EXHIBIT 13
First Citizens Banc Corp 2002 Annual Report to Shareholders
Dear Shareholder:
First Citizens Banc Corp had a good year financially in 2002, highlighted
by improved profitability of Farmers State Bank and the fact that our
partnership with Citizens National Bank lived up to expectations. We also
accomplished many other positive things during the year; however, we now want to
maintain the momentum that First Citizens Banc Corp has achieved. As a result,
we have focused on the following priorities for 2003: maximizing net interest
margins, growing non-interest income, and providing solid leadership and
governance as our business becomes more complex.
Our year-end net interest margin of 4.09% is below our 2001 margin of
4.23% due to unprecedented low interest rates. When interest rates return to
historic levels we are confident our interest margin will improve. As interest
rates moved downward we focused on variable lending products and avoided
competitive pressure to fix interest rates, which could hold down interest
margins in a rising interest rate environment. Therefore, we should be
positioned properly when rates increase.
For the past several years, our loan mix has been changing. We continue to
increase commercial loans because they provide higher interest margins. To
further our efforts to book good commercial loans, we are investing in people.
We have hired well-qualified professionals from other organizations to
supplement associates who joined us via acquisitions and staff developed
internally. We are supporting these lenders by increasing our commitment to
credit administration and restructuring our loan processing. We are also
supplementing the loan growth from the six counties that we serve by
participating in loans originated by community banks in other markets. The
combination of variable rate lending and increased commercial lending should
have a future positive impact on our net interest margin.
Our efforts to increase non-interest income have two parts. First, we are
examining every customer relationship for the opportunity to introduce new
banking products. Through our affiliated companies or through third party
arrangements we can provide appraisals, title insurance, credit insurance,
casualty insurance, and courier services - all of which provide services our
customers need and provide us additional non-interest income.
The second effort regarding non-interest income consists of building a
private banking function. By combining the trust department acquired with the
Citizens National Bank of Norwalk with a new investment operation, certain
insurance services, and our existing Select Banking, we have formed First
Citizens Advisors. We have been fortunate to attract to First Citizens Advisors
experienced local investment professionals who will enhance our efforts to
provide services that our customers need and generate additional non-interest
income for the company.
Corporate leadership and governance have received considerable public
attention last year. Long before the current public attention, senior management
of First Citizens annually certified the financial results that were filed with
the Securities and Exchange Commission and maintained regular open
communications between our accountants, regulators, management, and the board of
directors. We have addressed leadership succession and increased the depth of
management by our additions in the investment and lending areas and by adding
in-house legal counsel. Last year the First Citizens Directors selected a
special non-compensated committee to review and evaluate the efficiency and
effectiveness of the Board of Directors. As a result of this committee's report,
along with an outside consultant's input at
a strategic planning session of the Board, recommendations have been adopted
concerning director qualifications, evaluations, terms, board size, committee
assignments, and board compensation. We are proud of our organization's efforts
on these issues.
Finally, I would like to recognize Lowell Leech, who retired in 2002 from
the Board of First Citizens Banc Corp and the boards of the subsidiary companies
on which he served. Lowell was our President when First Citizens Banc Corp was
established in 1987 and had 55 years of service to Citizens Bank and First
Citizens. His leadership and support will be missed.
Please feel free to contact us. The Board of Directors and management are
always interested in your questions or comments.
Very truly yours,
David A. Voight
President/Chief Executive Officer
Five Year Consolidated Financial Summary
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
EARNINGS
Net Income (000) $7,127 $5,293 $5,692 $6,063 $5,761
Per Common Share (1)
Earnings (basic and diluted) $1.48 $1.30 $1.39 $1.43 $1.35
Book Value $14.24 $11.94 $11.72 $11.58 $12.61
Dividends Paid $1.30 $1.24 $1.24 $1.15 $1.11
BALANCES
Assets (millions) 651.6 487.7 489.3 472.2 508.9
Deposits (millions) 539.9 410.2 392.0 403.2 417.9
Net Loans (millions) 415.7 331.3 342.0 284.4 278.8
Shareholders' Equity (millions) 71.7 48.7 47.9 48.2 53.7
PERFORMANCE RATIOS
Return on Average Assets 1.12% 1.06% 1.19% 1.24% 1.18%
Return on Average Equity 10.22% 10.65% 12.09% 11.58% 10.95%
Equity Capital Ratio 11.00% 9.99% 9.80% 10.21% 10.56%
Net Loans to Deposit Ratio 76.99% 80.78% 87.25% 70.55% 66.71%
Loss Allowance to Total Loans 1.50% 1.45% 1.19% 1.48% 1.60%
(1) Per share data has been adjusted for the business combination with Farmers
State Bank in April 1998 and the business combination with Independent
Community Banc Corp. in April 2002
ANNUAL REPORT
CONTENTS
Five -Year Selected Consolidated Financial Data............................. 1
Common Stock and Stockholder Matters........................................ 3
General Development of Business............................................. 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 5
Quantitive and Qualitative Disclosures About Market Risk.................... 16
Financial Statements
Report of Independent Auditors......................................... 19
Consolidated Balance Sheets............................................ 21
Consolidated Statements of Income...................................... 22
Consolidated Statements of Changes in Shareholders' Equity............. 23
Consolidated Statement of Cash Flows................................... 24
Notes to Consolidated Financial Statements............................. 26
Five-Year Selected Consolidated Finacial Data
(Dollars in thousands, except per share data)
Year ended December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statements of income:
Total interest income $ 36,007 $ 35,348 $ 34,190 $ 33,067 $ 34,204
Total interest expense 11,724 15,453 15,756 15,130 17,295
----------- ---------- ---------- ---------- ----------
Net interest income 24,283 19,895 18,434 17,937 16,909
Provision for loan losses 1,178 1,803 807 266 362
----------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 23,105 18,092 17,627 17,671 16,547
Security gains (1) 8 863 1,080 1,602 575
Other noninterest income 6,823 5,254 4,583 3,927 5,651
----------- ---------- ---------- ---------- ----------
Total noninterest income 6,831 6,117 5,663 5,529 6,226
Total noninterest expense 19,893 16,933 15,466 14,771 14,679
----------- ---------- ---------- ---------- ----------
Income before federal income taxes 10,043 7,276 7,824 8,429 8,094
Federal income tax expense 2,916 1,983 2,132 2,366 2,333
----------- ---------- ---------- ---------- ----------
Net income $ 7,127 $ 5,293 $ 5,692 $ 6,063 $ 5,761
=========== ========== ========== ========== ==========
Per share of common stock:
Basic and diluted earnings $ 1.48 $ 1.30 $ 1.39 $ 1.43 $ 1.35
Dividends 1.30 1.24 1.24 1.15 1.11
Book value 14.24 11.94 11.72 11.58 12.61
Average common shares outstanding:
Basic 4,811,591 4,082,879 4,107,269 4,242,546 4,263,401
Diluted (2) 4,812,664 4,082,879 4,107,269 4,242,546 4,263,401
Year-end balances:
Loans, net $ 415,682 $ 334,347 $ 341,982 $ 284,446 $ 278,782
Securities 161,962 113,726 115,792 150,661 172,763
Total assets 651,634 487,671 489,259 472,220 508,889
Deposits 539,899 410,178 391,968 403,160 417,899
Borrowings 36,692 25,842 46,153 18,000 30,576
Shareholders' equity 71,689 48,727 47,925 48,195 53,741
Average balances:
Loans, net $ 424,947 $ 342,443 $ 309,878 $ 279,649 $ 283,433
Securities 138,062 114,072 135,129 163,134 155,715
Total assets 638,664 499,109 476,874 487,242 487,710
Deposits 533,869 412,385 400,921 409,665 403,488
Borrowings 30,983 33,321 26,541 20,525 26,805
Shareholders' equity 69,767 49,693 47,062 52,347 52,595
(1) Partial recoveries of $10, $10, and $25 were received in 2000, 1999 and
1998 for securities that were written off in prior periods.
(2) Prior to 2002, there were no additional potential common shares issuable
under stock options.
1
Five-Year Selected Ratios
(Dollars in thousands, except per share data)
Year ended December 31,
--------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net yield on average interest-earning assets 4.09% 4.23% 4.10% 3.89% 3.69%
Return on average total assets 1.12 1.06 1.19 1.24 1.18
Return on average shareholders' equity 10.22 10.65 12.09 11.58 10.95
Average shareholders' equity as a percent
of average total assets 10.92 9.96 9.87 10.74 10.78
Net loan charge-offs as a percent of
average total loans 0.27 0.30 0.31 0.20 0.17
Allowance for loan losses as a percent
of loans at year-end 1.50 1.45 1.19 1.48 1.60
Shareholders' equity as a percent
of total year-end assets 11.50 9.99 9.80 10.21 10.56
A copy of Form 10-K, as filed with the Securities and Exchange Commission, will
be furnished, free of charge, to shareholders, upon written request to the
Secretary of First Citizens Banc Corp, 100 East Water Street, Sandusky, Ohio
44870.
