1 First Citizens Banc Corp - -------------------------------------------------------------------------------- The Castalia Banking Company The Citizens Banking Company The Farmers State Bank R. A. Reynolds Appraisal Service, Inc. SCC Resources, Inc. 1999 Annual Report 2 FIRST CITIZENS BANC CORP CONTENTS INSIDE Message to Shareholders ............................................... 1 Five Year Consolidated Financial Summary................................... 2 Form 10-K .............................................................. 3 Index ................................................................ 4 PART I Item 1. Business................................................... 5 Item 2. Properties.................................................19 Item 3. Legal Proceedings..........................................19 Item 4. Submission of Matters to a Vote of Security Holders......................................19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................19 Item 6. Selected Financial Data....................................20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.............21 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.31 Item 8. Financial Statements and Supplementary Data Independent Auditors' Report...............................35 Consolidated Financial Statements..........................36 Notes to Consolidated Financial Statements ................41 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................59 PART III Item 10. Directors and Executive Officers of the Registrant.........60 Item 11. Executive Compensation.....................................61 Item 12. Security Ownership of Certain Beneficial Owners and Management...........................................61 Item 13. Certain Relationships and Related Transactions.............61 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................62 Signatures ..........................................................63 First Citizens Banc Corp Directors and Officers............................64 Directors of Affiliated Companies..........................................65 Officers of Affiliated Companies...........................................67 First Citizens Banc Corp Shareholder Information...........................69 3 FIRST CITIZENS BANC CORP Castalia Banking Company Citizens Banking Company Farmers State Bank R. A. Reynolds Appraisal Services, Inc. SCC Resources, Inc. - -------------------------------------------------------------------------------- 100 East Water Street, Sandusky, Ohio 44870 Dear Shareholder: Last year at this time we were facing three significant challenges. They were the Year 2000, our data processing conversion, and continued expansion of related non-traditional banking services. We are pleased to report no Y2K related problems. Our software conversion has brought us a higher level of technology more cost effectively. The move has allowed us to introduce new highly visible products such as Internet banking and bill paying. We are encouraged by the continued success of our brokerage affiliation that has been expanded to all of our banks. Our insurance affiliation has provided experience that will be beneficial as we significantly expand our involvement in these services. Recent changes in the banking laws will allow us to examine many other opportunities to increase non-traditional services and enhance our non-interest income. Pursuing traditional banking opportunities Farmers State has opened a facility in Willard, Ohio while Citizens has opened a facility in Huron, Ohio and recently introduced loan production capabilities in Ottawa County. Last October we completed the move to Illinois Stock Transfer Company as our stock transfer agent and manager of our Dividend Reinvestment Program. We hope that you are as pleased with this move as we are. In your proxy is information on a Stock Option and Stock Appreciation Rights Plan. We are asking you to support the recommendation of the Directors for the adoption of this proposal. We believe that First Citizens has accomplished the transition to a larger operation. The corporation continues to reach new levels of total corporate earnings as we expand our banking franchise. Earnings have benefited from one-time gains that have been used to offset one-time expenses such as acquisition costs, Y2K and conversion costs, and entry costs in new locations and services. We believe First Citizens is in a position to take advantage of its size, locations, and complimentary products and services to increase shareholder value. Your Board of Directors and management are committed to enhancing your investment in First Citizens Banc Corp. Your questions, comments, and suggestions are always welcomed. Very truly yours, /s/ David A. Voight President 4 FIRST CITIZENS BANC CORP FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY - -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Earnings Net income (000) $ 6,062 $ 5,761 $ 4,441 $ 5,568 $ 5,278 Per Common Share(1): Earnings $ 1.43 $ 1.35 $ 1.04 $ 1.31 $ 1.24 Book value 11.58 12.61 12.01 11.42 10.92 Dividends paid 1.15 1.11 1.07 1.02 0.71 Balances (in millions) Assets $ 472.2 $ 508.9 $ 484.1 $ 455.9 $ 446.8 Deposits 403.2 417.9 402.2 375.8 369.2 Net loans 284.4 278.8 287.7 260.0 240.4 Shareholders' equity 48.2 53.7 51.2 48.7 46.6 Performance ratios Return on average assets 1.24% 1.18% 0.95% 1.24% 1.22% Return on average equity 11.58 10.95 8.75 11.71 12.20 Shareholders' equity to assets ratio 10.21 10.56 10.58 10.68 10.42 Net loans to deposit ratio 70.55 66.71 71.53 69.19 65.11 Allowance for loan losses to total loans 1.48 1.60 1.60 1.48 1.46 (1) 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. 2 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0 - 25980 FIRST CITIZENS BANC CORP -------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-1558688 - ------------------------------------ ---------------------- State or other jurisdiction of (IRS Employer incorporation or organization Identification No.) 100 EAST WATER STREET, SANDUSKY, OHIO 44870 - ----------------------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (419) 625 - 4121 ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing market price as of January 31, 2000 was $86,328,843. As of January 31, 2000, there were 4,151,119 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 17, 2000, 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. 3 6 INDEX PART I Item 1. Business........................................................ 5 Item 2. Properties...................................................... 19 Item 3. Legal Proceedings............................................... 19 Item 4. Submission of Matters to a Vote of Security Holders............. 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................. 19 Item 6. Selected Financial Data......................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation...................................... 21 Item 7a. Quantitative and Qualitative Disclosures About Market Risk...... 31 Item 8. Financial Statements and Supplementary Data Independent Auditor's Report.................................... 35 Consolidated Financial Statements............................... 36 Notes to Consolidated Financial Statements...................... 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 59 PART III Item 10. Directors and Executive Officers of the Registrant.............. 60 Item 11. Executive Compensation.......................................... 61 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 61 Item 13. Certain Relationships and Related Transactions.................. 61 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................ 62 Signatures................................................................ 63 4 7 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS First Citizens Banc Corp (FCBC) was organized under the laws of the State of Ohio on February 19, 1987 and is a registered 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 $472,220,057 at December 31, 1999. FCBC and its subsidiaries are referred to together as the Corporation. THE CITIZENS BANKING COMPANY (Citizens), owned by the Corporation since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Citizens was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Citizens surrendered its trust charter and began operation under its current name. Citizens is an insured bank under the Federal Deposit Insurance Act. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio and operates three branch banking offices in Perkins Township (Sandusky, Ohio), one branch banking office in Berlin Heights, Ohio and one branch banking office in Huron, Ohio. This subsidiary accounts for 59% of the Corporation's consolidated assets at December 31, 1999. 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 30% of the Corporation's consolidated assets at December 31, 1999. 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 11% of the Corporation's consolidated assets at December 31, 1999. 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 item processing services for financial institutions, including the Banks, and other nonrelated entities. The Corporation acquired total ownership of SCC in February 1993. On June 19, 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. This subsidiary accounts for less than one percent of the Corporation's consolidated assets as of December 31, 1999. 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, 1999. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS FCBC is a bank holding company. Through the 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 10-K for financial information about the Corporation's banking business. 5 8 (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL The Corporation's primary business is incidental to the three subsidiary banks. Citizens, Farmers and Castalia, located in Erie, Crawford, Marion and Union Counties, Ohio, conduct a general banking business that 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 61% of total revenue for 1999 and 60% of total revenue for 1998. The primary focus of lending is real estate mortgages. Residential real estate mortgages comprised 62% of the total loan portfolio in 1999 and 61% of the total loan portfolio in 1998. Citizens', Farmers' and Castalia's loan portfolios do not include any foreign-based loans, loans to lesser-developed countries or loans to FCBC. Citizens has a loan to SCC, which is secured by real estate. On a parent company only basis, FCBC'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 FCBC for shareholder dividends. FCBC 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 respective market area. Traditional financial service competition for the Banks consists of large regional financial institutions, community banks, thrifts and credit unions operating within the Corporation's market area. A growing nontraditional source of competition for loan and deposit dollars comes from captive auto finance companies, mortgage banking companies, internet banks, brokerage companies, insurance companies and direct mutual funds. EMPLOYEES FCBC has no employees. The subsidiary companies employ approximately 206 full-time equivalent employees to whom a variety of benefits are provided. FCBC and its subsidiaries are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good. SUPERVISION AND REGULATION FCBC, as a registered bank holding company, is subject to the Bank Holding Company Act of 1956, as amended (Act), and to regulation by the Board of Governors of the Federal Reserve System. The Act limits the activities in which FCBC and its subsidiaries may engage to those activities that the Federal 6 9 Reserve Board finds to be closely related to banking, managing or controlling banks. In addition, the Act requires FCBC 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 FCBC nor its subsidiaries could acquire banks outside Ohio, unless the laws of the state in which the target bank was located specifically authorized the transaction. The Interstate Banking and Branch Efficiency Act has eased restrictions on interstate expansion and consolidation of banking operations by, among other things: (i) permitting interstate bank acquisitions regardless of host state laws, (ii) permitting interstate merger of banks unless specific states have opted out of this provision and (iii) permitting banks to establish new branches outside the state provided the law of the host state specifically allows interstate bank branching. The Federal Reserve Board has adopted risk-based capital guidelines to evaluate the adequacy of capital of bank holding companies and state member banks. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the holding company's capital base. Failure to meet capital guidelines could subject a banking institution to various penalties, including termination of FDIC deposit insurance. Both FCBC and its subsidiary Banks had risk-based capital ratios above minimum requirements at December 31, 1999. RECENT LEGISLATION On November 12, 1999, President Clinton signed the Graham-Leach-Bliley Act of 1999 (GLB Act), which is intended to modernize the financial services industry. The GLB Act sweeps away large parts of a regulatory framework that had its origins in the Depression Era of the 1930s. Effective March 11, 2000, new opportunities will be available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act introduces the concept of functional regulation. Functional regulation mandates that the Board of Governors of the Federal Reserve System give deference to the Securities and Exchange Commission and relevant state securities and insurance authorities with respect to interpretations and enforcement of activities within their respective jurisdictions. The GLB Act amends the Bank Holding Company Act of 1956 to allow bank holding companies to become certified as financial holding companies and participate in the new financial activities contemplated in the GLB Act. The Federal Reserve Board will serve as the umbrella regulator for financial holding companies while the financial holding company's separately regulated subsidiaries will be regulated by their primary functional regulators. In addition to meeting "well capitalized" and "well managed" standards, the GLB Act makes satisfactory or above Community Reinvestment Act compliance for insured depository institutions necessary in order for them to engage in new financial activities. Financial subsidiaries of banks may also be formed to engage in a new range of activities under the GLB Act. 7 10 The GLB Act provides a federal right to privacy of non-public personal information of individual customers. Federal regulatory agencies with primary supervisory authority over numerous financial institutions have responsibility for implementing this privacy provision and are currently in the process of adopting regulations. FCBC and its subsidiaries are also subject to certain state laws that deal with the use and distribution of non-public personal information. Given the fact that the legislation is new, the regulatory process is only beginning and numerous final regulations are still forthcoming, we cannot predict the impact that the GLB Act will have on the Corporation at this time. REGULATION OF BANK SUBSIDIARIES In addition to regulation of FCBC, FCBC's banking subsidiaries are subject to federal regulation regarding such matters as reserves, limitations on the nature and amount of loans and investments, issuance or retirement of their own securities, limitations on the payment of dividends and other aspects of banking operations. As Ohio chartered banks, all three of FCBC's banking subsidiaries, Citizens, Castalia and Farmers, are supervised and regulated by the State of Ohio Department of Commerce, 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 State of Ohio Department of Commerce, 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. Farmers is subject to periodic examinations by the FDIC. Pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a subsidiary of a 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. 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 does not have any offices located in a foreign country, nor do they have any foreign assets, liabilities, or related income and expense for the years presented. (e) STATISTICAL INFORMATION Pages 9 through 18 present various statistical disclosures required for bank holding companies. 8 11 DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL The following table sets forth, for the years ended December 31, 1999, 1998 and 1997, 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: 1999 1998 1997 ---------------------------- ----------------------------- --------------------------- 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) $ 284,080 $23,408 8.24% $ 288,108 $ 24,357 8.45% $ 280,141 $ 24,015 8.57% Taxable securities (4) 115,240 6,645 5.87 114,099 6,752 6.11 111,485 6,821 6.19 Nontaxable Securities (4)(5) 47,894 2,306 4.89 41,616 2,093 5.18 39,760 2,166 5.50 Federal funds sold 12,770 627 4.91 17,490 943 5.39 10,477 583 5.56 Interest-bearing deposits in other banks 4,294 81 1.89 1,271 59 4.64 1,368 64 4.68 --------- ------- ---------- -------- --------- -------- Total interest-earning assets 464,278 33,067 7.16 462,584 34,204 7.47 443,231 33,649 7.62 ------- -------- -------- Noninterest-earning assets: Cash and due from financial institutions 11,538 13,238 13,517 Premises and equipment, net 7,311 7,497 7,139 Accrued interest receivable 3,723 3,682 3,517 Intangible assets 2,379 2,716 2,965 Other assets 2,444 2,668 3,024 Less allowance for loan losses (4,431) (4,675) (3,633) --------- ---------- --------- Total $ 487,242 $ 487,710 $ 469,760 ========= ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-bearing liabilities: Savings and interest- bearing demand accounts $ 164,246 $ 3,868 2.36% $ 155,080 $ 4,144 2.67% $ 157,745 $ 4,302 2.73% Certificates of deposit 206,296 10,329 5.01 212,081 11,765 5.55 196,081 10,945 5.58 Federal Home Loan Bank borrowings 4,348 254 5.84 13,913 797 5.73 15,126 867 5.73 Securities sold under repurchase agreements 15,044 625 4.15 11,863 535 4.51 9,487 500 5.27 U.S. Treasury demand notes payable 1,133 54 4.77 1,029 54 5.25 1,195 61 5.10 --------- ------- ---------- -------- --------- -------- Total interest- bearing liabilities 391,067 15,130 3.87 393,966 17,295 4.39 379,634 16,675 4.40 --------- ------- ---------- -------- --------- -------- Noninterest-bearing liabilities: Demand deposits 39,123 36,327 35,239 Other liabilities 4,705 4,822 4,127 --------- ---------- --------- 43,828 41,149 39,366 Shareholders' equity 52,347 52,595 50,760 --------- ---------- --------- Total $ 487,242 $ 487,710 $ 469,760 ========= ========== ========= Net interest income $17,937 $ 16,909 $ 16,974 ======= ======== ======== Net yield on interest- earning assets 3.89% 3.69% 3.84% ==== ==== ==== (1) For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale. (2) Included in loan interest income are loan fees of $782,115 in 1999, $639,371 in 1998, and $811,737 in 1997. (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. 9 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. 1999 compared to 1998 1998 compared to 1997 Increase (decrease) Increase (decrease) due to (1) due to (1) -------------------------------------- -------------------------------------- VOLUME RATE NET VOLUME RATE NET ------ ---- --- ------ ---- --- (Dollars in thousands) Interest income: Loans $ (337) $ (612) $ (949) $ 677 $ (335) $ 342 Taxable securities 164 (271) (107) 64 (133) (69) Nontaxable securities 337 (124) 213 56 (129) (73) Federal funds sold (237) (79) (316) 379 (19) 360 Interest-bearing deposits in other banks 74 (52) 22 (5) -- (5) --------- ---------- ---------- ---------- ---------- ---------- Total interest- earning assets $ 1 $ (1,138) $ (1,137) $ 1,171 $ (616) $ 555 ========= ========== ========== ========== ========== ========== Interest expense: Savings and interest- bearing demand accounts $ 235 $ (511) $ (276) $ (72) $ (86) $ (158) Certificates of deposit (314) (1,122) (1,436) 888 (68) 820 Federal Home Loan Bank borrowings (558) 15 (543) (70) -- (70) Securities sold under repurchase agreements 135 (45) 90 114 (79) 35 U.S. Treasury demand notes payable 5 (5) -- (9) 2 (7) --------- ---------- ---------- ---------- ---------- ---------- Total interest- bearing liabilities $ (497) $ (1,668) $ (2,165) $ 851 $ (231) $ 620 ========= ========== ========== ========== ========== ========== Net interest income $ 498 $ 530 $ 1,028 $ 320 $ (385) $ (65) ========= ========== ========== ========== ========== ========== (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. 10 13 SECURITY PORTFOLIO The following table sets forth the carrying amount of securities at December 31. 1999 1998 1997 ---- ---- ---- (Dollars in thousands) AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 63,224 $ 70,125 $ 72,286 Obligations of states and political subdivisions (1) 52,606 54,404 34,587 Other securities, including mortgage-backed securities (1) 34,425 47,424 30,344 ----------- ----------- ----------- Total $ 150,255 $ 171,953 $ 137,217 =========== =========== =========== HELD TO MATURITY U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ -- $ -- $ 1,000 Obligations of states and political subdivisions (1) 232 355 4,004 Other securities, including mortgage-backed securities (1) 174 455 1,733 ----------- ----------- ----------- Total $ 406 $ 810 $ 6,737 =========== =========== =========== (1) The Corporation has no securities of an "issuer" where the aggregate carrying value of such securities exceeded ten percent of shareholders' equity. 11 14 The following tables set forth the maturities of securities at December 31, 1999 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 $ 12,833 5.77% $ 48,258 5.75% $ 2,134 6.86% Obligations of states and political subdivisions (1) 7,304 5.13 27,788 4.66 16,944 4.52 $ 570 5.24% Other securities (2) 3,400 6.09 9,611 5.91 -- -- -- -- ---------- ---------- --------- --------- Total $ 23,537 5.62% $ 85,657 5.41% $ 19,078 4.78% $ 570 5.24% ========== ========== ========= ========= HELD TO MATURITY Obligations of states and political subdivisions (1) $ 78 4.54% $ 155 4.54% Other securities (3) -- -- -- -- ---------- ---------- Total $ 78 4.54% $ 155 4.54% ========== ========== (1) Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security. (2) Excludes $13,665,647 of mortgage-backed securities, $2,952,453 of equity securities, $4,207,400 of Federal Home Loan Bank stock and $587,650 of Federal Reserve stock which have no stated maturity. (3) Excludes $173,608 of mortgage-backed securities. (4) The weighted average yield has been computed using the historical amortized cost for available-for-sale securities. 12 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. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Commercial and agricultural $ 26,077 $ 24,140 $ 26,657 $ 24,053 $ 22,455 Commercial real estate 48,301 53,804 49,428 44,599 41,636 Residential real estate 178,876 173,789 183,031 165,148 154,176 Real estate construction 4,482 3,493 3,923 3,449 1,573 Consumer 28,106 27,490 28,759 25,949 24,225 Leases 392 589 736 883 612 Credit card and other 3,576 1,426 1,694 1,850 1,117 ------------ ------------- ------------ ------------ ------------ $ 289,810 $ 284,731 $ 294,228 $ 265,931 $ 245,794 ============ ============= ============ ============ ============ 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. Commercial real estate mortgage loans are made predicated on security interest in real property and secured wholly or substantially by that lien on real property. Commercial real estate mortgage loans generally maintain a loan-to-value ratio of 75%. Residential real estate mortgage loans are made predicated on security interest in real property and secured wholly or substantially by that lien on real property. Such real estate mortgage loans are primarily loans secured by one- to four-family real estate. At year-end 1999, loans secured by one- to four-family real estate represented 77% of total real estate mortgage loans (75% in 1998 and 77% in 1997). Residential real estate mortgage loans generally pose less risk to the Corporation due to the nature of the collateral being less susceptible to sudden changes in value. Real estate construction loans are for the construction of new buildings or additions to existing buildings. Generally, these loans are secured by one- to four-family real estate. The Corporation controls disbursements. 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. 13 16 Credit card loans are made as a convenience to existing customers of the Corporation. 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 Corporation. 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, 1999 and 1998, the Corporation was contingently liable for $507,000 and $623,000 of letters of credit. In addition, the Corporation had issued lines of credit to customers. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 1999 and 1998, the Corporation had commitments to extend credit in the aggregate amounts of approximately $27,060,000 and $26,727,000. Of these amounts, $23,982,000 and $23,412,000 represented lines of credit and construction loans, and $3,078,000 and $3,315,000 represented credit card commitments. Such amounts represent the portion of total commitments that had not been used by customers as of December 31, 1999 and 1998. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES - ------------------------------------------------------------------ The following table shows the amount of commercial and agricultural, commercial real estate and real estate construction loans outstanding as of December 31, 1999, 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 $ 12,084 $ 8,461 $ 5,532 $ 26,077 Commercial real estate 1,620 7,170 39,511 48,301 Real estate construction 866 3,616 -- 4,482 ------------ ------------- ------------ ------------ $ 14,570 $ 19,247 $ 45,043 $ 78,860 ============ ============= ============ ============ Interest Sensitivity ------------------------------- Fixed Variable Rate Rate ---- ---- (Dollars in thousands) Due after one but within five years $ 15,917 $ 3,330 Due after five years 15,038 30,005 ------------ ------------- $ 30,955 $ 33,335 ============ ============= The preceding maturity information is based on contract terms at December 31, 1999 and does not include any possible "rollover" at maturity date. In the normal course of business, the Corporation considers and acts 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. 14 17 RISK ELEMENTS The following table presents information concerning the amount of loans at December 31 that contain certain risk elements. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a nonaccrual basis (1) $ 1,682 $ 1,693 $ 1,969 $ 921 $ 1,432 Loans contractually past due 90 days or more as to principal or interest payments (2) 834 1,235 1,717 1,308 1,770 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) 693 305 308 -- -- ---------- --------- --------- --------- --------- Total $ 3,209 $ 3,233 $ 3,994 $ 2,229 $ 3,202 ========== ========= ========= ========= ========= Impaired loans included in above totals $ 994 $ 1,196 $ 864 $ 1,745 $ 1,920 Impaired loans not included in above totals 3,166 2,963 3,571 1,470 1,597 ---------- --------- --------- --------- --------- Total impaired loans $ 4,160 $ 4,159 $ 4,435 $ 3,215 $ 3,517 ========== ========= ========= ========= ========= There are no loans as of December 31, 1999, other than those disclosed above, where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. There are no other interest-bearing assets that would be required to be disclosed in the table above, if such assets were loans as of December 31, 1999. (1) Loans are placed on nonaccrual status when doubt exists as to the collectibility of the loan, including any accrued interest. With a few immaterial exceptions, commercial and agricultural, commercial real estate, residential real estate and construction loans past due 90 days are placed on nonaccrual unless they are well collateralized and in the process of collection. Generally, consumer loans are charged-off within 30 days after becoming past due 90 days unless they are well collateralized and in the process of collection. Credit card loans are charged-off before reaching 120 days of delinquency. Once a loan is placed on nonaccrual, interest is then recognized on a cash basis where future collections of principal is probable. (2) Excludes loans accounted for on a nonaccrual basis. (3) Excludes loans accounted for on a nonaccrual basis and loans contractually past due ninety days or more as to principal or interest payments. Interest income recognition associated with impaired loans was as follows. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Interest income on impaired loans, including interest income recognized on a cash basis $ 320,000 $ 273,000 $ 227,000 $ 242,000 $ 316,000 ========== ========== ========== ========= ========== Interest income on impaired loans recognized on a cash basis $ 320,000 $ 273,000 $ 182,000 $ 141,000 $ 227,000 ========== ========== ========== ========= ========== No concentrations of loans exceeded 10% of total loans. 15 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. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Daily average amount of loans, net of unearned income $ 284,080 $ 288,108 $ 280,141 $ 250,719 $ 236,831 ============ ============= ============= ============= ============== Allowance for possible loan losses at beginning of year $ 4,567 $ 4,707 $ 3,935 $ 3,585 $ 3,250 Loan charge-offs: Commercial and agricultural and commercial real estate 63 134 53 90 95 Real estate mortgage 95 40 70 32 24 Real estate construction -- -- -- -- -- Consumer 582 490 387 344 188 Leases -- -- -- 3 64 Credit card and other 49 61 47 51 42 ------------ ------------- ------------- ------------- -------------- 789 725 557 520 413 Recoveries of loans previously Charged-off: Commercial and agricultural and commercial real estate 29 32 48 41 161 Real estate mortgage 13 31 2 2 28 Real estate construction -- -- -- -- -- Consumer 171 133 132 82 75 Leases -- -- -- -- -- Credit card and other 17 27 18 12 27 ------------ ------------- ------------- ------------- -------------- 230 223 200 137 291 ------------ ------------- ------------- ------------- -------------- Net charge-offs (1) (559) (502) (357) (383) (122) Provision for loan losses (2) 266 362 1,129 733 457 ------------ ------------- ------------- ------------- -------------- Allowance for loan losses at end of year $ 4,274 $ 4,567 $ 4,707 $ 3,935 $ 3,585 ============ ============= ============= ============= ============== Allowance for loan losses as a percent of loans at year-end 1.48% 1.60% 1.60% 1.48% 1.46% ======== ======= ======== ======== ======= Ratio of net charge-offs during the year to average loans outstanding .20% .17% .13% .15% .05% ======== ======= ======== ======== ======= (1) The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy and specific business segments. (2) The determination of the balance of the allowance for loan losses is based on an analysis of the loan portfolio and reflects an amount that, in management's judgment, is adequate to provide for probable 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. 16 19 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The following table allocates the allowance for loan losses at December 31 to each loan category. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probable losses estimated to be incurred within the following categories of loans at the dates indicated. 1999 ---- Percentage of loans to (Dollars in thousands) Allowance total loans --------- ----------- Commercial and agricultural $ 531 9.0% Commercial real estate 152 16.7 Real estate mortgage 1,447 61.7 Real estate construction -- 1.6 Consumer 544 9.7 Credit card and other 12 1.2 Leases 23 0.1 Unallocated 1,565 ----------- $ 4,274 100.0% =========== ======== 1998 1997 ---- ---- Percentage Percentage of loans to of loans to Allowance total loans Allowance total loans --------- ----------- --------- ----------- Commercial and agricultural and commercial real estate $ 932 27.4% $ 768 25.9% Real estate mortgage 1,202 61.0 1,509 62.2 Real estate construction -- 1.2 -- 1.3 Consumer 784 9.7 377 9.8 Credit card and other 22 0.5 15 0.6 Leases 24 0.2 29 0.2 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 and commercial real estate $ 1,152 25.8% $ 1,162 26.1% Real estate mortgage 308 62.1 534 62.7 Real estate construction -- 1.3 -- 0.6 Consumer 235 9.8 313 9.9 Credit card and other 11 0.7 11 0.5 Leases 35 0.3 34 0.2 Unallocated 2,194 1,531 ----------- -------- ----------- ------- $ 3,935 100.0% $ 3,585 100.0% =========== ======== =========== ======= 17 20 DEPOSITS The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated. 1999 1998 1997 ------------------------ -------------------------- ---------------------- Average Average Average Average Average Average balance rate paid balance rate paid balance rate paid ------- --------- ------- --------- ------- --------- (Dollars in thousands) Noninterest-bearing demand deposits $ 39,123 N/A $ 36,327 N/A $ 35,239 N/A Interest-bearing demand deposits 49,189 1.36% 40,798 2.12% 45,533 2.18% Savings, including Money Market deposit accounts 115,057 2.78 114,282 2.87 112,212 2.95 Certificates of deposit, including IRAs 206,296 5.01 212,081 5.55 196,081 5.58 ------------ ------------ ------------ $ 409,665 $ 403,488 $ 389,065 ============ ============ ============ Maturities of certificates of deposits and individual retirement accounts of $100,000 or more outstanding at December 31, 1999 are summarized as follows. Individual Certificates Retirement of Deposits Accounts Total ----------- -------- ----- (Dollars in thousands) 3 months or less $ 8,285 $ 233 $ 8,518 Over 3 through 6 months 8,928 253 9,181 Over 6 through 12 months 2,950 507 3,457 Over 12 months 2,487 1,701 4,188 ----------- ---------- ----------- $ 22,650 $ 2,694 $ 25,344 =========== ========== =========== SHORT-TERM BORROWINGS See Note 8 to the consolidated financial statements and "Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential" for the statistical disclosures for short-term borrowings for 1999 and 1998. No short-term borrowings were outstanding in 1997 for which the average balance exceeded thirty percent of shareholders' equity. 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, ---------------------------------- 1999 1998 1997 ---- ---- ---- Percentage of net income to: Average total assets 1.24% 1.18% 0.95% Average shareholders' equity 11.58 10.95 8.75 Dividends declared as a percentage of net income 80.22 77.50 79.84 Percentage of average shareholders' equity to average total assets 10.74 10.78 10.81 18 21 ITEM 2. PROPERTIES FCBC neither owns nor leases any properties. Citizens maintains its main office at 100 East Water Street, Sandusky, Ohio, which is also the office of FCBC. Citizens also 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. Farmers maintains its main office at 102 South Kibler Street, New Washington, Ohio. Farmers also owns and operates a branch banking office in the Ohio communities of Chatfield, Tiro, Richwood and Green Camp. Castalia owns its main office located at 208 South Washington Street, Castalia, Ohio. SCC owns its processing center located at 1845 Superior Street, Sandusky, Ohio and leases offices in downtown Sandusky, Ohio. Reynolds leases offices in downtown Sandusky, Ohio. FCBC has three wholly-owned subsidiary banks, a wholly-owned item processing company subsidiary and a wholly-owned real estate appraisal company subsidiary. ITEM 3. LEGAL PROCEEDINGS The Corporation's management is aware of no pending or threatened litigation in which the Corporation faces potential loss or exposure that will materially affect the consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation has no established public trading market for its common stock and is not listed on any exchange. The brokerage firms of Everen Securities, Merrill Lynch and McDonald & 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. 1999 ---- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- $25.50 to $28.00 $28.25 to $28.00 $28.63 to $28.00 $28.03 to $28.70 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 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, 1999 was 881. 19 22 Dividends per share declared by the Corporation on common stock were as follows. 1999 1998 ---- ---- February $ .16 $ .15 May .16 .15 August .16 .15 November .67 .66 -------- ------- $ 1.15 $ 1.11 ======== ======= ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain selected consolidated financial information of the Corporation and is qualified in its entirety by reference to the detailed information and consolidated financial statements of the Corporation included in Item 8 hereof. YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands, except per share data) Statements of income: Total interest income $ 33,067 $ 34,204 $ 33,649 $ 32,138 $ 31,195 Total interest expense 15,130 17,295 16,675 15,856 15,122 ------------ ------------- ------------ ------------ ------------ Net interest income 17,937 16,909 16,974 16,282 16,073 Provision for loan losses 266 362 1,129 733 457 ------------ ------------- ------------ ------------ ------------ Net interest income after provision for loan losses 17,671 16,547 15,845 15,549 15,616 Security gains (losses) (1) 1,602 575 107 59 (223) Other noninterest income 3,926 5,651 4,238 3,787 3,172 ------------ ------------- ------------ ------------ ------------ Total noninterest income 5,528 6,226 4,345 3,846 2,949 Total noninterest expense 14,771 14,679 14,190 11,900 11,573 ------------ ------------- ------------ ------------ ------------ Income before federal income taxes 8,428 8,094 6,000 7,495 6,992 Federal income tax expense 2,366 2,333 1,559 1,927 1,715 ------------ ------------- ------------ ------------ ------------ Net income $ 6,062 $ 5,761 $ 4,441 $ 5,568 $ 5,277 ============ ============= ============ ============ ============ Per share of common stock: Net income $ 1.43 $ 1.35 $ 1.04 $ 1.31 $ 1.24 Dividends 1.15 1.11 1.07 1.02 .71 Book value 11.58 12.61 12.01 11.42 10.92 Average common shares outstanding 4,242,546 4,263,401 4,263,401 4,263,401 4,263,401 Year-end balances: Loans, net $ 284,446 $ 278,782 $ 287,738 $ 260,023 $ 240,359 Securities 150,661 172,763 143,954 157,442 160,350 Total assets 472,220 508,889 484,118 455,909 446,819 Deposits 403,160 417,899 402,183 375,810 369,241 Borrowings 18,000 30,576 25,643 27,406 26,461 Shareholders' equity 48,195 53,741 51,199 48,688 46,563 20 23 YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Average balances: Loans, net $ 279,649 $ 283,433 $ 276,508 $ 246,943 $ 234,324 Securities 163,134 155,715 151,245 159,830 158,402 Total assets 487,242 487,710 469,760 449,254 433,261 Deposits 409,665 403,488 389,065 371,179 356,213 Borrowings 20,525 26,805 25,808 26,448 25,931 Shareholders' equity 52,347 52,595 50,760 47,549 43,256 Selected ratios: Net yield on average interest- earning assets 3.89% 3.69% 3.84% 3.84% 3.91% Return on average total assets 1.24 1.18 .95 1.24 1.22 Return on average shareholders' equity 11.58 10.95 8.75 11.71 12.20 Average shareholders' equity as a percent of average total assets 10.74 10.78 10.81 10.58 9.98 Net loan charge-offs as a percent of average loans .20 .17 .13 .15 .05 Allowance for loan losses as a percent of loans at year-end 1.48 1.60 1.60 1.48 1.46 Shareholders' equity as a percent of total year-end assets 10.21 10.56 10.58 10.68 10.42 (1) Other-than-temporary declines in the values of a security of $226,000 were recorded during 1995. Partial recoveries of $10,000, $25,000, $214,000 and $39,000 were received in 1999, 1998, 1997 and 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 AND FOR THE YEARS ENDING DECEMBER 31, 1999, 1998 AND 1997 GENERAL The following paragraphs more fully discuss the significant highlights, changes and trends as they relate to the Corporation's financial condition, results of operations, liquidity and capital resources as of December 31, 1999 and 1998, and during the three-year period ended December 31, 1999. 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. FORWARD-LOOKING STATEMENTS When used in this discussion or future filings by the Corporation with the Securities and Exchange Commission, or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from those anticipated or projected. 21 24 The Corporation is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on its liquidity, capital resources or operations except as discussed herein. The Corporation is not aware of any current recommendations by regulatory authorities that would have such effect if implemented. The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. FINANCIAL CONDITION At December 31, 1999, total assets were $472,220,000 compared to $508,889,000 at December 31, 1998. Net loans increased $5,664,000, or 2.0% from 1998 to 1999. Commercial and agricultural loans increased $1,937,000, or 8.0% from 1998 to total $26,077,000. Residential real estate loans increased by $5,088,000, or 2.9% from 1998 to 1999 to total $178,876,000. Consumer loans increased $616,000, or 2.2% over 1998 to total $28,105,000. Credit card and other loans, which include overdraft protection (ODP) lines of credit, increased $2,149,000 from 1998 to total $3,575,000. In 1998, the Banks became involved in selling fixed-rate mortgages on the secondary market. In 1999, due to rising interest rates, demand began to shift to our three-year variable loans. As the demand for variable-rate loans increased and demand for fixed-rate loans decreased, we started to retain more loans and sell fewer loans. In addition to the $5,088,000 increase in mortgage loans, the Corporation originated mortgage loans held for sale totaling $10,041,000 in 1999. 