- JOHN L. BACON DEAN S. LUCAL Chairman Emeritus Attorney, Lucal & McGookey Mack Iron Works Company W. PATRICK MURRAY ROBERT L. BORDNER Attorney, Murray and Murray Company, L.P.A. President GEORGE L. MYLANDER Herald Printing Company Retired Educator and City Official MARY LEE G. CLOSE Chairman, Firelands Community Hospital BLYTHE A. FRIEDLEY PAUL H. PHEIFFER Owner/President Sandusky Bay Development Company Friedley & Co. Insurance Agency DAVID A. VOIGHT RICHARD B. FULLER President, Chief Executive Officer H. LOWELL HOFFMAN, M.D. The Citizens Banking Company LOWELL W. LEECH RICHARD O. WAGNER Chairman of the Board, The Citizens Banking Company The Castalia Banking Company
OFFICERS -------- LOWELL W. LEECH TODD A. MICHEL Chairman of the Board Vice President and Controller DAVID A. VOIGHT DONNA J. DALFERRO President Vice President and Secretary JAMES O. MILLER KAREN S. RUTGER Executive Vice President Assistant Vice President Human Resources LEROY C. LINK BRENDA R. LEAL Senior Vice President Risk Manager CHARLES C. RIESTERER Senior Vice President
65 DIRECTORS OF AFFILIATED COMPANIES The Citizens Banking Company - -------------------------------------------------------------------------------- JOHN L. BACON GRADY MCDONALD Chairman Emeritus Retired Mack Iron Works Company W. PATRICK MURRAY MARY LEE G. CLOSE Attorney, Murray and Murray Company, L.P.A. RICHARD B. FULLER GEORGE L. MYLANDER ANTHONY S. GUERRA Retired Educator and City Official President, LEWCO, Inc. Chairman, Firelands Community Hospital H. LOWELL HOFFMAN, M.D. PAUL H. PHEIFFER LOWELL W. LEECH Sandusky Bay Development Company Chairman of the Board DAVID A. VOIGHT The Citizens Banking Company President, Chief Executive Officer DEAN S. LUCAL The Citizens Banking Company Attorney, Lucal & McGookey RICHARD O. WAGNER Director Emeritus LELAND J. WELTY, CPA
The Castalia Banking Company - -------------------------------------------------------------------------------- JOHN L. BACON LOWELL W. LEECH Chairman Emeritus Chairman of the Board Mack Iron Works Company The Citizens Banking Company JACK D. BOHN W. PATRICK MURRAY Partner, Bohn Implement Company Attorney, Murray and Murray Company, L.P.A. Farmer ROBERT L. RANSOM JOYCE A. KELLER Funeral Director, Ransom Funeral Home President and Secretary DAVID H. STRACK, D.D.S. The Castalia Banking Company Bay Area Dental, Inc.
66 DIRECTORS OF AFFILIATED COMPANIES, CON'T. SCC Resources, Inc. - -------------------------------------------------------------------------------- H. LOWELL HOFFMAN, M.D. DAVID A. VOIGHT LEROY C. LINK President, Chief Executive Officer President, SCC Resources, Inc. The Citizens Banking Company
R. A. Reynolds Appraisal Services, Inc. - -------------------------------------------------------------------------------- DEAN S. LUCAL DAVID A. VOIGHt Attorney, Lucal & McGookey President, Chief Executive Officer JOHN F. STAUFFER The Citizens Banking Company President R. A. Reynolds Appraisal Services, Inc.