2
Common Stock and Stockholder Matters
The common stock of First Citizens Banc Corp trades on The Nasdaq Stock Market
under the symbol "FCZA". As of December 31, 2002, there were 5,033,203 shares
outstanding held by approximately 1,128 stockholders of record (not including
the number of persons or entities holding stock in nominee or street name
through various brokerage firms). Information below is the range of sales prices
for each quarter for the last two years.
2002
----
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
$19.88 to $24.00 $18.25 to $22.75 $20.50 to $24.25 $22.00 to $23.73
2001
----
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
$19.50 to $21.75 $17.00 to $21.00 $20.45 to $24.25 $21.00 to $24.50
Dividends per share declared by the Corporation on common stock were as follows:
2002 2001
------ ------
First quarter $ .19 $ .18
Second quarter .25 .18
Third quarter .25 .18
Fourth quarter .61 .70
------ ------
$ 1.30 $ 1.24
====== ======
General Development of Business
Dollars in thousands, except for per share data
FIRST CITIZENS BANC CORP (FCBC) was organized under the laws of the State of
Ohio on February 19, 1987 and is a registered financial holding company under
the Gramm-Leech-Bliley Act of 2000 (GLB Act), as amended. The Corporation's
office is located at 100 East Water Street, Sandusky, Ohio. The Corporation had
total consolidated assets of $651,634 at December 31, 2002. FCBC and its
subsidiaries are referred to together as the Corporation.
THE CITIZENS BANKING COMPANY (Citizens), owned by the Corporation since 1987,
opened for business in 1884 as The Citizens National Bank. In 1898, Citizens was
reorganized under Ohio banking law and was known as The Citizens Bank and Trust
Company. In 1908, Citizens surrendered its trust charter and began operation
under its current name. Citizens is an insured bank under the Federal Deposit
Insurance Act. Citizens maintains its main office at 100 East Water Street,
Sandusky, Ohio and operates three branch banking offices in Perkins Township
(Sandusky, Ohio), three branch banking offices in Norwalk, Ohio, one branch
banking office in Berlin Heights, Ohio, one branch banking office in Huron, Ohio
and one loan production office in Port Clinton, Ohio. As part of the acquisition
of Independent Community Banc Corp. and its subsidiary, The Citizens National
Bank of Norwalk, which was merged into Citizens, Citizens now has trust
authority again. This subsidiary accounts for 71.9% of the Corporation's
consolidated assets at December 31, 2002.
3
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 Willard, Ohio and the Ohio villages of Chatfield, Tiro, Richwood and
Green Camp. Farmers accounts for 18.1% of the Corporation's consolidated assets
at December 31, 2002.
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 7.4% of the Corporation's consolidated assets at December 31, 2002.
As of January 2, 2003 Castalia merged its operations in with Citizens.
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, 1999, SCC entered into an agreement with
Jack Henry & Associates, Inc. (JHA) to sell all of their contracts for providing
data processing services to community banks. JHA agreed to pay SCC a fee based
upon annual net revenue under a new JHA contract for each bank that signed a
five-year contract with JHA by January 31, 2000. This subsidiary accounts for
less than one percent of the Corporation's consolidated assets as of December
31, 2002.
R. A. REYNOLDS APPRAISAL SERVICE, INC. (Reynolds), owned by the Corporation
since 1993, was organized under the laws of the State of Ohio in September 1993.
Reynolds provides real estate appraisal services, for lending purposes, to the
Banks and to other financial institutions. Reynolds accounts for less than one
percent of the Corporation's consolidated assets as of December 31, 2002.
MR. MONEY FINANCE COMPANY (Mr. Money) was formed in year 2000 to provide
consumer lending products to customers who may not qualify for conventional
commercial bank lending products. Mr. Money has its main office in Sandusky,
Ohio and an office in Norwalk, Ohio. Loans for Mr. Money come from direct
consumer lending to customers, acquisition of loans from brokers and from home
improvement contractors and automobile dealerships. The primary focus of lending
for Mr. Money is in the mortgage and home improvement type of credits. Mr. Money
accounts for 2.1% of the Corporation's consolidated assets as of December 31,
2002.
FIRST CITIZENS TITLE INSURANCE AGENCY INC. (Title Agency) has been formed to
provide customers with a seamless mortgage product with improved service. Assets
of the Title Agency are not significant.
FIRST CITIZENS INSURANCE AGENCY INC. (Insurance Agency) was formed to allow the
Corporation to participate in commission revenue generated through its third
party insurance agreement. Assets of the Insurance Agency are not significant.
FIRST CITIZENS STATUTORY TRUST I (Trust I) was formed in March 2002. FCBC issued
$5,000 of 5.59% floating rate obligated mandatorily redeemable capital
securities through this special purpose subsidiary as part of a pooled
transaction.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001
AND FOR THE YEARS ENDING DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, except per share data)
General
The following paragraphs more fully discuss the significant highlights, changes
and trends as they relate to the Corporation's financial condition, results of
operations, liquidity and capital resources as of December 31, 2002 and 2001,
and during the three-year period ended December 31, 2002. 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.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities that would
have such effect if implemented.
The Corporation does not undertake, and specifically disclaims, any obligation
to publicly release the result of any revisions that may be made to any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
Financial Condition
At December 31, 2002, total assets were $651,634 compared to $487,671 at
December 31, 2001. The increase is primarily the result of the acquisition of
Independent Community Banc Corp. (ICBC) on April 1, 2002. ICBC had assets
totaling $127,713 at March 31, 2002. Net loans increased $84,335, or 25.5% from
2001 to 2002. Commercial and agricultural loans increased $19,787, or 74.1% from
2001 to total $46,495. Commercial real estate loans increased $46,058 or 65.2%
in 2002. Residential real estate loans increased by $6,435, or 3.1% from 2001 to
2002 to total $210,931. Consumer loans increased $7,178, or 31.1% over 2001 to
total $30,278. ICBC's balances for these items were $24,734 in commercial real
estate, $36,658 in residential real estate, $18,911 in commercial and
agriculture and $15,811 in consumer. Credit card and other loans, which include
overdraft protection (ODP) lines of credit, increased $1,385 from 2001 to total
$3,700. Without the acquisition of ICBC, net loans would have declined from 2001
to 2002.
In 2002, due to low interest rates, the demand for residential real estate loans
continued to shift to our fixed rate loan products. As a result, FCBC continued
to sell loans in the secondary market and retain fewer in the portfolio.
5
In 2002, management continued its recent emphasis on increasing the
Corporation's share of the local market for commercial and commercial real
estate loans through additional calling and marketing efforts. These lending
relationships generally offer more attractive returns than residential loans and
also offer opportunities for attracting larger balance deposit relationships.
However, the shift in loan portfolio mix from residential real estate to
commercial oriented loans will increase credit risk.
Both year-end and average 2002 deposit balances increased from 2001. Year-end
deposit balances totaled $539,899 in 2002 compared to $410,178 in 2001, an
increase of $129,721, or 31.6%. ICBC deposit balances totaled $111,968 as of
March 31, 2002. In addition, continued declines in the stock market have
prompted some investors to seek short-term financial institution deposit
products. Average deposit balances for 2002 were $533,869 compared to $412,385
for 2001, an increase of $121,484 or 29.5%. Noninterest-bearing deposits
averaged $62,707 for 2002, compared to $45,048 for 2001, increasing $17,659, or
39.2%. Savings, NOW, and MMIA accounts averaged $238,066 for 2002 compared to
$162,771 for 2001. Average time deposits increased $28,530 to total an average
balance of $233,096 for 2002.
Borrowings from the Federal Home Loan Bank of Cincinnati decreased from $811 at
December 31, 2001 to $183 at December 31, 2002. This decrease of $628 was a
result of scheduled paydowns. The Corporation had no new advances from the
Federal Home Loan Bank in 2002 and will pay off the existing advances in 2003.
The Corporation does not have any immediate plans to use FHLB advances to fund
loan growth.
The Corporation had line of credit borrowings of $14,000 to fund loans
originated by the finance company, Mr. Money at December 31, 2001. FCBC
restructured this borrowing in 2002 into two different loans, a $5,000 line of
credit and a $10,000 term note. Total borrowings under these loans were $13,000
at December 31, 2002. Note 11 in the consolidated financial statements provides
further details regarding the borrowing arrangement. The Corporation has $5,000
in long-term borrowings through the issuance of trust preferred securities. This
borrowing is a 30-year issuance but may be redeemed at par after five years. The
trust preferred securities are variable rate and count as Tier I capital for
regulatory purposes.
The Banks offer repurchase agreements in the form of sweep accounts to
commercial checking account customers. At December 31, 2002, total repurchase
agreements in the form of sweep accounts totaled $13,509. This compares to
$10,311 at December 31, 2001. U.S. Treasury securities and obligations of U.S.
government agencies maintained under the Banks' control are pledged as
collateral for the repurchase agreements.