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. While year-end 1999 deposit balances declined from 1998, average deposit balances for 1999 were $409,665,000 compared to $403,488,000 for 1998, an increase of $6,177,000, or 1.5%. 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 using alternatives to traditional banking deposits. Noninterest-bearing deposits averaged $39,123,000 for 1999 compared to $36,327,000 for 1998, increasing $2,796,000, or 7.7%. Savings, NOW, and MMIA accounts averaged $164,246,000 for 1999 compared to $155,080,000 for 1998. Average time deposits decreased $5,785,000 to total an average balance of $206,296,000 for 1999. Borrowings from the Federal Home Loan Bank of Cincinnati decreased from $13,235,000 at December 31, 1998 to $1,959,000 at December 31, 1999. This decrease of $11,276,000 was a result of scheduled paydowns, including balloon payments in February and April of 1999 on previous advances. The Corporation had no new advances from the Federal Home Loan Bank in 1999. The Banks offer repurchase agreements in the form of sweep accounts to commercial checking account customers. At December 31, 1999, total repurchase agreements in the form of sweep accounts totaled $12,975,000. This compares to $16,370,000 at December 31, 1998. United States Treasury Notes maintained under the Banks' control are pledged as collateral for the repurchase agreements. Securities decreased $22,102,000, or 12.8% from $172,763,000 on December 31, 1998 to $150,661,000 on December 31, 1999. Municipal securities decreased $1,920,000, or 3.5% from 1998 to 1999. Other securities decreased $13,281,000, or 27.7% from 1998 to 1999. Securities decreased due to sales of equity securities and principal paydowns of mortgage-backed securities. Securities were allowed to mature without being replaced as an alternative to pursuing higher priced deposits during a period of slower loan demand. 22 25 Securities held to maturity at December 31, 1999 had unrealized gains of approximately $2,000 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, 1999 of $150,255,000. This fair value includes unrealized gains of approximately $1,885,000 and unrealized losses of approximately $2,182,000. Equity securities consisting of common stock accounted for $1,501,000 in unrealized gains on securities. The net effect of the unrealized gains and losses on securities available for sale, net of taxes, was a reduction to shareholders' equity of $196,000, compared to an increase in equity of $3,672,000 at December 31, 1998. The change is due to realizing gains from the sales of equity securities and market value declines in the security portfolio due to interest rates increasing during 1999. Mortgage-backed securities totaled $13,839,000 at December 31, 1999 and none are considered unusual or "high risk" securities as defined by regulating authorities. Of this total, $4,588,000 are pass-through securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC); $9,220,000 are collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs) issued by FNMA and FHLMC; and $31,000 are privately issued and are collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or Government National Mortgage Association (GNMA). The average interest rate of the portfolio at December 31, 1999 was 5.89%. Also, 1.19% of the December 31, 1999 portfolio, or $167,000 are floating rate securities adjusting at least quarterly. The average maturity at December 31, 1999 was approximately 2.25 years. The Corporation has not invested in any derivative securities. Total shareholders' equity decreased $5,546,000, or 10.3% during 1999 to $48,195,000. The ratio of total shareholders' equity to total assets was 10.2% in 1999 and 10.6% in 1998. The decline was caused by repurchase of the Corporation's common stock and decline in fair value of securities available for sale. RESULTS OF OPERATIONS The operating results of the Corporation are affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. The Corporation's cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans, and other types of loans, which in turn is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities. The Corporation's net income primarily depends on its net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The level of net interest income is dependent on the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net income is also affected by provisions for loan losses, service charges, gains on the sale of assets, other income, noninterest expense and income taxes. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 NET INCOME The Corporation's net income for the year ended December 31, 1999 was $6,062,000 compared to $5,761,000 for the year ended December 31, 1998, an increase of $301,000, or 5.2%. The increase in net income was the result of the items discussed in the following sections. 23 26 NET INTEREST INCOME Net interest income for 1999 was $17,937,000, an increase of $1,028,000, or 6.1% from 1998. The change in the net interest income for 1999 was the net result of a decrease in interest income of $1,137,000 and a decrease in interest expense of $2,165,000. Total interest income decreased $1,137,000, or 3.3% for 1999 compared to $34,204,000 for 1998. This decrease in interest income can be attributed to a decrease in the rate on earning assets from 7.47% in 1998 to 7.16% in 1999. The effects of the decrease in rate were partially offset by an increase in the average interest-earning assets from $462,584,000 to $464,278,000 from 1998 to 1999. Total interest expense decreased $2,165,000, or 12.5% for 1999 compared to $17,295,000 in 1998. The decrease in interest expense can be attributed to a decrease in average interest-bearing liabilities from $393,966,000 to $391,067,000, or $2,899,000 from 1998 to 1999, as well as a decrease in the rate on interest-bearing liabilities from 4.39% to 3.87%. 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. PROVISION AND ALLOWANCE FOR LOAN LOSSES The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for loan losses for the three-year period ended December 31, 1999. AS OF AND FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 1998 1997 ---- ---- ---- Net loan charge-offs $ 559,000 $ 502,000 $ 357,000 Provision for loan losses charged to expense 266,000 362,000 1,129,000 Net loan charge-offs as a percent of average outstanding loans .20% .17% .13% Allowance for loan losses $ 4,274,000 $ 4,567,000 $ 4,707,000 Allowance for loan losses as a percent of year-end outstanding loans 1.48% 1.60% 1.60% Allowance for loan losses as a percent of impaired loans 102.74 109.81 106.13 Impaired loans $ 4,160,000 $ 4,159,000 $ 4,435,000 Impaired loans as a percent of gross year-end loans 1.44% 1.46% 1.51% Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans .87 1.03 1.25 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. 24 27 The provision for loan losses declined by $96,000 in 1999 from $362,000 in 1998 to $266,000 in 1999. Efforts are continually made to examine both the level and mix of the reserve by loan type as well as the overall level of the reserve. 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 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 $5,528,000 in 1999 compared to $6,226,000 in 1998. Income from the data processing and computer services division totaled $1,216,000 for 1999, a 61.7% decrease from 1998 income of $3,174,000. The loss in revenue is related to the sale of SCC Resources' data processing contracts to Jack Henry & Associates, Inc. (JHA). First, there was no gain from sale of contracts in 1999. The Corporation recognized a gain of $1,534,000 from the sale of SCC Resources' data processing contracts in 1998. Second, as the banks serviced by SCC Resources converted processing to JHA, the revenue stream associated with their data processing ended. SCC Resources still provides item processing services for 10 financial institutions plus the three subsidiary banks. Service charges on deposit accounts totaled $1,053,000 in 1999, an increase of $95,000, or 9.9% over 1998 income of $958,000. Additional services and account features have been introduced to generate increased noninterest income from the deposit accounts of the Banks. In addition, the Banks began to review service charges on all products and services to ensure reasonable compensation for the services provided. Some of the fee changes were in place by the end of 1999, with the remaining changes scheduled for completion by the first quarter of 2000. For 1999, the Corporation received $10,000 in payments against an investment security previously written off. 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, 1999 and 1998. In addition, during 1999, the Corporation recognized gains from calls of securities of $9,000 and $1,583,000 from the sales of securities available for sale, of which the majority was from the sales of equity securities at Farmers. The Corporation decided to take advantage of significant increases in the market values and sell a portion of the portfolio. At December 31, 1999 the fair market value of Farmers' equity portfolio totaled $2,528,000 with an amortized cost of $1,028,000. Other noninterest income totaled $1,461,000 in 1999 compared to $1,284,000 in 1998. Increases in other noninterest income are a result of additional products and services introduced to generate noninterest income which include the following areas. Brokerage fees increased $20,000 in 1999 due to increased 25 28 volume. The Corporation added three additional ATMs in 1999. The additional volume of the new ATMs, combined with an ATM surcharge originally instituted in January 1997, led to an increase in fee income of $26,000. The increase in the number of credit card merchants, led to an increase in fee income of $126,000. NONINTEREST EXPENSE Noninterest expense totaled $14,771,000 in 1999, an increase of $92,000, or 0.6% over 1998. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense. Salaries, wages and benefits totaled $6,908,000 in 1999 compared to $7,167,000 in 1998 for a decrease of $259,000. The decrease is primarily due to having fewer employees resulting from the sale of SCC Resources' data processing contracts to JHA. Net occupancy expense totaled $754,000 in 1999 compared to $933,000 in 1998. Equipment expense totaled $865,000 in 1999 compared to $784,000 in 1998. The decrease in occupancy expense and the increase in equipment expense are primarily related to the sale of SCC Resources' data processing contracts. FDIC premiums totaled $48,000 in 1999 compared to $161,000 in 1998. The decrease in FDIC premiums of $113,000 from 1998 to 1999 is a result of a change in the FDIC rating at Farmers for a six-month period in 1998. State of Ohio Franchise taxes were $587,000 in 1999 compared to $657,000 in 1998. The franchise taxes are based on the capital positions of the Banks. Castalia and Farmers paid special dividends to First Citizens at the end of 1998 thus, reducing franchise tax expense. These were used to continue the current dividend policy of the Corporation, as well as provide funding for possible stock repurchases. Professional fees represent legal, audit and outside consulting fees paid by the Corporation. Professional fees totaled $896,000 in 1999 compared to $911,000 in 1998. The overall decrease in professional fees is due to the absence of fees associated with the purchase of Farmers, partially offset by increased advisor fees. The increase in advisor fees can be attributed to the conversion of data processing systems as well as preparation for the Year 2000 date change. Amortization of intangible assets remained constant from 1998 to 1999 at $336,000. Data processing expense was $465,000 in 1999 and relates to data processing services provided by JHA. Prior to 1999, SCC Resources provided this service to the Banks. This expense would have been reflected in salaries, wages and benefits, net occupancy expense and equipment expense in prior years. Other operating expenses totaled $3,912,000 in 1999 compared to $3,729,000 in 1998. Increased expenditures in advertising, marketing, and employee education and training in customer service and cross selling make up the $183,000 increase in 1999. INCOME TAX EXPENSE Income before federal income taxes amounted to $8,428,000 in 1999 and $8,094,000 in 1998. The Corporation's effective income tax rate was 28.1% in 1999 compared to 28.8% in 1998. 26 29 COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 NET INCOME The Corporation's net income for the year ended December 31, 1998 was $5,761,000 compared to $4,441,000 for the year ended December 31, 1997, an increase of $1,320,000, or 29.7%. The increase in net income was mainly the result of the gain on the sale of SCC's data processing contracts. Other factors are explained below. NET INTEREST INCOME Net interest income for 1998 was $16,909,000, a decrease of $65,000, or 0.4% from 1997. The change in 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% from 1997 to 1998. This increase in 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 net volume of average interest-earning assets offset a decrease in the average yield on interest-earning assets of 15 basis points from 7.62% in 1997 to 7.47% in 1998. Total interest expense increased $620,000, or 3.7% from 1997 to 1998. 