Farmers State Bank - -------------------------------------------------------------------------------- ROBERT L. BORDNER JAY R. PRESSLER President, Herald Printing Co. President, Farmers State Bank RONALD E. DENTINGER DOROTHY L. ROBEY Manager, Country Star Coop Retired BLYTHE A. FRIEDLEY LUTHER F. SHAFER Owner/Pres., Friedley & Co. Insurance Farmer DEAN S. LUCAL WILLIAM G. SHEAFFER Attorney, Lucal & McGookey Senior Vice President, Farmers State Bank RICHARD A. NIEDERMIER DAVID A. VOIGHT Owner, Niedermier Sunoco President, First Citizens Banc Corp ROBERT M. OBRINGER Partner, Studer-Obringer, Inc
67 OFFICERS OF AFFILIATED COMPANIES The Citizens Banking Company The Castalia Banking Company - -------------------------------------- ------------------------------ Chairman of the Board Chairman of the Board - --------------------- --------------------- Lowell W. Leech Lowell W. Leech President, Chief Executive Officer President & Secretary - ---------------------------------- --------------------- David A. Voight Joyce A. Keller Executive Vice President Senior Vice President - ------------------------ --------------------- James O. Miller Bruce A. Bravard, Cashier Senior Vice President Vice President - --------------------- -------------- Charles C. Riesterer Mary K. Schlessman Vice President Assistant Vice President - -------------- ------------------------ Donna J. Dalferro, Secretary Sharon K. Keimer Lee A. Jordan Todd A. Michel, Controller Lending Officer David L. Ott --------------- Virginia L. Bluhm Assistant Vice President - ------------------------ Operations Officer Judy A. Burkey ------------------ Robin J. Grathwol Mary K. Meyer Karen S. Rutger Karen M. Irons Assistant Secretary Customer Service Officer - ------------------- ------------------------ Kathleen A. Bodi Marie K. Greene Gloria J. Mesenburg Cashier - ------- Douglas A. Greulich Credit Card Administrator - ------------------------- Paul D. Mesenburg Lending/Customer Service Officer - -------------------------------- Christine J. Kane Linda G. Kelley Lisa M. Schwerer L. Cathy Wright Customer Service Officer - ------------------------ Beverly A. Knupke Deborah E. Morrow Lending Officer - --------------- James P. Greek Connie M. Heuberger David G. Majoy Christina A. Raftery Brenda J. Stallard Suellen M. Williams Mortgage Loan Specialist - ------------------------ Richard C. Finneran, Jr. Marcia A. Gasteier Mortgage Loan Administrator - --------------------------- Kenneth C. Hahn Operations Officer - ------------------ Ann E. Baum Joann M. Gies Shirley J. Hoover Susan A. Winkel Personal Banking Officer - ------------------------ Phyllis L. Bransky Senior Operations Officer - ------------------------- David J. Dillon Paula J. York 68 OFFICERS OF AFFILIATED COMPANIES, CON'T. Farmers State Bank SCC Resources, Inc. - ------------------------------------- -------------------------------------- President President - --------- --------- Jay R. Pressler LeRoy C. Link Senior Vice President Vice President - --------------------- -------------- William G. Sheaffer William E. Couch Ralph M. Chicotel Vice President Thomas C. York, Jr. - -------------- Richard A. Bast Donna M. Miller Customer Service Officer Collections Officer ------------------------ - ------------------- Rae L. Cox Thomas L. Grey Vicky L. Doski Daniel M. Reffert Operations Officer Controller ------------------ - ---------- Geriann M. Sartor Doris M. Lambert Secretary-Treasurer Loan Operations/Collections ------------------- - --------------------------- James O. Miller Carl F. Arnold R. A. Reynolds Appraisal Services, Inc. Lending Officer --------------------------------------- - --------------- Douglas A. Hancock President Gloria J. Miller --------- Jack R. O. Vetter John F. Stauffer Lending Officer/Customer Service Rep. Secretary/Treasurer - ------------------------------------- ------------------- Constance F. Bores James O. Miller Donna J. Norris Nancy L. Everly Operations Officer - ------------------ Sharon K. Ehrman Roxann A. Young Secretary - --------- Wanda J. White Senior Teller Operations/Cashier - -------------------------------- Paul E. Zimmerman 69 FIRST CITIZENS BANC CORP SHAREHOLDER INFORMATION The Annual Meeting of the Shareholders of First Citizens Banc Corp will be held at The Citizens Banking Company, 100 East Water Street, Sandusky, Ohio on April 14, 1998 at 2:00 p.m. Notice of the meeting and a proxy statement will be sent to shareholders in a separate mailing. REGISTRAR AND TRANSFER AGENT Fifth Third Bank Corporate Trust Stock Transfer Division 38 Fountain Square Plaza Cincinnati, Ohio 45202 FIRST CITIZENS BANC CORP 100 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-4121 or 1-888-645-4121 (Toll Free) Fax: (419) 627-0103 AFFILIATE The Citizens Banking Company 100 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-4121 Fax: (419) 627-0103 The Castalia Banking Company 208 South Washington Street Castalia, Ohio 44824 Tel: (419) 684-5333 Fax: (419) 684-7051 The Farmers State Bank 102 South Kibler Street New Washington, Ohio 44854 Tel: (419) 492-2177 Fax: (419) 492-2757 SCC Resources, Inc. 165 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-1605 Fax: (419) 625-0081 R. A. Reynolds Appraisal Services, Inc. 165 East Water Street Sandusky, Ohio 44870 Tel: (419) 627-4543 Fax: (419) 625-0081 EX-27 2 EXHIBIT 27
9 0000944745 First Citizen's Banc Corp YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 16,443,613 248,282 19,950,000 0 171,952,700 810,122 823,632 278,782,075 4,567,126 508,888,863 417,899,245 17,341,239 6,672,283 13,325,165 0 0 23,257,520 30,483,411 508,888,863 24,357,161 8,844,605 1,002,170 34,203,936 15,909,096 17,295,235 16,908,701 361,886 574,981 14,678,987 8,094,023 5,260,667 0 0 5,760,667 1.35 1.35 3.69 1,693,000 1,235,000 305,000 0 4,707,000 725,000 223,000 4,567,000 4,567,000 0 1,603,000