Securities available for sale, securities held to maturity and Federal Home Loan
Bank (FHLB), Federal Reserve Bank (FRB) and Great Lakes Bankers Bank (GLBB)
stock increased $48,236, or 42.4% in total from $113,726 on December 31, 2001 to
$161,962 on December 31, 2002. ICBC's security portfolio totaled $16,099 as of
March 31, 2002. Obligations of states and political subdivisions available for
sale increased $2,907 from 2001 to 2002. Other securities decreased $788 or 8.5%
from 2001 to 2002. U.S. Treasury securities and obligations of U.S. government
agencies accounted for the majority of the increase from 2001 to 2002.
Securities increased due to purchases of investments to meet additional pledging
requirements and to gain additional yield compared to federal funds sold, from
excess funds provided by deposits and other borrowings that were not utilized
for loans. In the current interest rate environment, the Corporation will
continue to look at investment securities as an alternative to federal funds
sold.
Securities held to maturity at December 31, 2002 had unrealized gains of
approximately $2. Since management intends to hold this portion of the portfolio
to maturity, the unrecognized gains have no impact on operations of the
Corporation. Securities available for sale had an estimated fair value at
December 31, 2002 of $155,168. This fair value includes unrealized gains of
approximately $3,802 and unrealized losses of approximately $36. Net unrealized
gains of $3,766 on December 31, 2002 was an increase over net unrealized gains
of $2,339 at December 31, 2001. The increase in security market values is due to
the decline in interest rates during 2002.
6
Mortgage-backed securities totaled $7,845 at December 31, 2002 and none are
considered unusual or "high risk" securities as defined by regulating
authorities. Of this total, $5,971 are pass-through securities issued by the
Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC); $1,818 are collateralized mortgage obligations (CMOs) and
real estate mortgage investment conduits (REMICs) issued by FNMA and FHLMC; and
$56 are privately issued and are collateralized by mortgage-backed securities
issued or guaranteed by FNMA, FHLMC, or Government National Mortgage Association
(GNMA). The average interest rate of the mortgage-backed portfolio at December
31, 2002 was 4.78%. The average maturity at December 31, 2002 was approximately
5.50 years. The Corporation has not invested in any derivative securities.
Total shareholders' equity increased $22,962, or 47.1% during 2002 to $71,689.
The merger with ICBC resulted in the issuance of common shares with a fair value
of $24,450 less issuance costs of $338. Also, as of December 31, 2002, the
Company had recorded an additional minimum pension liability of $513
representing the excess of the accumulated benefit obligation over the fair
value of plan assets and accrued pension liabilities, net of tax, which reduced
equity. See Note 14 for further explanation. Finally, the Corporation purchased
an additional $2,322 of treasury stock during 2002. The ratio of total
shareholders' equity to total assets was 11.0% in 2002 and 10.0% in 2001.
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, 2002 and
December 31, 2001
Net Income
The Corporation's net income for the year ended December 31, 2002 was $7,127
compared to $5,293 for the year ended December 31, 2001, an increase of $1,834,
or 34.6%. The increase in net income was the result of the items discussed in
the following sections.
Net Interest Income
Net interest income for 2002 was $24,283, an increase of $4,388, or 22.1% from
2001. The change in the net interest income for 2002 was the net result of an
increase in interest income of $659 and a decrease in interest expense of
$3,729.
Total interest income increased $659, or 1.9% for 2002. Average interest
earning-assets increased from $472,965 to $596,228 from 2001 to 2002. Average
loans increased $84,547 from 2001 to 2002. Income earned on the loan portfolio
increased $694 from 2001 to 2002 due to the increase in balance more than
offsetting a significant decline in yield. Other interest bearing assets
increased $38,716. However, the
7
decline in the rate earned on other earning assets more than offset the impact
from the increase in average balance, causing a reduction in interest income of
$35.
Total interest expense decreased $3,729, or 24.1% for 2002. The decrease in
interest expense can be attributed to a decrease in the rate on interest-bearing
liabilities from 3.86% in 2001 to 2.32% in 2002. An increase in average
interest-bearing liabilities from $400,658 to $502,145, or $101,487 from 2001 to
2002 offset some of the decrease due to rate. The decline in the yield on
interest earning assets and interest-bearing liabilities is result of continued
repricing of assets and liabilities in the low interest rate environment that
existed throughout 2002. The Corporation continues to examine its rate structure
to ensure that its interest rates are competitive and reflective of the current
rate environment in which it competes.
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, 2002.
2002 2001 2000
----- ---- ----
Net loan charge-offs $ 1,144 $ 1,045 $ 974
Provision for loan losses charged to expense 1,178 1,803 807
Net loan charge-offs as a percent of average
outstanding loans 0.27% 0.30% 0.31%
Allowance for loan losses $ 6,325 $ 4,865 $ 4,107
Allowance for loan losses as a percent
of year-end outstanding loans 1.50% 1.45% 1.19%
Allowance for loan losses as a percent
of impaired loans 105.43% 136.47% 79.72%
Impaired loans $ 5,999 $ 3,565 $ 5,152
Impaired loans as a percent of gross
year-end loans (1) 1.42% 1.06% 1.48%
Nonaccrual and 90 days or more past due loans
as a percent of gross year-end loans (1) 1.39% 1.56% 0.55%
(1) Nonperfroming loans and impaired loans are defined differently. Some loans
may be included in both categories, wheras other loans may only be
included in one category.
The Corporation's policy is to maintain the allowance for loan losses at a level
to provide for probable incurred losses. Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions.
The provision for loan losses decreased by $625 in 2002, from $1,803 in 2001 to
$1,178 in 2002. Impaired loans have increased, which include those acquired in
ICBC's portfolio. ICBC already had specific allowances in place for its impaired
loans; therefore, management felt the allowance was adequate with
8
no additional provision for these loans. Efforts are continually made to examine
both the level and mix of the reserve by loan type as well as the overall level
of the reserve. Management specifically evaluates loans that are impaired, or
graded as doubtful by the internal grading function for estimates of loss. Other
pools of loans are evaluated for loss using historical experience and
consideration of changes in delinquency trends and portfolio composition.
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 $6,831 in 2002 compared to $6,117 in 2001, an
increase of 11.7%. The more significant items contributing to this change are as
follows.
During 2002, the Corporation recognized gains from calls of securities of $8. In
2001, the Corporation recognized gains from calls of securities of $7 and net
gains of $856 from the sales of securities available for sale. The gains in 2001
were primarily from the sale of the remaining equity securities at Farmers.
Due to the continued low interest rates, customers continued to refinance their
loans to lower fixed-rate loans. Net gains were $333 for 2002 compared to the
net gain of $438 in 2001. The decline is due to many customers having already
refinanced in this low interest rate environment.
The Banks introduced a new deposit product called Check Protect which helped
generate $471 of additional service charge fee income for the year compared to
2001. Customers acquired through the merger were not qualified to enter Check
Protect until December 2, 2002. The Corporation expects the addition of these
customers to increase the amount of service charge income generated through
Check Protect. Other noninterest income totaled $2,444 in 2002 compared to
$1,844 in 2001. Increases in other noninterest income are a result of additional
products and services introduced to generate noninterest income. These products
include brokerage and insurance commissions, the sale of wholesale mortgages,
and income from the Trust department which was acquired in the ICBC merger. The
Trust department will be the cornerstone of wealth management services currently
being developed by the Corporation.
Noninterest Expense
Noninterest expense totaled $19,893 in 2002, an increase of $2,960, or 17.5%
over 2001. The following discussion highlights the significant items that
resulted in increases or decreases in the components of noninterest expense.
Salaries, wages and benefits totaled $9,253 in 2002 compared to $7,763 in 2001
for an increase of $1,490. The primary reason for the change in salaries and
benefits is due to the addition of approximately 40 employees through the merger
with ICBC.
State of Ohio franchise taxes were $642 in 2002 compared to $759 in 2001. The
franchise taxes are based on the capital positions of the Banks.
9
Professional fees represent legal, audit and outside consulting fees paid by the
Corporation. Professional fees totaled $920 in 2002 compared to $719 in 2001.
The overall increase is due to services related to the acquisition of ICBC as
detailed in Note 2 of the consolidated financial statements.
Contracted data processing increased from $736 in 2001, to $869 in 2002. The
additional customer base acquired through the ICBC merger is the primary reason
for this increase.
Other operating expenses totaled $5,591 in 2002 compared to $4,638 in 2001. The
ICBC merger was the primary cause of this increase, along with increased
expenditures in advertising, marketing, and employee education and training in
customer service and cross selling. The Corporation will continue our marketing
and advertising efforts to increase our customer base. Training of the employees
to further service the Corporations customers will continue.