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 3.8% from 1997 to 1998. 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. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses declined by $767,000 from 1997 to $362,000 for 1998. The larger provision in the prior year was primarily related to Farmers. In 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 Bank's collateral position for many of the loans originated in 1997. As a result of these improvement efforts, the 1998 provision for loan losses declined. NONINTEREST INCOME Noninterest income totaled $6,226,000 in 1998 compared to $4,345,000 in 1997. 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. The increase in revenue is attributed to a gain of $1,534,000 from the sale of SCC Resources' data processing contracts in 1998, which offset the decreased data processing fees. The Corporation also recognized gains of $550,000 on the sales and calls of securities in 1998. Service charges on deposit accounts totaled $958,000 in 1998, an increase of $34,000, or 3.6% over 1997 income of $924,000. Additional services and account features have been introduced to generate increased 27 30 noninterest income from the deposit accounts of the Banks. In addition, service charges are reviewed annually to ensure reasonable compensation for the services provided. For 1998, the Corporation received $25,000 in payments against an investment security previously written off. 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. Net gains on sales of loans increased from $61,000 in 1997 to $235,000 in 1998 primarily due to increased emphasis on and involvement in selling fixed rate mortgages on the secondary market. Other noninterest income totaled $1,284,000 in 1998 compared to $1,062,000 in 1997. Increases in other noninterest income are a result of additional products and services introduced to generate noninterest income, which include the following 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. NONINTEREST EXPENSE Noninterest expense totaled $14,679,000 in 1998, an increase of $489,000, or 3.4% over 1997. 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, for an increase of $93,000. Net occupancy expense totaled $933,000 in 1998 compared to $661,000 in 1997. Equipment expense totaled $784,000 in 1998 compared to $861,000 in 1997. 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. 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. State of Ohio Franchise taxes were $657,000 in 1998 compared to $631,000 in 1997. 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. Decreases in these fees represent the additional consulting costs incurred in 1997 as a result of the acquisition of The Farmers State Bank of New Washington, which was completed in April 1998. Amortization of intangible assets remained almost constant from 1997 to 1998, increasing from $326,000 to $336,000. 28 31 Other operating expenses totaled $3,729,000 in 1998 compared to $3,479,000 in 1997 due to increased expenditures in advertising, marketing, and employee education and training in customer service and cross selling. INCOME TAX EXPENSE Income before federal income taxes amounted to $8,094,000 in 1998 and $5,999,000 in 1997. The Corporation's effective income tax rate was 28.8% in 1998 compared to 26.0% in 1997. The effective tax rate increased in 1998 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 1999 year-end balances of $4,600,000 in federal funds sold and by approximately $150,255,000 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 1999 was $7,343,000. This includes net income of $6,062,000 plus net adjustments of $1,281,000 to reconcile net earnings to net cash provided by operations. Cash provided by investing activities was $25,868,000 in 1999 which includes maturities, prepayments and sales of securities and federal funds partially offset by new loans and security purchases. Cash used in financing activities for 1999 totaled $35,056,000. This includes the reduction in deposits, repayments of FHLB borrowings and the payments of dividends. Cash used by financing activities exceeded cash generated by operating activities and investing activities by $1,845,000, which resulted in a decrease in cash and cash equivalents to $14,599,000. 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 State of Ohio Department of Commerce, Division of Financial Institutions, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. In 1999, Citizens paid dividends of $2,600,000 to the Corporation. Also in 1999, Farmers paid a special $941,000 dividend to the Corporation with the approval of the State of Ohio Department of Commerce, Division of Financial Institutions. 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 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 $3,507,000 at December 31, 1999. 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. 29 32 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 risk adjusted assets, with at least 4% being in tier I capital. The Corporation's ratios as of December 31, 1999 and 1998 were 18.7% and 18.8% respectively for total capital, and 17.3% and 17.4% 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 9.6% and 9.5% at December 31, 1999 and 1998. 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, 1999 and 1998 in Note 14 to the consolidated financial statements. The fair value of the Corporation's financial instruments generally decreased relative to their carrying values in 1999 as a result of an increase in the general level of interest rates. The fair value of loans at December 31, 1999 was 94.5% of the carrying value compared to 101.3% at December 31, 1998. The fair value of deposits at December 31, 1999 was 99.9% of the carrying value, compared to 99.2% at December 31, 1998. YEAR 2000 The Corporation formed Year 2000 (Y2K) Health Check Teams to be on hand January 1, 2000 to establish that all systems were in working order after the new year date change. The teams consisted of employees representing each company, department and branch. A checklist procedure was developed for each affiliate company to follow so that the following areas would be tested and signed-off that each was Y2K compliant: Facilities, Network Servers, Security, Hardware and Software. A training class was held late in December 1999 to go over the checklist and the procedures for verifying Y2K compliance. On January 1, 2000, as each team finished their checklist, they signed-off and reported to a central location that all was well. There were no significant problems caused by the date change and all offices opened for business, providing full services to our customers on Monday, January 3, 2000. 30 33 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 institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment. Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Corporation is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Corporation's primary asset/liability management technique is the measurement of the Corporation's asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this 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. 31 34 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, 1999 and 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, 1999 or 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. 32 35 DECEMBER 31, 1999 On-Balance-Sheet Financial Instruments (Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total Fair value ---- ---- ---- ---- ---- ---------- ----- ---------- Interest-earning assets: Loans receivable(1)(2) Fixed rate $ 12,781 $ 5,497 $ 11,427 $ 11,884 $ 23,392 $ 89,805 $154,786 $147,861 Avg. int. rate 8.24% 9.84% 8.85% 8.89% 8.19% 7.77% 8.11% Adj. rate $ 12,604 $ 1,402 $ 1,956 $ 1,591 $ 1,938 $115,533 $135,024 $126,370 Avg. int. rate 9.25% 8.55% 8.53% 7.72% 8.06% 7.53% 7.73% Mortgage-backed securities(3) Fixed rate $ 1,439 $ 462 $ 898 $ 10,873 $ 13,672 $ 13,673 Avg. int. rate 5.50% 6.00% 6.00% 5.93% 5.89% Adj. rate $ 168 $ 168 $ 168 Avg. int. rate 6.06% 6.06% Securities(4) $ 28,465 $ 26,252 $ 22,152 $ 25,626 $ 8,975 $ 25,352 $136,822 $136,822 Avg. int. rate 5.78% 6.36% 6.23% 5.69% 5.96% 5.55% 5.90% Fed funds sold 4,600 $ 4,600 $ 4,600 Avg. int. rate 5.50% 5.50% Interest-bearing deposit $ 51 $ 51 $ 51 Avg. int. rate 5.88% 5.88% Total $ 58,501 $ 33,151 $ 36,974 $ 39,563 $ 35,203 $241,731 $445,123 $429,545 Interest-bearing liabilities: Interest-bearing deposits and escrows(5) $195,688 $ 65,825 $ 39,213 $ 20,890 $ 356 $ 40,942 $362,914 $362,873 Avg. int. rate 4.27% 3.98% 3.54% 2.79% 4.64% 1.76% 3.77% Borrowings $ 16,600 $ 592 $ 625 $ 183 $ 18,000 $ 17,959 Avg. int. rate 4.53% 5.61% 5.61% 5.58% 4.62% Total $212,288 $ 66,417 $ 39,838 $ 21,073 $ 356 $ 40,942 $380,914 $380,832 33 36 DECEMBER 31, 1998 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 <FN> 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 equity securities. (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. 34 37 [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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Columbus, Ohio January 28, 2000 35 38 FIRST CITIZENS BANC CORP CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 - -------------------------------------------------------------------------------------------------------------------- 1999 1998 ---- ---- ASSETS Cash and due from financial institutions $ 14,598,566 $ 16,443,613 Federal funds sold 4,600,000 19,950,000 Interest-bearing deposits 51,031 248,282 Securities available for sale 150,254,933 171,952,700 Securities held to maturity (Estimated fair values of $407,765 in 1999 and $823,632 in 1998) 406,108 810,122 Loans held for sale 2,217,250 2,273,509 Loans, net 284,446,025 278,782,075 Premises and equipment, net 7,457,886 7,363,513 Accrued interest receivable 3,680,082 3,717,568 Intangible assets 2,197,916 2,533,963 Other assets 2,310,260 4,813,518 ----------------- ----------------- Total assets $ 472,220,057 $ 508,888,863 ================= ================= LIABILITIES Deposits Noninterest-bearing $ 40,246,502 $ 38,574,055 Interest-bearing 362,913,881 379,325,190 ----------------- ----------------- Total deposits 403,160,383 417,899,245 Federal Home Loan Bank advances 1,958,960 13,235,165 Securities sold under repurchase agreements 12,975,188 16,369,681 U.S. Treasury interest-bearing demand note payable 3,065,681 971,558 Accrued expenses and other liabilities 2,865,057 6,672,283 ----------------- ----------------- Total liabilities 424,025,269 455,147,932 ----------------- ----------------- SHAREHOLDERS' EQUITY Common stock, no par value, 10,000,000 shares authorized, 4,263,401 shares issued 23,257,520 23,257,520 Retained earnings 28,010,371 26,811,264 Treasury Stock, 100,586 shares at cost (2,877,032) -- Accumulated other comprehensive income (loss) (196,071) 3,672,147 ----------------- ----------------- Total shareholders' equity 48,194,788 53,740,931 ----------------- ----------------- Total liabilities and shareholders' equity $ 472,220,057 $ 508,888,863 ================= ================= See accompanying notes to consolidated financial statements. 36 39 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- INTEREST AND DIVIDEND INCOME Loans, including fees $ 23,407,541 $ 24,357,161 $ 24,015,061 Taxable securities 6,644,790 6,751,399 6,820,602 Tax-exempt securities 2,305,993 2,093,206 2,166,143 Federal funds sold 627,370 943,431 582,845 Other 81,225 58,739 64,361 --------------- --------------- ---------------- 33,066,919 34,203,936 33,649,012 INTEREST EXPENSE Deposits 14,196,629 15,909,096 15,247,451 Federal Home Loan Bank advances 253,925 797,265 866,482 Other 678,972 588,874 561,067 --------------- --------------- ---------------- 15,129,526 17,295,235 16,675,000 --------------- --------------- ---------------- NET INTEREST INCOME 17,937,393 16,908,701 16,974,012 Provision for loan losses 266,443 361,886 1,129,468 --------------- --------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,670,950 16,546,815 15,844,544 --------------- --------------- ---------------- NONINTEREST INCOME Computer center data and item processing fees 1,215,507 1,640,275 2,191,004 Gain on sale of data processing contracts -- 1,534,120 -- Service charges 1,052,646 957,573 923,957 Net gains on sale of securities 1,601,924 574,981 107,057 Net gains on sale of loans 197,446 234,973 61,317 Other 1,461,188 1,284,273 1,062,015 --------------- --------------- ---------------- 5,528,711 6,226,195 4,345,350 NONINTEREST EXPENSE Salaries, wages and benefits 6,908,328 7,167,285 7,074,025 Net occupancy expense 754,360 933,377 661,157 Equipment expense 864,745 784,206 860,983 Federal deposit insurance premiums 48,320 160,812 47,950 State franchise tax 586,802 657,283 631,061 Professional services 895,666 910,867 1,109,808 Amortization of intangible assets 336,048 336,048 326,048 Contracted data processing 464,837 -- -- Other operating expenses 3,912,310 3,729,109 3,479,379 --------------- --------------- ---------------- 14,771,416 14,678,987 14,190,411 --------------- --------------- ---------------- Income before income taxes 8,428,245 8,094,023 5,999,483 Income tax expense 2,366,076 2,333,356 1,558,939 --------------- --------------- --------------- NET INCOME $ 6,062,169 $ 5,760,667 $ 4,440,544 =============== =============== =============== EARNINGS PER COMMON SHARE $ 1.43 $ 1.35 $ 1.04 =============== =============== =============== See accompanying notes to consolidated financial statements. 