EX-99 3 EXHIBIT 99 1 FIRST CITIZENS BANC CORP EXHIBIT NO. 99 - -------------------------------------------------------------------------------- SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. First Citizens Banc Corp ("Corporation") desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance and finances and plans and objectives of management, contained or incorporated by reference in Corporation's Annual Report on Form 10-K for fiscal year 1998 is forward-looking. In some cases, information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appear together with such statement. In addition, forward-looking statements are subject to other risks and uncertainties affecting the financial institutions' industry, including, but not limited to, the following: Interest Rate Risk - ------------------ The Corporation's operating results are dependent to a significant degree on its net interest income, which is the difference between interest income from loans, investments and other interest-earning assets and interest expense on deposits, borrowings and other interest-bearing liabilities. The interest income and interest expense of the Corporation change as the interest rates on interest-earning assets and interest-bearing liabilities change. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond the Corporation control. In a rising interest rate environment, loans tend to prepay slowly and new loans at higher rates increase slowly, while interest paid on deposits increases rapidly because the terms to maturity of deposits tend to be shorter than the terms to maturity or prepayment of loans. Such differences in the adjustment of interest rates on assets and liabilities may negatively affect the Corporation income. Adequacy of the Allowance for Loan Losses - ----------------------------------------- The Corporation maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of nonperforming assets and classified loans, current and anticipated economic conditions in the primary lending area, past loss experience, possible losses arising from specific problem loans and changes in the composition of the loan portfolio. While the Board of Directors of the Corporation believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in material adjustments, and net earnings could be significantly adversely affected if circumstances differ substantially from the assumptions used in making the final determination. Loans not secured by one-to-four family residential real estate are generally considered to involve greater risk of loss than loans secured by one-to-four family residential real estate due, in part, to the effects of general economic conditions. The repayment of commercial loans generally depends upon the cash flow from the operation of the property, which may be negatively affected by national and local economic conditions. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. When consumers have trouble paying their bills, they are more likely to pay mortgage loans than consumer loans. In addition, the collateral securing such loans, if any, may decrease in value more rapidly than the outstanding balance of the loan. Competition - ----------- The Citizens Banking Company, The Castalia Banking Company, and The Farmers State Bank (the "Banks") compete for deposits with other commercial banks, credit unions and issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Banks compete with other commercial banks, 2 consumer finance companies, credit unions, leasing companies, mortgage companies and other lenders. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors, which are not readily predictable. The size of financial institutions competing with the Banks is likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the Corporation. Legislation and Regulation that may Adversely Affect FCBC's Earnings - -------------------------------------------------------------------- The Banks are subject to extensive regulation by the Federal Reserve Bank (the "FRB") and the Federal Deposit Insurance Corporation (the "FDIC") and are periodically examined by such regulatory agencies to test compliance with various regulatory requirements. As a bank holding company, the Corporation is also subject to regulation and examination by the FRB. Such supervision and regulation of the Banks and the Corporation are intended primarily for the protection of depositors and not for the maximization of shareholder value and may affect the ability of the Corporation to engage in various business activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may have an adverse effect on the Corporation's net earnings. The FDIC is authorized to establish separate annual assessment rates for deposit insurance of members of the Bank Insurance fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under such system, assessments may vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined by reference to the institution's capital level and the FDIC's level of supervisory concern about the institution. Federal legislation that was effective September 30, 1996, provided for the recapitalization of the SAIF by means of a special assessment of $.657 per $100 in deposits held at March 31, 1995, in order to increase SAIF to levels required by law. That legislation also required that BIF members begin to share the cost of prior thrift failures. As a result of the recapitalization of SAIF and this cost sharing between BIF and SAIF members, FDIC assessments for well-capitalized, well-managed institutions during 1997 have been set at $.013 per $100 of BIF deposits. The recapitalization plan also provides for the merger of the SAIF and BIF effective January 1, 1999, assuming there are no saving associations under federal law. Under separate proposed legislation, Congress is considering elimination of the federal thrift charter. The Corporation cannot predict the impact of such legislation and the merger of the BIF and SAIF on the Corporation or the Banks until the legislation is enacted and the funds are merged. -----END PRIVACY-ENHANCED MESSAGE-----