Income Tax Expense
Income before federal income taxes amounted to $10,043 in 2002 and $7,276 in
2001. The Corporation's effective income tax rate was 29.0% in 2002 compared to
27.3% in 2001. The shifting in the security portfolio from tax-free municipal
securities to taxable securities contributed to the increase in the Corporations
effective tax rate.
Comparison of Results of Operations for the Year Ended December 31, 2001 and
December 31, 2000
Net Income
The Corporation's net income for the year ended December 31, 2001 was $5,293
compared to $5,692 for the year ended December 31, 2002, a decrease of $399 or
7.0%. The decrease in net income was the result of the items discussed in the
following sections.
Net Interest Income
Net interest income for 2001 was $19,895, an increase of $1,461 or 7.9% from
2000. The change in net interest income for 2001 was the net result of an
increase in interest income of $1,158 and an increase in interest expense of
$303.
Total interest income increased $1,158, or 3.4% for 2001. This increase in
interest income can be attributed to an increase in the average interest-earning
assets from $450,520 to $472,965 from 2000 to 2001. The effects of the increase
in average interest-earning assets were partially offset by a decrease in the
rate on earning assets from 7.59% in 2000 to 7.47% in 2001.
Total interest expense decreased $303, or 1.9% for 2001. The decrease in
interest expense can be attributed to a decrease in the rate on interest-bearing
liabilities from 4.11% in 2000 to 3.86% in 2001. An increase in average
interest-bearing liabilities from $383,192 to $400,658, or $17,466 from 2000 to
2001, offset some of the decrease due to rate. The decline in the yield on
interest earning assets and interest-bearing liabilities is reflective of the
decline in interest rates that occurred during 2001 when the Federal Reserve
Bank decreased short term interest rates eleven times dropping the federal funds
rate from 6.50% to 1.75%.
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.
10
Provisions and Allowance for Loan Losses
The provision for loan losses increased by $996 in 2001 from $807 in 2000 to
$1,803 in 2001. The increase is largely due to the increased size of Mr. Money's
loan portfolio, increased charge-offs and increased non-performing loans.
Efforts are continually made to examine both the level and mix of the reserve by
loan type as well as the overall level of the reserve. Management specifically
evaluates loans that are impaired, or graded as substandard or doubtful by the
internal grading function for estimates of loss. Other pools of loans are
evaluated for loss using historical experience and consideration of changes in
delinquency trends and portfolio composition.
Noninterest income
Noninterest income totaled $6,117 in 2001 compared to $5,663 in 2000, an
increase of 8.0%. The more significant items contributing to this charge is as
follows.
During 2001, the Corporation recognized gains from calls of securities of $7 and
net gains of $856 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
the remaining portion of the portfolio. In 2000, security gains totaled $1,080,
also primarily from the sale of equity securities at Farmers.
Due to the decline in interest rates, customers' demand for fixed-rate loans
increased which resulted in substantially more secondary market loan sales. Net
gains were $438 for 2001 compared to a net loss of $31 in 2000.
Other noninterest income totaled $1,844 in 2001 compared to $1,714 in 2000.
Increases in other noninterest income are a result of additional products and
services introduced to generate noninterest income including brokerage and
insurance commissions.
Noninterest Expense
Noninterest expense totaled $16,933 in 2001, an increase of $1,467, or 9.5% over
2000. The following discussion highlights the significant items that resulted in
increases or decreases in the components of noninterest expense.
Salaries, wages and benefits totaled $7,763 in 2001 compared to $7,110 in 2000
for an increase of $653. The two primary reasons for the change in salaries and
benefits lie with Mr. Money and Citizens. Mr. Money, a new consumer finance
company, which existed for only part of 2000, increased salaries and benefits by
$230 while Citizens salaries and benefits increased $371. Citizens increase was
mainly due to commissions for selling new products.
State of Ohio Franchise taxes were $759 in 2001 compared to $552 in 2000. The
franchise taxes are based on the capital positions of the Banks. 2000 included
refunds from prior years.
Professional fees represent legal, audit and outside consulting fees paid by the
Corporation. Professional fees totaled $719 in 2001 compared to $600 in 2000.
The overall increase is due to services related to legal expenses at Farmers and
consulting fees at Mr. Money.
Other operation expenses totaled $4,638 in 2001 compared to $4,214 in 2000.
Increased expenditures in advertising, marketing, and employee education and
training in customer service and cross selling make up the increase in 2001.
11
Income Tax Expense
Income before federal income taxes amounted to $7,276 in 2001 and $7,824 in
2000. The Corporation's effective income tax rate was 27.3% for 2001 and 2000.
Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Rates and Interest Differential
The following table sets forth, for the years ended December 31, 2002, 2001 and
2000, the distribution of assets, including interest amounts and average rates
of major categories of interest-earning assets and interest-bearing liabilities
(Dollars in thousands):
2002 2001 2000
--------------------------------- ----------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Assets balance Interest rate balance Interest rate balance Interest rate
- ------ ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans (1)(2)(3) $ 431,243 $ 29,602 6.86% $346,696 $28,908 8.34% $314,071 $26,645 8.48%
Taxable securities (4) 100,819 4,318 4.33 72,856 4,345 6.13 91,107 5,352 5.94
Non-taxable
securities (4)(5) 37,243 1,601 4.38 41,216 1,702 4.18 44,022 2,118 4.79
Federal funds sold 26,699 476 1.78 11,013 360 3.27 741 41 5.53
Interest-bearing deposits
in other banks 224 10 4.46 1,184 33 2.79 579 34 5.87
--------- --------- -------- ------- -------- -------
Total interest-earning
assets 596,228 36,007 6.06 472,965 35,348 7.51 450,520 34,190 7.60
Noninterest-earning assets:
Cash and due from
financial institutions 17,711 15,696 14,290
Premises and
equipment, net 8,377 7,217 7,302
Accrued interest
receivable 4,285 3,821 3,741
Intangible assets 11,795 1,716 2,043
Other assets 6,564 1,947 3,171
Less allowance for
loan losses (6,296) (4,253) (4,193)
--------- --------- --------
Total $ 638,664 $ 499,109 $ 476,874
========= ========= =========
(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 $988 in 2002, $994 in
2001 and $792 in 2000.
(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.
12
Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Rates and Interest Differential (Continued)
The following table sets forth, for the years ended December 31, 2002, 2001 and
2000, the distribution of liabilities and shareholders' equity, including
interest amounts and average rates of major categories of interest-earning
assets and interest-bearing liabilities (Dollars in thousands):
2002 2001 2000
------------------------- -------------------------- --------------------------
Liabilities and Average Yield/ Average Yield/ Average Yield/
Shareholders' Equity balance Interest rate balance Interest rate balance Interest rate
- -------------------- ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning liabilities:
Savings and interest-
bearing demand
accounts $238,066 $ 3,340 1.40% $ 162,771 $ 4,189 2.57% $ 167,928 $ 4,394 2.62%
Certificates of deposit 233,096 7,436 3.19 204,566 9,668 4.73 188,723 9,801 5.19
Federal Home Loan
Bank advances 519 27 5.20 1,127 66 5.86 1,701 96 5.64
Securities sold under
repurchase agreements 11,491 158 1.37 13,078 395 3.02 8,668 389 4.49
Federal funds purchased - - - 4,493 141 3.14 12,666 808 6.38
Notes payable 13,838 534 5.48 13,655 962 7.05 2,523 209 8.28
Trust preferred securities 3,866 212 3.86
U.S. Treasury demand
notes payable 1,269 17 1.34 968 32 3.31 983 59 6.00
-------- ------- --------- ------ -------- -------
Total interest-
bearing liabilities 502,145 11,724 2.33 400,658 15,453 3.86 383,192 15,756 4.11
-------- ------- --------- ------ -------- -------
Noninterest-bearing
liabilities:
Demand deposits 62,707 45,048 44,270
Other liabilities 4,045 3,710 2,349
-------- -------- --------
66,752 48,758 46,619
Shareholders' equity 69,767 49,693 47,062
-------- -------- --------
Total $638,664 $499,109 $476,874
======== ======== ========
Net interest income and
interest rate spread $24,283 3.73% $ 19,895 3.65% $ 18,434 3.49%
======= ==== ======== ==== ======== ====
Net yield on interest-
earning assets 4.09% 4.23% 4.10%
==== ==== ====
13
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.