37 40 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------------- Accumulated Other Total Common Stock Retained Treasury Comprehensive Shareholders' Shares Amount Earnings Stock Income Equity ------ ------ -------- ----- ------ ------ Balance, January 1, 1997 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 (loss) on securities available for sale, net of reclassification and tax effects 1,615,663 1,615,663 -------------- Total comprehensive income 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 (loss) on securities available for sale, net of reclassification and tax effects 1,245,085 1,245,085 -------------- Total comprehensive income 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 ============= ============= ============= ============ ============ ============== (Continued) 38 41 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued) Years ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Other Total ------------ Retained Treasury Comprehensive Shareholders' Shares Amount Earnings Stock Income (loss) Equity ------ ------ -------- ----- ------------- ------ Balance, December 31, 1998 4,263,401 $ 23,257,520 $ 26,811,264 $ -- $ 3,672,147 $ 53,740,931 Comprehensive income: Net income 6,062,169 6,062,169 Change in unrealized gain (loss) on securities available for sale, net of reclassification and tax effects (3,868,218) (3,868,218) -------------- Total comprehensive income 2,193,951 Cash dividends ($1.15 per share) (4,863,062) (4,863,062) Purchase of treasury stock, at cost (100,586) (2,877,032) (2,877,032) ------------- ------------- ------------- ------------ ------------ -------------- Balance, December 31, 1999 4,162,815 $ 23,257,520 $ 28,010,371 $ (2,877,032) $ (196,071) $ 48,194,788 ============= ============= ============= ============ ============ ============== See accompanying notes to consolidated financial statements. 39 42 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,062,169 $ 5,760,667 $ 4,440,544 Adjustments to reconcile net income to net cash from operating activities Security amortization, net of accretion 644,696 371,550 156,086 Depreciation 888,887 1,014,740 886,933 Write-down of obsolete property and equipment -- 437,501 -- Amortization of intangible assets 336,048 336,048 326,048 Net realized (gain) loss on sales of securities (1,601,924) (574,981) 106,629 FHLB stock dividends (287,100) (273,000) (243,300) Provision for loan losses 266,443 361,886 1,129,468 Loans originated for sale (10,040,992) (10,921,465) (2,892,410) Proceeds from sale of loans 10,167,243 9,463,171 2,262,728 Gain on sale of loans (197,446) (234,973) (61,317) Amortization of mortgage servicing rights 45,962 11,405 -- Deferred income taxes (395,283) 726,990 (257,542) Change in Net deferred loan fees (162,905) (162,502) (61,927) Accrued interest receivable 37,486 (365,621) (107,378) Other assets 2,560,194 (2,411,988) (304,254) Accrued interest, taxes and other expenses (980,916) (226,473) 402,027 --------------- -------------- --------------- Net cash from operating activities 7,342,562 3,312,955 5,782,335 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale Maturities, prepayments and calls 34,044,498 51,168,709 22,940,951 Purchases (24,509,471) (84,947,103) (19,433,147) Sales 7,546,840 1,412,990 10,427,598 Securities held to maturity Maturities, prepayments and calls 403,304 5,919,787 5,557,254 Purchases -- -- (4,904,789) Sales -- -- 1,329,289 Loan originations, net of loan payments (5,767,488) 8,761,592 (28,782,920) Proceeds from the sale of assets 26,182 -- 32,350 Property and equipment expenditures (1,423,194) (815,265) (550,268) Change in federal funds sold 15,350,000 (2,350,000) (8,179,000) Maturity of interest bearing deposit 197,251 99,000 686,000 --------------- -------------- --------------- Net cash from investing activities 25,867,922 (20,750,290) (20,876,682) CASH FLOWS FROM FINANCING ACTIVITIES Branch acquisition -- -- 12,153,945 Change in deposits (14,738,862) 15,716,004 11,797,095 Repayment of Federal Home Loan Bank borrowings (11,276,205) (1,252,869) (1,183,652) Change in securities sold under repurchase agreements (3,394,493) 8,590,335 (2,177,686) Change in U.S. Treasury interest-bearing notes payable 2,094,123 (2,403,900) 1,598,957 Cash dividends paid (4,863,062) (4,464,256) (3,545,110) Purchase of treasury stock (2,877,032) -- -- --------------- -------------- --------------- Net cash from financing activities (35,055,531) 16,185,314 18,643,549 --------------- -------------- --------------- Net change in cash and cash equivalents (1,845,047) (1,252,021) 3,549,202 Cash and cash equivalents at beginning of year 16,443,613 17,695,634 14,146,432 --------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,598,566 $ 16,443,613 $ 17,695,634 =============== ============== =============== See accompanying notes to consolidated financial statements. 40 43 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the accounting policies adopted by First Citizens Banc Corp, which have a significant effect on the financial statements. CONSOLIDATION POLICY: The consolidated financial statements include the accounts of First Citizens Banc Corp (FCBC) and its wholly-owned subsidiaries, The Citizens Banking Company (Citizens), The Farmers State Bank (Farmers), The Castalia Banking Company (Castalia), SCC Resources, Inc. (SCC), and R. A. Reynolds Appraisal Services, Inc. (Reynolds), together referred to as the Corporation. Intercompany balances and transactions are eliminated in consolidation. 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 that potentially represent concentrations of credit risk include deposit accounts in other financial institutions. In 1999, SCC provided item processing for 10 financial institutions in addition to the three subsidiary banks. SCC accounted for 3.1% of the Corporation's total revenues. Reynolds provides real estate appraisal services for lending purposes to the subsidiary banks and other financial institutions. Reynolds accounts for less than 1.0% of total Corporation revenues. Management considers the Corporation to operate primarily in one reportable 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: Cash and cash equivalents include cash on hand and demand deposits with financial institutions. Net cash flows are reported 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, 1999, 1998 and 1997, the Corporation paid interest of $15,505,000, $17,527,000 and $16,594,000, and income taxes of $2,718,000, $1,415,000 and $2,034,000. 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. 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. (Continued) 41 44 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) LOANS: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, 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, 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. OTHER REAL ESTATE: Other real estate acquired through or instead of loan foreclosure is initially recorded at fair value when acquired, establishing a new cost basis. Any reduction from carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair value is recognized in a valuation allowance by a charge to income. Other real estate owned included in other assets totaled approximately $431,000 at December 31, 1999 and $456,000 at December 31, 1998. SERVICING RIGHTS: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. (Continued) 42 45 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 deposit intangibles 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, 1999, the remaining balances of goodwill and core deposit intangibles totaled $1,123,000 and $1,075,000. At December 31, 1998, the remaining balances of goodwill and core deposit intangibles totaled $1,276,000 and $1,258,000. 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. REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. INCOME TAXES: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. RETIREMENT PLANS: The Corporation sponsors a noncontributory defined benefit retirement plan for all full-time employees who have attained the age of 21 and have a minimum of six months of service. Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Accrued pension costs are funded to the extent deductible for federal income tax purposes. The Corporation also provides a savings and retirement 401(k) plan for all 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 off-balance-sheet 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. Such financial instruments are recorded when they are funded. COMPREHENSIVE INCOME: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of shareholders' equity. (Continued) 43 46 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 FCBC or by FCBC to shareholders. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. EARNINGS PER COMMON SHARE: Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Basic weighted average common shares outstanding totaled 4,242,546 in 1999 and 4,263,401 in 1998 and 1997. Dividends per share are based on the number of shares outstanding at the record date. FINANCIAL STATEMENT PRESENTATION: Certain items in the 1998 and 1997 financial statements have been reclassified to correspond with the 1999 presentation. NOTE 2 - SECURITIES Year-end securities are as follows. _______________________________1 9 9 9______________________________ 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 $ 64,114,363 $ 32,178 $ (921,945) $ 63,224,596 Obligations of state and political subdivisions 53,004,191 328,583 (727,110) 52,605,664 Other securities, including mortgage- backed and equity securities 33,433,455 1,524,465 (533,247) 34,424,673 --------------- -------------- ------------- ---------------- Total securities available for sale $ 150,552,009 $ 1,885,226 $ (2,182,302) $ 150,254,933 =============== ============== ============= ================ HELD TO MATURITY Obligations of state and political subdivisions $ 232,500 $ 475 $ (31) $ 232,944 Other securities, including mortgage- backed securities 173,608 1,343 (130) 174,821 --------------- -------------- ------------- ---------------- Total securities held to maturity $ 406,108 $ 1,818 $ (161) $ 407,765 =============== ============== ============= ================ (Continued) 44 47 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) _______________________________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 ============== ============== ============= ============= The contractual maturities of securities at year-end 1999 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 $ 77,500 $ 77,669 $ 23,515,911 $ 23,536,892 Due from one to five years 155,000 155,275 86,761,240 85,656,799 Due from five to ten years -- -- 19,444,172 19,078,092 Due after ten years -- -- 570,000 570,000 Mortgage-backed 173,608 174,821 14,013,938 13,665,647 Equity securities -- -- 6,246,748 7,747,503 -------------- -------------- ------------- ------------- Total $ 406,108 $ 407,765 $ 150,552,009 $ 150,254,933 ============== ============== ============= ============= During 1995, management concluded that one of its investments, 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 $10,000, $25,000 and $214,000 in recoveries from Tower Financial Corp. in 1999, 1998 and 1997. (Continued) 45 48 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) Proceeds from sales of securities, gross realized gains and gross realized losses were as follows. Gross Gross Realized Realized Sales Proceeds Gains Losses -------------- ----- ------ Year ended December 31, 1999 $ 7,547,000 $ 1,586,000 $ 3,000 Year ended December 31, 1998 1,413,000 542,000 -- Year ended December 31, 1997 11,757,000 63,000 170,000 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 $9,000 and $8,000 in 1999 and 1998. No gains resulted from securities being called in 1997. Securities with a carrying value of $62,614,000 and $60,960,000 were pledged as of December 31, 1999 and 1998, 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. 1999 1998 ---- ---- Commercial and agricultural $ 26,077,141 $ 24,139,620 Commercial real estate 48,301,000 53,804,390 Residential real estate 178,876,326 173,788,501 Real estate construction 4,482,294 3,492,928 Consumer 28,105,412 27,489,889 Credit card and other 3,575,411 1,426,312 Leases 392,042 589,015 ---------------- ----------------- Total loans 289,809,626 284,730,655 Allowance for loan losses (4,273,825) (4,567,126) Net deferred loan fees (977,613) (1,140,518) Unearned interest (112,163) (240,936) ---------------- ----------------- Net loans $ 284,446,025 $ 278,782,075 ================ ================= (Continued) 46 49 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 3 - LOANS (Continued) Loans to directors and executive officers, including their immediate families and companies in which they are principal owners during 1999 were as follows. Balance - January 1, 1999 $ 5,277,318 New loans and advances 3,695,729 Repayments (2,621,343) Effect of changes in related parties (62,219) -------------- Balance - December 31, 1999 $ 6,289,485 ============== NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses was as follows. 1999 1998 1997 ---- ---- ---- Balance - January 1 $ 4,567,126 $ 4,707,051 $ 3,935,038 Provision for loan losses 266,443 361,886 1,129,468 Loans charged-off (789,067) (724,739) (557,701) Recoveries 229,323 222,928 200,246 --------------- -------------- -------------- Balance - December 31 $ 4,273,825 $ 4,567,126 $ 4,707,051 =============== ============== ============== Impaired loans were as follows. 1999 1998 ---- ---- Year-end loans with no allocated allowance for loan losses $ -- $ -- Year-end loans with allocated allowance for loan losses 4,160,000 4,159,000 Amount of allowance for loan losses allocated 1,145,000 1,173,000 1999 1998 1997 ---- ---- ---- Average balance of impaired loans during year $ 4,118,000 $ 3,915,000 $ 3,264,000 Interest income recognized during impairment 320,000 273,000 227,000 Interest income recognized on a cash basis 320,000 273,000 182,000 Nonperforming loans were as follows. 