2002 compared to 2001 2001 compared to 2000
Increase (decrease) Increase (decrease)
due to (1) due to (1)
-------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
(Dollars in thousands)
Interest income:
Loans $ 6,327 $ (5,633) $ 694 $ 2,727 $ (464) $ 2,263
Taxable securities 1,460 (1,487) (27) (1,170) 163 (1,007)
Nontaxable securities (181) 80 (101) (161) (255) (416)
Federal funds sold 336 (220) 116 342 (23) 319
Interest-bearing deposits
in other banks (36) 13 (23) 23 (24) (1)
--------- ---------- ---------- ---------- ---------- ----------
Total interest-
earning assets $ 7,906 $ (7,247) $ 659 $ 1,761 $ (603) $ 1,158
========= ========== ========== ========== ========== ==========
Interest expense:
Savings and interest-
bearing demand
accounts $ 1,493 $ (2,342) $ (849) $ (133) $ (72) $ (205)
Certificates of deposit 1,217 (3,449) (2,232) 787 (920) (133)
Federal Home Loan
Bank borrowings (32) (7) (39) (33) 3 (30)
Securities sold under
repurchase agreements (43) (194) (237) 159 (153) 6
Federal funds purchased (141) - (141) (373) (294) (667)
Note payable 13 (441) (428) 789 (36) 753
Trust preferred 212 - 212 - - -
U.S. Treasury demand
notes payable 8 (23) (15) (1) (26) (27)
--------- ---------- ---------- ---------- ---------- ----------
Total interest-
bearing liabilities $ 2,727 $ (6,456) $ (3,729) $ 1,195 $ (1,498) $ (303)
========= ========== ========== ========== ========== ==========
Net interest income $ 5,179 $ (791) $ 4,388 $ 566 $ 895 $ 1,461
========= ========== ========== ========== ========== ==========
(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.
14
Liquidity and Capital Resources
The Banks maintain a conservative liquidity position. Liquidity is evidenced by
all but $42 of securities being classified as 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 from operations for 2002 was $7,126. This includes net income of $7,127
plus net adjustments of $(1) to reconcile net earnings to net cash provided by
operations. Cash from investing activities was $(18,821) in 2002 that includes
security purchases and increases in federal funds partially offset by
maturities, prepayments and sales of securities and a decrease in loans. Cash
from financing activities in 2002 totaled $16,265. This includes the increase in
deposits, repayments of FHLB borrowings, the payments of dividends and changes
in other borrowings. Cash from operating and financing activities was more than
cash used by investing activities by $4,570, which resulted in an increase in
cash and cash equivalents to $23,797.
Future loan demand of the Banks can be funded by increases in deposit accounts,
proceeds from payments on existing loans, the maturity of securities and the
sale of securities classified as available for sale. Additional sources of funds
may also come from borrowing in the federal funds market and/or borrowing from
the Federal Home Loan Bank. Future loan demand of Mr. Money can be funded by
proceeds from payments on existing loans, sales of existing loans on the
secondary market as well as borrowings from affiliates or other institutions. On
a separate entity basis, the Corporation's primary source of funds is dividends
paid primarily by the subsidiary Banks. The ability of the Banks to pay
dividends is subject to limitations under various laws and regulations, and to
prudent and sound banking principles. Generally, subject to applicable minimum
capital requirements, the Banks may declare a dividend without the approval of
the State of Ohio Department of commerce, Division of Financial Institutions,
provided the total dividends in a calendar year do not exceed the total of its
profits for that year combined with its retained profits for the two preceding
years. In 2002, Citizens paid $2,500, Farmers paid $625, and Castalia paid $370
in dividends to the Corporation. The purpose of these dividends was to
accumulate cash at the Corporation to be used for general corporate purposes
including the possible repurchase of its common stock. The amount of
unrestricted dividends available to be paid by the Banks to the Corporation was
approximately $2,096 at December 31, 2002. Management believes the future
earnings of the Banks will be sufficient to support anticipated asset growth at
the Banks and provide funds to the Corporation to continue paying dividends at
their current level.
Capital Adequacy
The Corporation's policy is, and always has been, to maintain its capital levels
above the well capitalized regulatory standards. Under the regulatory capital
standards, total capital has been defined as Tier I (core) capital and Tier II
(supplementary) capital. The Corporation's Tier I capital includes shareholders'
equity (net of unrealized security gains and losses) and Tier II capital
includes the allowance for possible loan losses. The definition of risk-adjusted
assets has also been modified to include items both on and off the balance
sheet. Each item is then assigned a risk weight or risk adjustment factor to
determine ratios of capital to risk adjusted assets. The standards require that
total capital (Tier I plus Tier II) be a minimum of 8.0% of risk-adjusted
assets, with at least 4.0% being in Tier I capital. To be well capitalized, a
company must have a minimum of 10.0% of risk adjusted assets, with at least 6.0%
being Tier I capital The Corporation's ratios as of December 31, 2002 and 2001
were 14.9% and 16.0% respectively for total capital, and 12.5% and 14.7%
respectively for Tier I capital.
15
Additionally, the Federal Reserve Board has adopted minimum leverage-capital
ratios. These standards were established to supplement the previously issued
risk based capital standards. The leverage ratio standards use the existing Tier
I capital definition but the ratio is applied to average total assets instead of
risk-adjusted assets. The standards require that tier I capital be a minimum of
4.0% of total average assets for high rated entities such as the Corporation and
a minimum of 5.0% of total average assets to be well capitalized. The
Corporation's leverage ratio was 8.0% and 9.1% at December 31, 2002 and 2001.
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, 2002 and 2001 in Note 19 to the consolidated financial
statements. The fair value of the Corporation's financial instruments generally
increased relative to their carrying values in 2002 as a result of a decrease in
the general level of longer-term interest rates. The fair value of loans at
December 31, 2002 was 103.6% of the carrying value compared to 102.8% at
December 31, 2001. The fair value of deposits at December 31, 2002 and 2001 was
100.5% of the carrying value.
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.
16
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. 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.
17
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December 31,
2002 and 2001, based on certain prepayment and account decay assumptions that
management believes are reasonable. The Corporation had no derivative financial
instruments or trading portfolio as of December 31, 2002 or 2001. Expected
maturity date values for interest-bearing core deposits were calculated based on
estimates of the period over which the deposits would be outstanding. From a
risk management perspective, the Corporation believes that repricing dates for
adjustable-rate instruments, as opposed to expected maturity dates, may be a
more relevant measure in analyzing the value of such instruments. The
Corporation's borrowings were tabulated by contractual maturity dates and
without regard to any conversion or repricing dates.
NET PORTFOLIO VALUE - DECEMBER 31, 2002
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
-------- -------- --------
+200 bp $ 64,806 $ (10,373) (14)%
+100 bp 70,702 (4,477) (6)%
Base 75,179 - -
-100 bp 79,921 4,742 6%
-200 bp 84,492 9,313 12%
NET PORTFOLIO VALUE - DECEMBER 31, 2001
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
-------- -------- --------
+200 bp $ 42,491 $ (9,621) (18)%
+100 bp 47,743 (4,369) (8)%
Base 52,112 - -
-100 bp 56,594 4,482 9%
-200 bp 60,239 8,127 16%
The reduction in the relative change in net portfolio value from 2001 to 2002,
given the assumed immediate change in interest rates is primarily a result of
two factors. First, the continued reduction in long-term interest rates during
2002 served to increase the base level of net portfolio value due to the
corresponding increase in the fair value of loans and investments. In addition,
the majority of new loans originated in 2002 have interest rate adjustment
features, which lessens the impact of future rate changes.
18
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, 2002 and 2001, 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, 2002. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Citizens Banc
Corp as of December 31, 2002 and 2001, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 7, during 2002, the Corporation adopted new accounting
guidance for goodwill and intangible assets.
Crowe, Chizek and Company LLP
Columbus, Ohio
January 30, 2003
19
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20
FIRST CITIZENS BANC CORP
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands, except share data)
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 23,797 $ 19,227
Federal funds sold 12,700 6,025
Securities available for sale 155,168 108,230
Securities held to maturity (Fair value of $44 in
2002 and $143 in 2001) 42 139
Loans held for sale 1,390 2,307
Loans, net of allowance of $6,325 and $4,865 415,682 331,347
FHLB, FRB and GLBB stock 6,752 5,357
Premises and equipment, net 8,219 7,003
Accrued interest receivable 4,795 3,883
Goodwill 15,052 672
Core deposit and other intangibles 3,000 871
Other assets 5,037 2,610
--------- ---------
Total assets $ 651,634 $ 487,671
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 70,527 $ 44,612
Interest-bearing 469,372 365,566
--------- ---------
Total deposits 539,899 410,178
Federal Home Loan Bank advances 183 811
Securities sold under agreements to repurchase 13,509 10,311
U. S. Treasury interest-bearing demand note payable 5,000 720
Notes payable 13,000 14,000
Trust preferred securities 5,000 -
Accrued expenses and other liabilities 3,354 2,924
--------- ---------
Total liabilities 579,945 438,944
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized,
5,326,441 and 4,263,401 shares issued 47,370 23,258
Retained earnings 29,588 28,844
Treasury stock, 293,238 and 180,782 shares at cost (7,241) (4,919)
Accumulated other comprehensive income 1,972 1,544
--------- ---------
Total shareholders' equity 71,689 48,727
--------- ---------
Total liabilities and shareholders' equity $ 651,634 $ 487,671
========= =========
See accompanying notes to consolidated financial statements.
21
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
---- ---- ----
Interest and dividend income
Loans, including fees $ 29,602 $ 28,908 $ 26,645
Taxable securities 4,318 4,345 5,352
Tax-exempt securities 1,601 1,702 2,118
Federal funds sold 476 360 41
Other 10 33 34
---------- ---------- -----------
36,007 35,348 34,190
Interest expense
Deposits 10,776 13,857 14,195
Federal Home Loan Bank advances 27 66 96
Trust preferred securities 212 - -
Other 709 1,530 1,465
---------- ---------- -----------
11,724 15,453 15,756
---------- ---------- -----------
Net interest income 24,283 19,895 18,434
Provision for loan losses 1,178 1,803 807
---------- ---------- -----------
Net interest income after provision for
loan losses 23,105 18,092 17,627
---------- ---------- -----------
Noninterest income
Computer center item processing fees 1,184 1,173 1,124
Service charges 2,862 1,799 1,776
Net gains on sale of securities 8 863 1,080
Net gain (loss) on sale of loans 333 438 (31)
Other 2,444 1,844 1,714
---------- ---------- -----------
6,831 6,117 5,663
Noninterest expense
Salaries, wages and benefits 9,253 7,763 7,110
Net occupancy expense 1,073 882 847
Equipment expense 1,219 1,110 1,104
Contracted data processing 869 736 710
State franchise tax 642 759 552
Professional services 920 719 600
Amortization of goodwill - 201 201
Amortization of intangible assets 326 125 128
Other operating expenses 5,591 4,638 4,214
---------- ---------- -----------
Total noninterest expense 19,893 16,933 15,466
---------- ---------- -----------
Income before income taxes 10,043 7,276 7,824
Income tax expense 2,916 1,983 2,132
---------- ---------- -----------
Net income $ 7,127 $ 5,293 $ 5,692
========== ========== ===========
Earnings per common share, basic and diluted $ 1.48 $ 1.30 $ 1.39
========== ========== ===========
Weighted average basic common shares 4,811,591 4,082,879 4,107,269
========== ========== ===========
Weighted average diluted common shares 4,812,664 4,082,879 4,107,269
========== ========== ===========
See accompanying notes to consolidated financial statements.
22
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(In thousands, except share data)
Accumulated
Other Total
Common Stock Retained Treasury Comprehensive Shareholders'
Shares Amount Earnings Stock Income (Loss) Equity
------ ------ -------- ----- ------------- ------
Balance, January 1, 2000 4,162,815 $ 23,258 $ 28,010 $(2,877) $ (196) $48,195
Comprehensive income:
Net income 5,692 5,692
Change in unrealized loss
on securities available
for sale, net of reclassification
and tax effects 1,067 1,067
-------
Total comprehensive income 6,759
Cash dividends ($1.24 per share) (5,088) (5,088)
Purchase of treasury stock, at cost (75,196) (1,941) (1,941)
---------- -------- -------- ------- ------- -------
Balance, December 31, 2000 4,087,619 23,258 28,614 (4,818) 871 47,925
Comprehensive income:
Net income 5,293 5,293
Change in unrealized gain
on securities available
for sale, net of reclassification
and tax effects 673 673
-------
Total comprehensive income 5,966
Cash dividends ($1.24 per share) (5,063) (5,063)
Purchase of treasury stock, at cost (5,000) (101) (101)
---------- -------- -------- ------- ------- -------
Balance, December 31, 2001 4,082,619 23,258 28,844 (4,919) 1,544 48,727
Comprehensive income:
Net income 7,127 7,127
Change in minimum additional
pension liability, net of tax (513) (513)
Change in unrealized gain
on securities available
for sale, net of reclassification
and tax effects 941 941
-------
Total comprehensive income 7,555
Cash dividends ($1.30 per share) (6,383) (6,383)
Issuance of common stock for
merger, net of issuance costs 1,063,040 24,112 24,112
Purchase of treasury stock, at cost (112,456) (2,322) (2,322)
---------- -------- -------- ------- ------- -------
Balance, December 31, 2002 5,033,203 $ 47,370 $ 29,588 $(7,241) $ 1,972 $71,689
========== ======== ======== ======= ======= =======
See accompanying notes to consolidated financial statements.
23
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $ 7,127 $ 5,293 $ 5,692
Adjustments to reconcile net income to net cash
from operating activities
Security amortization, net of accretion 1,303 457 372
Depreciation 1,033 851 975
Amortization of intangible assets 326 326 329
Net realized gain on sales/calls of securities (8) (863) (1,080)
FHLB stock dividends (247) (351) (317)
Provision for loan losses 1,178 1,803 807
Loans originated for sale (8,285) (15,420) (2,392)
Proceeds from sale of loans 9,405 13,412 1,869
(Gain) loss on sale of loans (333) (438) 31
Deferred income taxes 95 (38) 90
Change in
Net deferred loan fees (302) (109) (21)
Accrued interest receivable (912) 180 (383)
Other assets (1,272) (273) (169)
Accrued interest, taxes and other expenses (1,982) (250) 233
----------- ------------ ------------
Net cash from operating activities 7,126 4,580 6,036
Cash flows from investing activities
Cash and cash equivalents received in bank acquisition 3,079 - -
Securities available for sale
Maturities, prepayments and calls 58,382 37,097 31,100
Purchases (89,835) (34,845) (4,336)
Sales 4 1,452 10,619
Securities held to maturity
Maturities, prepayments and calls 97 139 128
Purchases of FRB stock (406) - -
Loan originations, net of loan payments 12,773 8,941 (48,841)
Loans purchased - - (7,364)
Property and equipment expenditures (740) (633) (738)
Change in federal funds sold (2,175) (6,025) 4,600
Maturity of interest bearing deposit - 51 -
----------- ------------ ------------
Net cash from investing activities (18,821) 6,177 (14,832)
(Continued)
24
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits 16,771 18,210 (11,192)
Repayment of Federal Home Loan Bank borrowings (628) (589) (559)
Change in securities sold under repurchase agreements 3,198 (2,635) (29)
Change in U.S. Treasury interest-bearing notes payable 4,280 (487) (1,859)
Change in short-term note payable (13,500) 3,400 10,600
Proceeds from long-term note payable 10,000 - -
Change in federal funds purchased - (20,000) 20,000
Cash dividends paid (6,383) (5,063) (5,088)
Net proceeds from issuance of trust preferred securities 4,849 - -
Purchase of treasury stock (2,322) (101) (1,941)
---------- --------- -----------
Net cash from financing activities 16,265 (7,265) 9,932
---------- --------- -----------
Net change in cash and cash equivalents 4,570 3,492 1,136
Cash and cash equivalents at beginning of year 19,227 15,735 14,599
---------- --------- -----------
Cash and cash equivalents at end of year $ 23,797 $ 19,227 $ 15,735
========== ========= ===========
Supplemental cash flow information:
Interest paid $ 11,722 $ 15,651 $ 16,207
Income taxes paid 3,027 1,913 1,605
Supplemental non-cash disclosures:
Transfer of loans held for sale to portfolio $ - $ - $ 2,138
Acquisition of ICBC through issuance of
common stock 24,450 - -
See accompanying notes to consolidated financial statements.
25
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the accounting policies adopted by First Citizens
Banc Corp, which have a significant effect on the financial statements.
Consolidation Policy: The consolidated financial statements include the accounts
of First Citizens Banc Corp (FCBC) and its wholly-owned subsidiaries, The
Citizens Banking Company (Citizens), The Farmers State Bank (Farmers), The
Castalia Banking Company (Castalia), SCC Resources, Inc. (SCC), R. A. Reynolds
Appraisal Service, Inc. (Reynolds), Mr. Money Finance Company (Mr. Money), First
Citizens Title Insurance Agency Inc. (Title Agency), First Citizens Insurance
Agency Inc. (Insurance Agency) and First Citizens Statutory Trust I (Trust I)
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, Huron, Marion, Ottawa and Union.
Its primary deposit products are checking, savings, and term certificate
accounts, and its primary lending products are residential mortgage, commercial,
and installment loans. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and commercial and
residential real estate. Commercial loans are expected to be repaid from cash
flow from operations of businesses. Other financial instruments that potentially
represent concentrations of credit risk include deposit accounts in other
financial institutions and federal funds sold. In 2002, SCC provided item
processing for nine financial institutions in addition to the three subsidiary
banks. SCC accounted for 2.8% of the Corporation's total revenues. Reynolds
provides real estate appraisal services for lending purposes to the subsidiary
banks and other financial institutions. Reynolds accounts for less than 1.0% of
total Corporation revenues. Mr. Money, which began operations in 2000, provides
consumer finance loans and real estate loans that the Banks would not normally
provide to B and C credits at a rate commensurate with the risk and accounted
for approximately 5.0% of the Corporation's total revenue. In September 2000,
the Corporation formed two new affiliates, First Citizens Title Insurance Agency
Inc. and First Citizens Insurance Agency Inc. First Citizens Title Insurance
Agency Inc. was formed to provide customers with a seamless mortgage product
with improved service. First Citizens Insurance Agency Inc. was formed to allow
the Corporation to participate in commission revenue generated through its third
party insurance agreement. Insurance commission revenue is less than 1.0% of
total revenue for the year ended December 31, 2002. First Citizens Statutory
Trust I is a special purpose entity formed in March 2002 for the purpose of
issuing $5,000 of 5.59% floating rate obligated mandatorily redeemable capital
securities as part of a pooled transaction.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, fair values of financial instruments, and status of contingencies are
particularly subject to change.