1999 1998 ---- ---- Loans past due over 90 days still on accrual $ 834,000 $ 1,235,000 Nonaccrual loans 1,682,000 1,693,000 (Continued) 47 50 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued) Nonperforming loans would include some loans which are classified as impaired, and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. NOTE 5 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows. 1999 1998 ---- ---- Land and improvements $ 807,232 $ 807,232 Buildings and improvements 7,480,558 6,854,051 Furniture and equipment 6,507,128 7,132,152 --------------- ---------------- Total 14,794,918 14,793,435 Accumulated depreciation 7,337,032 7,429,922 --------------- ---------------- Premises and equipment, net $ 7,457,886 $ 7,363,513 =============== ================ The Corporation has no material future lease commitments. NOTE 6 - INTEREST-BEARING DEPOSITS Interest-bearing deposits as of December 31, 1999 and 1998 were as follows. 1999 1998 ---- ---- Demand $ 52,659,391 $ 58,453,216 Statement and passbook savings 113,509,210 108,492,369 Certificates of deposit: In excess of $100,000 22,650,261 35,453,288 Other 150,702,363 152,538,800 Individual Retirement Accounts 23,392,656 24,387,517 ----------------- ----------------- Total $ 362,913,881 $ 379,325,190 ================= ================= Scheduled maturities of certificates of deposit and IRAs at December 31, 1999 were as follows. 2000 $ 128,974,089 2001 28,197,660 2002 12,528,862 2003 3,055,362 2004 356,011 Thereafter 240,640 ---------------- Total $ 173,352,624 ================ (Continued) 48 51 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS The Corporation has fixed-rate mortgage-matched advances from the Federal Home Loan Bank. Mortgage-matched advances are utilized to fund specific fixed-rate loans with certain prepayment of principal permitted without penalty. At December 31, 1999 and 1998, Federal Home Loan Bank borrowings were as follows. 1999 1998 ---- ---- 5.95 percent secured note $ -- $ 7,731,782 5.80 percent secured note 381,087 487,630 5.60 percent secured note 969,788 1,234,451 5.55 percent secured note 608,085 765,362 5.25 percent secured note -- 3,015,940 --------------- ---------------- $ 1,958,960 $ 13,235,165 =============== ================ The notes outstanding at December 31, 1999 had required annual principal payments as follows. 2000 $ 558,990 2001 591,260 2002 625,394 2003 183,316 --------------- $ 1,958,960 Federal Home Loan Bank borrowings are collateralized by Federal Home Loan Bank stock and by $2,938,440 and $19,852,748 of residential mortgage loans under a blanket lien arrangement at year-end 1999 and 1998. The Corporation has a $10 million cash management advance line of credit with the Federal Home Loan Bank. No advances were outstanding on this line as of December 31, 1999. NOTE 8 - OTHER BORROWINGS Information concerning securities sold under agreements to repurchase and treasury tax and loan deposits was as follows. 1999 1998 ---- ---- Average balance during the year $ 16,177,000 $ 12,892,000 Average interest rate during the year 4.20% 4.58% Maximum month-end balance during the year 24,895,000 17,341,000 Securities underlying repurchase agreements at year-end were as follows. 1999 1998 ---- ---- Carrying value of securities $ 15,989,000 $ 24,351,000 Fair Value 15,989,000 24,351,000 (Continued) 49 52 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES Income tax expense was as follows. 1999 1998 1997 ---- ---- ---- Current $ 2,761,359 $ 1,606,366 $ 1,816,481 Deferred (395,283) 726,990 (257,542) --------------- -------------- -------------- Income tax expense $ 2,366,076 $ 2,333,356 $ 1,558,939 =============== ============== ============== Effective tax rates differ from the statutory federal income tax rate of 34% due to the following. 1999 1998 1997 ---- ---- ---- Income taxes computed at the statutory federal tax rate $ 2,865,603 $ 2,751,968 $ 2,039,824 Add (subtract) tax effect of Nontaxable interest income, net of nondeductible interest expense (676,296) (608,005) (641,403) Dividends received deduction (5,777) (45,306) (47,588) Amortization of goodwill 68,522 68,522 68,522 Nondeductible reorganization costs -- 89,879 105,992 Other 114,024 76,298 33,592 --------------- -------------- -------------- Income tax expense $ 2,366,076 $ 2,333,356 $ 1,558,939 =============== ============== ============== Tax expense attributable to security gains totaled $544,654, $195,494 and $36,399 in 1999, 1998 and 1997. Year-end deferred tax assets and liabilities were due to the following. 1999 1998 ---- ---- Allowance for loan losses $ 1,081,210 $ 1,180,970 Deferred loan fees 274,534 325,291 Unrealized loss on securities available for sale 101,008 -- Other 88,749 76,852 -------------- -------------- Deferred tax asset 1,545,501 1,583,113 -------------- -------------- Tax depreciation in excess of book depreciation (301,992) (267,057) Discount accretion on securities (6,870) (10,726) Pension costs (28,825) (79,502) Undistributed equity earnings of computer center (269,700) (269,700) Federal Home Loan Bank stock dividends (461,074) (364,310) Unrealized gain on securities available for sale -- (1,891,712) Intangible asset amortization (131,510) (133,822) Leases (72,240) (80,740) Deferred installment gain -- (654,881) Other (101,792) (47,168) -------------- -------------- Deferred tax liability (1,374,003) (3,799,618) -------------- -------------- Net deferred tax asset (liability) $ 162,998 $ (2,216,505) ============== ============== (Continued) 50 53 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 10 - RETIREMENT PLANS The Corporation sponsors a savings and retirement 401(k) plan, which covers all employees who meet certain eligibility requirements and who choose to participate in the plan. The matching contribution to the 401(k) plan was $68,000, $67,000 and $59,000 in 1999, 1998 and 1997. 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 1999, 1998 or 1997. Information about the pension plan was as follows. 1999 1998 ---- ---- Change in benefit obligation: Beginning benefit obligation $ 4,039,171 $ 3,633,341 Service cost 283,799 234,494 Interest cost 249,499 239,789 Actuarial (gain) loss (394,398) 909,770 Benefits paid (522,331) (929,373) Expenses paid (25,884) (48,850) ------------ ------------ Ending benefit obligation 3,629,856 4,039,171 Change in plan assets, at fair value: Beginning plan assets 3,921,683 4,935,505 Actual return 381,219 (35,599) Employer contribution -- -- Benefits paid (522,331) (929,373) Expenses paid (25,884) (48,850) ------------ ------------ Ending plan assets 3,754,687 3,921,683 ------------ ------------ Funded status 124,831 (117,488) Unrecognized net actuarial loss 361,446 827,453 Unrecognized prior service cost 103,305 116,363 Unrecognized net transition asset at January 1, 1989 being recognized over 17 years (495,656) (574,961) ------------ ------------ Prepaid benefit cost $ 93,926 $ 251,367 ============ ============ (Continued) 51 54 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 10 - RETIREMENT PLANS (Continued) The components of pension expense and related actuarial assumptions were as follows. 1999 1998 1997 ---- ---- ---- Service cost $ 283,799 $ 234,494 $ 253,096 Interest cost 249,499 239,789 259,514 Expected return on plan assets (355,335) 84,449 (580,437) Net amortization and deferral (20,522) (567,124) 120,351 ------------ ------------ ------------ Net $ 157,441 $ (8,392) $ 52,524 ============ ============ ============ Discount rate on benefit obligation 7.64% 6.52% 7.27% Long-term rate of return on plan assets 9.00 9.00 9.00 Rate of compensation increase 4.00 4.00 5.00 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 were 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. No gain or loss was realized as a result of the termination. NOTE 11 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end. 1999 1998 ---- ---- Commitments to extend credit: Lines of credit and construction loans $ 23,982,000 $ 23,412,000 Credit cards 3,078,000 3,315,000 Letters of credit 507,000 623,000 -------------- -------------- $ 27,567,000 $ 27,350,000 ============== ============== Commitments to make loans are generally made for a period of one year or less. Fixed-rate loan commitments included above totaled $4,484,000 and have interest rates ranging from 3.75% to 10.00% at December 31, 1999. Maturities extend up to 30 years. (Continued) 52 55 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 11 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK (Continued) 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, 1999 and 1998 approximated $3,065,000 and $2,326,000. NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS The Corporation and the subsidiary Banks are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The Corporation and the Banks were well capitalized at December 31, 1999 and 1998. No conditions or events have occurred since the last notification from regulators that management believes has changed the Corporation's or the Banks' classification. (Continued) 53 56 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued) At December 31, 1999 and 1998, the Corporation's and the Banks' actual capital levels and minimum required levels were as follows. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in Millions) 1999 Total capital to risk- weighted assets Consolidated $ 49.8 18.7% $ 21.3 8.0% $ 26.6 10.0% Citizens 25.0 15.5 12.9 8.0 16.2 10.0 Castalia 5.5 17.6 2.5 8.0 3.1 10.0 Farmers 14.7 21.0 5.6 8.0 7.0 10.0 Tier I (Core) capital to risk- weighted assets Consolidated 46.2 17.3 10.7 4.0 16.0 6.0 Citizens 23.0 14.2 6.5 4.0 9.7 6.0 Castalia 5.2 16.4 1.3 4.0 1.9 6.0 Farmers 13.8 19.7 2.8 4.0 4.2 6.0 Tier I (Core) capital to average assets Consolidated 46.2 9.6 19.2 4.0 23.9 5.0 Citizens 23.0 8.1 11.4 4.0 14.2 5.0 Castalia 5.2 10.3 2.0 4.0 2.5 5.0 Farmers 13.8 9.7 5.7 4.0 7.1 5.0 1998 Total capital to risk- weighted assets Consolidated $ 51.3 18.8% $ 21.8 8.0% $ 27.3 10.0% Citizens 23.4 14.2 13.2 8.0 16.5 10.0 Castalia 4.8 15.5 2.5 8.0 3.1 10.0 Farmers 13.7 18.2 6.0 8.0 7.5 10.0 Tier I (Core) capital to risk- weighted assets Consolidated 47.5 17.4 10.9 4.0 16.4 6.0 Citizens 21.4 13.0 6.6 4.0 9.9 6.0 Castalia 4.4 14.3 1.2 4.0 1.9 6.0 Farmers 12.7 17.0 3.0 4.0 4.5 6.0 Tier I (Core) capital to average assets Consolidated 47.5 9.5 20.0 4.0 25.0 5.0 Citizens 21.4 7.5 11.4 4.0 14.2 5.0 Castalia 4.4 8.4 2.1 4.0 2.6 5.0 Farmers 12.7 8.1 6.3 4.0 7.9 5.0 (Continued) 54 57 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued) FCBC's primary source of funds for paying dividends to its shareholders and for operating expenses is dividends received from the Banks. Payment of dividends by the Banks to FCBC is subject to restrictions by 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 FCBC approximates $3,507,000 and $2,414,000 at December 31, 1999 and 1998. NOTE 13- PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of FCBC follows. CONDENSED BALANCE SHEETS 1999 1998 ---- ---- Assets: Cash $ 2,353,850 $ 6,876,368 Securities available for sale 389,044 -- Investment in bank subsidiaries 43,956,980 44,751,727 Investment in nonbank subsidiaries 2,079,779 2,123,078 Other assets 119,729 426,322 --------------- ---------------- Total assets $ 48,899,382 $ 54,177,495 =============== ================ Liabilities and Shareholders' Equity: Deferred income taxes and other liabilities $ 704,594 $ 436,564 Common stock 23,257,520 23,257,520 Retained earnings 28,010,371 26,811,264 Treasury Stock (2,877,032) -- Accumulated other comprehensive income (loss) (196,071) 3,672,147 --------------- ---------------- Total liabilities and shareholders' equity $ 48,899,382 $ 54,177,495 =============== ================ CONDENSED STATEMENTS OF INCOME 1999 1998 1997 ---- ---- ---- Dividends from bank subsidiaries $ 3,541,000 $ 7,511,664 $ 3,693,249 Other income 24,657 31,000 24,417 Other expense, net (533,652) (273,627) (297,824) -------------- -------------- --------------- Earnings before equity in undistributed net earnings of subsidiaries 3,032,005 7,269,037 3,419,842 (Distributions in excess of earnings of subsidiaries)/ equity in undistributed net earnings of subsidiaries 3,030,164 (1,508,370) 1,020,702 -------------- -------------- --------------- Net income $ 6,062,169 $ 5,760,667 $ 4,440,544 ============== ============== =============== (Continued) 55 58 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 13- PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued) CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997 ---- ---- ---- Operating activities: Net income $ 6,062,169 $ 5,760,667 $ 4,440,544 Adjustment to reconcile net income to net cash provided by operating activities: Change in other assets and other liabilities 274,615 41,992 (121,031) Distributions in excess of/(equity in undistributed) net earnings of subsidiaries (3,030,164) 1,508,370 (1,020,702) -------------- -------------- --------------- Net cash from operating activities 3,306,620 7,311,029 3,298,811 -------------- -------------- --------------- Investing activities: Purchase of securities (389,044) -- -- Change in loan to subsidiary 300,000 -- (300,000) -------------- -------------- --------------- Net cash from investing activities (89,044) -- (300,000) -------------- -------------- --------------- Financing activities: Cash paid for treasury stock (2,877,032) -- -- Cash dividends paid (4,863,062) (4,372,256) (3,545,110) -------------- -------------- --------------- Net cash from financing activities (7,740,094) (4,372,256) (3,545,110) -------------- -------------- --------------- Net change in cash and cash equivalents (4,522,518) 2,938,773 (546,299) Cash and cash equivalents at beginning of year 6,876,368 3,937,595 4,483,894 -------------- -------------- --------------- Cash and cash equivalents at end of year $ 2,353,850 $ 6,876,368 $ 3,937,595 ============== ============== =============== (Continued) 56 59 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair values of financial instruments were as follows. December 31, 1999 December 31, 1998 ----------------- ----------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Financial assets: Cash and due from banks $ 14,598,566 $ 14,599,000 $ 16,443,613 $ 16,444,000 Federal funds sold 4,600,000 4,600,000 19,950,000 19,950,000 Interest-bearing deposits 51,031 51,000 248,282 248,000 Securities available for sale 150,254,933 150,255,000 171,952,700 171,953,000 Securities held to maturity 406,108 408,000 810,122 824,000 Loans held for sale 2,217,250 2,217,000 2,273,509 2,274,000 Loans, net of allowance for loan losses 284,446,025 268,867,000 278,782,075 282,353,000 Accrued interest receivable 3,680,082 3,680,000 3,717,568 3,718,000 Financial liabilities: Deposits (403,160,383) (403,119,000) (417,899,245) (414,612,000) Federal Home Loan Bank borrowings (1,958,960) (1,918,000) (13,235,165) (13,235,000) Securities sold under repurchase agreements and other borrowings (16,040,869) (16,041,000) (17,341,239) (17,341,000) Accrued interest payable (1,533,720) (1,534,000) (1,924,373) (1,924,000) 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. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are considered nominal. NOTE 15 - ACQUISITION Effective April 28, 1998, the Corporation acquired Farmers. 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. (Continued) 57 60 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------- NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows. 1999 1998 1997 ---- ---- ---- Unrealized holding gains and (losses) on available for sale securities $ (4,259,012) $ 2,461,473 $ 2,340,917 Reclassification adjustments for (gains) and losses later recognized in income (1,601,924) (574,981) 107,057 ------------ ------------- ------------ Net unrealized gains and losses (5,860,938) 1,886,492 2,447,974 Tax effect 1,992,720 (641,407) (832,311) ------------ ------------ ------------ Other comprehensive income (loss) $ (3,868,218) $ 1,245,085 $ 1,615,663 ============ ============ ============ NOTE 17 - 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. 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. SCC retained its item processing services. 58 61 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. 59 62 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, 1999. Director Name Age Position since (1) ---- --- -------- -------- DIRECTORS John L. Bacon 74 Chairman Emeritus 1973 Mack Iron Works Company Robert L. Bordner 63 President, Herald Printing Co. 1998 Mary Lee G. Close 84 Personal Investments 1983 Blythe A. Friedley 50 Owner and President, Friedley Insurance Co. 1998 Richard B. Fuller 78 Retired, former President of Universal 1960 Clay Products, Inc. H. Lowell Hoffman, M.D. 76 Retired, former Surgeon 1980 Lowell W. Leech 73 Chairman of the Board, 1975 First Citizens Banc Corp The Citizens Banking Company The Castalia Banking Company Dean S. Lucal 62 Attorney, Lucal & McGookey 1973 W. Patrick Murray 59 Attorney, Murray and Murray 1983 Company, L.P.A. George L. Mylander 67 Retired Educator 1965 Chairman, Firelands Community Hospital Paul H. Pheiffer 74 Chairman of the Board, 1968 Sandusky Bay Development Company (operates the Battery Park Marina in Sandusky, Ohio) David A. Voight 57 President, First Citizens Banc Corp 1989 President, Chief Executive Officer The Citizens Banking Company Richard O. Wagner 86 Retired, former Chairman of First Citizens 1968 Banc Corp and former President of The Citizens Banking Company 60 63 Name Age Position ---- --- -------- EXECUTIVE OFFICERS James O. Miller 47 Executive Vice President First Citizens Banc Corp The Citizens Banking Company LeRoy C. Link 51 Senior Vice President First Citizens Banc Corp President, SCC Resources, Inc. Todd A. Michel 35 Senior Vice President/Controller First Citizens Banc Corp The Citizens Banking Company Charles C. Riesterer 45 Senior Vice President First Citizens Banc Corp The Citizens Banking Company <FN> (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 17, 2000 used in connection with the Corporation'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 17, 2000 utilized in connection with the Corporation'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 17, 2000 used concerning the Corporation's Annual Shareholders' Meeting is incorporated herein by reference. 61 64 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 of 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) Articles of Incorporation, as amended, of First Citizens Banc Corp have been filed under separate pages of the 1999 Form 10-K and are available to shareholders upon request. (3)(ii) Code of Regulations of First Citizens Banc Corp has been filed under separate pages of the 1999 Form 10-K and is available to shareholders upon request. (4) Certificate for Registrant's Common Stock has been filed under separate pages of the 1999 Form 10-K and is available to shareholders upon request. (10)(i) Supplemental Retirement Benefit Agreement - Donald E. Gosser has been filed under separate pages of the 1999 Form 10-K and is available to shareholders upon request. (11) Statement regarding earnings per share is included in Note 1 to the Consolidated Financial Statements and can be located under Item 8 of this Form 10-K. (21) Subsidiaries of the Registrant have been filed as separate pages of the 1999 Form 10-K and are available to shareholders upon request. (27) Financial Data Schedule. (99) Safe Harbor Under the Private Securities Litigation Reform Act of 1995 is incorporated by reference to First Citizens Banc Corp's Form 10-K for the year ended December 31, 1997. (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, 1999. 62 65 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 March 21, 2000 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 63 66 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 Chairman, Firelands Community Hospital MARY LEE G. CLOSE PAUL H. PHEIFFER BLYTHE A. FRIEDLEY Chairman, Sandusky Bay Development Company Owner/President DAVID A. VOIGHT Friedley & Co. Insurance Agency President, First Citizens Banc Corp 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 First Citizens Banc Corp The Citizens Banking Company The Castalia Banking Company OFFICERS LOWELL W. LEECH DONNA J. DALFERRO Chairman of the Board Vice President and Secretary DAVID A. VOIGHT KAREN S. RUTGER President Assistant Vice President Human Resources JAMES O. MILLER DOUGLAS A. GREULICH Executive Vice President Investment Officer LEROY C. LINK BRENDA R. LEAL Senior Vice President Risk Manager TODD A. MICHEL VICKY L. DOSKI Senior Vice President, Controller Compliance/CRA Officer CHARLES C. RIESTERER Senior Vice President 64 67 DIRECTORS OF AFFILIATED COMPANIES The Citizens Banking Company - ------------------------------------------------------------------------------- GRADY MCDONALD JOHN L. BACON W. PATRICK MURRAY Chairman Emeritus Attorney, Murray and Murray Company, L.P.A. Mack Iron Works Company GEORGE L. MYLANDER MARY LEE G. CLOSE Chairman, Firelands Community Hospital RICHARD B. FULLER PAUL H. PHEIFFER ANTHONY S. GUERRA Chairman, Sandusky Bay Development Company President, LEWCO, Inc. DAVID A. VOIGHT H. LOWELL HOFFMAN, M.D. President, Chief Executive Officer LOWELL W. LEECH The Citizens Banking Company Chairman of the Board RICHARD O. WAGNER The Citizens Banking Company DEAN S. LUCAL Attorney, Lucal & McGookey YVONNE MASON Board Treasurer/General Manager Director Emeritus Akil. Inc. 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 Castalia Banking Company JACK D. BOHN W. PATRICK MURRAY Partner, Bohn Implement Company Attorney, Murray and Murray Company, L.P.A. Farmer ROBERT L. RANSOM BRUCE A. BRAVARD Funeral Director, Ransom Funeral Home President DAVID H. STRACK, D.D.S. The Castalia Banking Company Bay Area Dental, Inc. JOYCE A. KELLER 65 68 THE FARMERS STATE BANK - -------------------------------------------------------------------------------- ROBERT L. BORDNER JAY R. PRESSLER Chairman, CEO President Herald Printing Co. The Farmers State Bank RONALD E. DENTINGER DOROTHY L. ROBEY Manager Chairman of the Board Country Star Co-op The Farmers State Bank BLYTHE A. FRIEDLEY WILLIAM G. SHEAFFER Owner/President Senior Vice President Friedley & Co. Insurance Agency The Farmers State Bank DEAN S. LUCAL DAVID A. VOIGHT Attorney, Lucal & McGookey President, First Citizens Banc Corp RICHARD A. NIEDERMIER President, Chief Executive Officer Owner, Niedermier Sunoco The Citizens Banking Company ROBERT M. OBRINGER GERALD B. WURM President Owner/President Studer-Obringer Construction Co. Wurm's Woodworking Co. SCC Resources, Inc. - ------------------------------------------------------------------------------- H. LOWELL HOFFMAN, M.D. LEROY C. LINK DAVID A. VOIGHT President President, First Citizens Banc Corp SCC Resources, Inc. President, Chief Executive Officer The Citizens Banking Company R. A. Reynolds Appraisal Services, Inc. - ------------------------------------------------------------------------------- DEAN S. LUCAL DAVID A. VOIGHT Attorney, Lucal & McGookey President, First Citizens Banc Corp JOHN F. STAUFFER President, Chief Executive Officer President The Citizens Banking Company Reynolds Appraisal Service, Inc. 66 69 OFFICERS OF AFFILIATED COMPANIES The Citizens Banking Company - ------------------------------------------------------------------------------- Chairman of the Board Lending/customer Service Officer - --------------------- -------------------------------- Lowell W. Leech Lois A. Bilgen President, Chief Executive Officer Christine J. Kane - ---------------------------------- David A. Voight Linda G. Kelley Executive Vice President Lisa M. Schwerer - ------------------------ James O. Miller L. Cathy Wright Senior Vice President Paula J. York - --------------------- Todd A. Michel, Controller Lending Officers ---------------- Charles C. Riesterer James P. Greek Vice Presidents Connie M. Lewis - --------------- Phyllis L. Bransky David G. Majoy Donna J. Dalferro, Secretary Brenda J. Stallard Lee A. Jordan Mortgage Loan Administrator --------------------------- David L. Ott Kenneth C. Hahn Assistant Vice President Mortgage Loan Specialist - ------------------------ ------------------------ Judy A. Burkey Richard C. Finneran, Jr. Robin J. Grathwol Marcia A. Gasteier Karen S. Rutger Suellen M. Williams Investment Officer & Cashier Operations Officers - ---------------------------- ------------------- Douglas A. Greulich Ann E. Baum Credit Card Administrator Joann M. Geis - ------------------------- Paul D. Mesenburg Shirley J. Hoover - Customer Service Officer Susan A. Winkel - ------------------------ Beverly A. Knupke Deborah E. Morrow The Castalia Banking Company - ---------------------- --------------------------------------------------------- Chairman of the Board Lending Officer - --------------------- --------------- Lowell W. Leech Virginia L. Bluhm President Mortgage Loan Specialist - ---------- ------------------------ Bruce A. Bravard Christina A. Raftery Senior Vice President Operations Officers - --------------------- ------------------- Mary K. Schlessman Karen M. Irons Vice President & Cashier Mary K. Meyer - ------------------------ Sharon K. Keimer, Secretary Customer Service Officer ------------------------ Marie K. Greene Gloria J. Mesenburg 67 70 The Farmers State Bank - ------------------------------------------------------------------------------- Chairman of the Board Mortgage Loan Specialist - --------------------- ------------------------ Dorothy L. Robey Gloria J. Miller President Cherynn D. Reebel - --------- Jay R. Pressler Lending/Customer Service Officer -------------------------------- Senior Vice President Cindy S. Berridge - --------------------- Constance F. Bores Donna M. Miller, Cashier Sharon K. Ehrman William G. Sheaffer Nancy L. Everly Vice President Douglas A. Hancock - -------------- Wanda J. White Customer Service Officer Controller ------------------------ - ---------- Janet E. Rowland Doris M. Lambert Commercial Lender/Collections Officer Operations Officer - ------------------------------------- ------------------ Carl F. Arnold Roxann A. Young Consumer/Mortgage Lending Officer Teller Supervisor - --------------------------------- ----------------- Jack R. O. Vetter Tammy J. Hale SCC Resources, Inc. - ------------------------------------------------------------------------------- President Operations Officer - --------- ------------------ LeRoy C. Link Rae L. Cox Vice Presidents David J. Dillon - --------------- Geriann M. Sartor Richard A. Bast Ralph M. Chicotel Secretary-Treasurer ------------------- William E. Couch James O. Miller R. A. Reynolds Appraisal Services, Inc. - ------------------------------------------------------------------------------- President Secretary-treasurer - --------- ------------------- John F. Stauffer James O. Miller 68 71 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 18, 2000 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 Illinois Stock Transfer Company 209 West Jackson Boulevard, Suite 903 Chicago, Illinois 60606-6905 Tel: (312) 427-2953 or 1-800-757-5755 (Toll Free) Fax: (312) 427-2879 FIRST CITIZENS BANC CORP 100 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-4121 Fax: (419) 627-0103 AFFILIATES The Citizens Banking Company 100 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-4121 Fax: (419) 627-0103 The Farmers State Bank 102 South Kibler Street New Washington, Ohio 44854 Tel: (419) 492-2177 Fax: (419) 492-2757 The Castalia Banking Company 208 South Washington Street Castalia, Ohio 44824 Tel: (419) 684-5333 Fax: (419) 684-7051 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 69