Cash: Cash and cash equivalents include cash on hand and demand deposits with
financial institutions. Net cash flows are reported for federal funds purchased
or sold, customer loan transactions, deposit transactions, securities sold under
agreements to repurchase and other short-term borrowings.
(Continued)
26
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 FHLB stock, FRB stock and GLBB stock are carried at
cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans: 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 on loans is
discontinued at the time the loan is 90 days delinquent unless the credit is
well-secured and in process if collection. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
Interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, risks in the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off. Loan losses are charged against the allowance when
management believes the loan balance is uncollectible.
A loan is impaired when full payment under the loan terms is not expected.
Smaller-balance loans of similar nature such as residential mortgage, consumer,
and credit card loans are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosures.
Commercial and commercial real state loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
the loan is reported, net, at the present value of estimated future cash flows
using the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral.
Premises and Equipment: Land is carried at cost. 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, ranging from three to seven years for equipment and seven to fifty years
for premises.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
(Continued)
27
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
valuation allowance by a charge to income. Other real estate owned included in
other assets totaled approximately $341 at December 31, 2002 and $145 at
December 31, 2001.
Servicing Assets: Servicing assets are recognized as assets for the allocated
value of retained servicing rights on loans sold. Servicing assets 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. Servicing assets at December 31,
2002 were $292 and $283 at December 31, 2001.
Goodwill and Other Intangible Assets: Goodwill results from prior business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Upon adopting new accounting guidance on January 1, 2002, the Company ceased
amortizing goodwill. Goodwill is assessed at least annually for impairment and
any such impairment will be recognized in the period identified.
Other intangible assets consist of core deposit and acquired customer
relationship intangible assets arising from whole bank and branch acquisitions.
They are initially measured at fair value and then amortized on an accelerated
method over their estimated useful lives, which range from four to fourteen
years.
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 fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax basis of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Retirement Plans: The Corporation sponsors a noncontributory defined benefit
retirement plan for all full-time employees who have attained the age of 20 1/2
and have a minimum of six months of service. Pension expense is the net of
service and interest cost, return on plan assets and amortization of gains and
losses not immediately recognized. Accrued pension costs are funded to the
extent deductible for federal income tax purposes.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Corporation also provides a savings and retirement 401(k) plan for all
eligible employees who elect to participate. The decision to make contributions
to the plan, which represents a match of a portion of the salary deferred by
participants, is made annually by the Board of Directors. Such contributions are
funded as they are accrued.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation. No stock options were granted prior to 2002.
(Continued)
28
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
2002
----
Net income as reported $ 7,127
Deduct: Stock-based compensation expense
determined under fair value based method 17
--------
Pro forma net income $ 7,110
========
Basic earnings per share as reported $ 1.48
Pro forma basic earnings per share 1.48
Diluted earnings per share as reported $ 1.48
Pro forma diluted earnings per share 1.48
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2002
----
Risk-free interest rate 4.77%
Expected option life 10 years
Expected stock price volatility 19.37%
Dividend yield 4.44%
Calculated fair value $ 3.33
Off-Balance-Sheet 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.
(Continued)
29
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale and changes in minimum pension
liability, which are also recognized as separate components of shareholders'
equity.
Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in 2003
they will not have a material impact on the Corporation's financial condition or
results of operations.
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. These restrictions pose no practical limit on the ability of the
Banks or FCBC to pay dividends at historical levels.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect these estimates.
Earnings per Common Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share include the dilutive effect of additional potential
common shares issuable under stock option, which were 1,073 shares for 2002. The
Corporation had no potentially dilutive common shares in 2001 and 2000.
Operating Segments: While the Corporation's chief decision makers monitor the
revenue streams of the various Corporation products and services, the
identifiable segments are not material and operations are managed and financial
performance is evaluated on a Corporation-wide basis. Accordingly, all of the
Corporation's financial service operations are considered by management to be
aggregated in one reportable operating segment.
Financial Statement Presentation: Certain items in the 2001 and 2000 financial
statements have been reclassified to conform to the 2002 presentation.
(Continued)
30
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 2 - MERGER
On April 1, 2002, the Corporation completed the merger of Independent Community
Banc Corp. ("ICBC") which was announced November 1, 2001. ICBC merged with and
into the Corporation and ICBC'S subsidiary, The Citizens National Bank of
Norwalk, was merged with and into Citizens.
The Corporation issued 1,063,040 shares of common stock valued at approximately
$24,450 less stock issuance costs of $338. Total assets of ICBC prior to the
merger were $127,713, including $97,623 in loans and $111,968 in deposits. The
transaction was recorded as a purchase and, accordingly, the operating results
of ICBC have been included in the Corporation's consolidated financial
statements since the date of the merger. The aggregate of the purchase price
over the fair value of the net assets acquired of approximately $14,380 will be
evaluated for impairment on an annual basis.
The following summarizes pro forma financial information for the year ended
December 31, 2002, assuming the ICBC merger occurred as of January 2001.
2002 2001
---- ----
Net interest income after provision for loan losses $ 24,395 $ 23,241
Net income 7,395 6,421
Basic and diluted earnings per share 1.46 1.25
These amounts include ICBC's actual results in 2001 and for the first three
months of 2002 prior to the merger and actual results for the nine months in
2002 after the merger. The pro forma results do not necessarily represent
results which would have occurred if the merger had taken place on the basis
assumed above, nor are they indicative of the results of future combined
operations.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
Cash and short-term investments $ 7,583
Securities 16,099
Loans, net 97,984
Goodwill 14,380
Core deposit intangible and other intangibles 2,455
Other assets 2,530
-----------
Total assets acquired 141,031
Deposits 112,950
Other borrowed funds 2,500
Other liabilities 1,131
-----------
Total liabilities assumed 116,581
-----------
Net assets acquired $ 24,450
===========
This acquisition provided the Corporation and its affiliate, Citizens, the
opportunity to expand south from Erie County into contiguous Huron County and
the City of Norwalk. The acquisition also provided Citizens access to trust
services through ICBC's Trust department.
NOTE 3 - SECURITIES
(Continued)
31
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income were as
follows.
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
2002
U.S. Treasury securities and obligations
of U.S. government agencies $ 102,780 $ 1,822 $ -
Corporate bonds 2,475 45 -
Obligations of states and political
subdivisions 41,458 1,688 (36)
Other securities, including mortgage-
backed and equity securities 8,455 247 -
--------- -------- -------
Total $ 155,168 $ 3,802 $ (36)
========= ======== =======
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
2001
U.S. Treasury securities and obligations
of U.S. government agencies $ 55,362 $ 1,263 $ (7)
Corporate bonds 4,618 59 (8)
Obligations of states and political
subdivisions 38,551 931 (7)
Other securities, including mortgage-
backed and equity securities 9,699 122 (14)
--------- ----------- -------
Total $ 108,230 $ 2,375 $ (36)
========= =========== =======
(Continued)
32
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 3 - SECURITIES (Continued)
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows.
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
2002
Mortgage-backed securities $ 42 $ 2 $ - $ 44
=============== ============== ============= ================
2001
Obligations of states and political
subdivisions $ 78 $ 2 $ - $ 80
Mortgage-backed securities 61 2 - 63
--------------- -------------- ------------- ----------------
Total $ 139 $ 4 $ - $ 143
=============== ============== ============= ================
The fair value of securities and carrying amount, if different, at year end 2002
by contractual maturity were as follows. Securities not due at a single maturity
date, primarily mortgage-backed securities, are shown separately.
Held to maturity Available for sale
---------------- ------------------
Amortized Cost Fair Value Fair Value
-------------- ---------- ----------
Due in one year or less $ - $ - $ 56,088
Due from one to five years - - 83,871
Due from five to ten years - - 5,420
Due after ten years - - 1,334
Mortgage-backed 42 44 7,803
Equity securities - - 652
------------- -------------- ----------------
Total $ 42 $ 44 $ 155,168
============== ============== ================
Proceeds from sales of securities, gross realized gains and gross realized
losses were as follows.
2002 2001 2000
---- ---- ----
Sale proceeds $ 4 $ 1,452 $ 10,619
Gross realized gains - 856 1,080
Gross realized losses - - -
Gains from securities called or settled by the issuer 8 7 -
Securities with a carrying value of $102,072 and $71,106 were pledged as of
December 31, 2002 and 2001, to secure public deposits and other deposits and
liabilities as required or permitted by law.
NOTE 4 - LOANS
Loans at year-end were as follows.
(Continued)
33
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
2002 2001
---- ----
Commercial and agricultural $ 46,495 $ 26,708
Commercial real estate 116,674 70,616
Residential real estate 210,931 204,496
Real estate construction 13,179 9,402
Consumer 30,278 23,100
Credit card and other 3,700 2,315
Leases 1,302 435
------- -------
Total loans 422,559 337,072
Allowance for loan losses (6,325) (4,865)
Net deferred loan fees (546) (848)
Unearned interest (6) (12)
------------ ------------
Net loans $ 415,682 $ 331,347
============ ============
Loans to directors and executive officers, including their immediate families
and companies in which they are principal owners during 2002 were as follows.
Balance - January 1, 2002 $ 7,040
New loans and advances 2,516
Repayments (2,668)
Effect of changes in related parties (3,074)
--------------
Balance - December 31, 2002 $ 3,814
==============
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses was as follows.
2002 2001 2000
---- ---- ----
Balance - January 1 $ 4,865 $ 4,107 $ 4,274
Provision for loan losses 1,178 1,803 807
Balance from acquisition 1,426 - -
Loans charged-off (1,517) (1,460) (1,271)
Recoveries 373 415 297
---------- --------- ----------
Balance - December 31 $ 6,325 $ 4,865 $ 4,107
========== ========= ==========
NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans were as follows.
2002 2001
---- ----
(Continued)
34
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
Year-end loans with no allocated allowance
for loan losses $ - $ -
Year-end loans with allocated allowance
for loan losses 5,999 3,656
Amount of allowance for loan losses allocated 1,033 648
2002 2001 2000
---- ---- ----
Average balance of impaired
loans during year $5,381 $3,107 $4,296
Interest income recognized
during impairment 346 184 344
Interest income recognized on
a cash basis 346 184 344
Nonperforming loans were as follows.
2002 2001
---- ----
Loans past due over 90 days still on accrual $2,414 $2,818
Nonaccrual loans 3,468 2,413
Nonperforming loans include both smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment and individual classified impaired loans.
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
2002 2001
---- ----
Land and improvements $ 1,327 $ 807
Buildings and improvements 8,894 8,015
Furniture and equipment 7,925 7,267
---------- ----------
Total 18,146 16,089
Accumulated depreciation (9,927) (9,086)
---------- ----------
Premises and equipment, net $ 8,219 $ 7,003
========== ==========
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
Rent expense was $217, $227, and $92 for 2002, 2001, and 2000. Rent commitments
under non-cancelable operating leases were as follows, before considering
renewal options that generally are present.
2003 $ 270
2004 252
(Continued)
35
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
2005 206
2006 150
2007 130
--------
TOTAL $ 1,008
========
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the year ended December 31,
2002 is as follows.
Balance as of January 1, 2001 $ 672
Goodwill from acquisition during the period 14,380
-----------
Balance as of December 31, 2002 $ 15,052
===========
Goodwill is no longer amortized starting in 2002.
The following summarizes the effect of not amortizing goodwill for the years
ended December 31.
2002 2001 2000
---- ---- ----
Reported net income $ 7,127 $ 5,293 $ 5,692
Add back: goodwill amortization - 201 201
--------- --------- ---------
Adjusted net income $ 7,127 $ 5,494 $ 5,893
========= ========= =========
Basic earnings per share
Reported net income $ 1.48 $ 1.30 $ 1.39
Goodwill amortization - .05 .04
--------- --------- ---------
Adjusted net income $ 1.48 $ 1.35 $ 1.43
========= ========= =========
Diluted earnings per share
Reported net income $ 1.48 $ 1.30 $ 1.39
Goodwill amortization - .05 .04
--------- --------- ---------
Adjusted net income $ 1.48 $ 1.35 $ 1.43
========= ========= =========
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS (Continued)
(Continued)
36
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets were as follows as of year end.
2002 2001
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Core deposit intangibles $3,735 $ 949 $1,494 $ 623
Noncompete agreement 214 - - -
------ ----------- ------ -----------
$3,949 $ 949 $1,494 $ 623
====== =========== ====== ===========
Aggregate amortization expense was $326, $125 and $128 for 2002, 2001, and 2000.
Estimated amortization expense for each of the next five years and thereafter is
as follows.
2003 $ 494
2004 486
2005 370
2006 362
2007 343
Thereafter 945
NOTE 8 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits as of December 31, 2002 and 2001 were as follows.
2002 2001
---- ----
Demand $ 64,746 $ 53,798
Statement and passbook savings 183,339 112,680
Certificates of deposit:
In excess of $100,000 46,830 49,885
Other 146,789 128,267
Individual Retirement Accounts 27,668 20,936
-------- --------
Total $469,372 $365,566
======== ========
(Continued)
37
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 8 - INTEREST-BEARING DEPOSITS (Continued)
Scheduled maturities of certificates of deposit at December 31, 2002 were as
follows.
2003 $ 115,877
2004 40,407
2005 19,071
2006 6,059
2007 12,077
Thereafter 128
------------
Total $ 193,619
============
NOTE 9 - 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, 2002 and 2001, Federal Home Loan Bank borrowings were as
follows.
2002 2001
---- ----
5.80 percent secured note $ 22 $ 149
5.60 percent secured note 81 395
5.55 percent secured note 80 267
--------- ----------
$ 183 $ 811
========= ==========
The notes outstanding at December 31, 2002 mature in 2003.
In addition to the borrowing, the Corporation has outstanding letters of credit
with the Federal Home Loan Bank totaling $12,300 at year end 2002 used for
pledging against public funds. Federal Home Loan Bank borrowings and the letters
of credit are collateralized by Federal Home Loan Bank stock and by $16,915 and
$19,087 of residential mortgage loans under a blanket lien arrangement at
year-end 2002 and 2001. The Corporation has a $27 million cash management
advance line of credit with the Federal Home Loan Bank. No advances were
outstanding on this line as of December 31, 2002.
(Continued)
38
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 10 - OTHER BORROWINGS
Information concerning securities sold under agreements to repurchase and
treasury tax and loan deposits was as follows.
2002 2001
---- ----
Average balance during the year $ 12,760 $ 14,046
Average interest rate during the year 1.37% 3.04%
Maximum month-end balance during the year $ 19,301 $ 17,206
Securities underlying repurchase agreements had a fair value of $17,984 at
December 31, 2002 and $14,000 at December 31, 2001.
NOTE 11 - NOTE PAYABLE
At December 31, 2002, FCBC has a secured borrowing agreement with LaSalle Bank,
NA for up to $15,000. The agreement is split into two pieces; a $5,000 secured
revolving line of credit which matures July 30, 2003, and a $10,000 term loan.
The term loan matures July 30, 2007 and requires annual principal payments of
$1,000 with a $6,000 balloon principal payment at maturity. At December 31,
2002, the line of credit balance is $3,000 and the term loan is $10,000. The
interest rate is LIBOR plus 1.75%, or 3.46% at December 31, 2002 and adjusts
quarterly. The borrowings are secured by 100% of the common stock of Citizens.
Maturities over the next five years were as follows.
2003 $ 4,000
2004 1,000
2005 1,000
2006 1,000
2007 6,000
---------
Total $ 13,000
=========
At December 31, 2001, FCBC had a $15,000 unsecured line of credit with Bank One
that had a balance of $14,000. The line of credit had a maturity date of July
31, 2002 and the interest payments were tied to LIBOR or prime.
NOTE 12 - TRUST PREFERRED SECURITIES
The Corporation issued $5,000 of 5.59% floating rate trust preferred securities
through a special purpose entity as part of a pooled offering. The Corporation
may redeem them, in whole but not in part, any time prior to March 26, 2007 at a
price of 107.50% of face value. After March 26, 2007, the securities may be
redeemed at face. They are presented in liabilities on the balance sheet and
count as Tier 1 capital for regulatory capital purposes. Debt issue costs of
$151 have been capitalized and are being amortized over the term of the
securities.
NOTE 13 - INCOME TAXES
Income tax expense was as follows.
(Continued)
39
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
2002 2001 2000
---- ---- ----
Current $2,821 $ 2,021 $2,042
Deferred 95 (38) 90
------ ------- ------
Income tax expense $2,916 $ 1,983 $2,132
====== ======= ======
Effective tax rates differ from the statutory federal income tax rate of 34% due
to the following.
2002 2001 2000
---- ---- ----
Income taxes computed at the
statutory federal tax rate $ 3,415 $ 2,474 $ 2,660
Add (subtract) tax effect of
Nontaxable interest income, net
of nondeductible interest expense (498) (503) (626)
Dividends received deduction - (9) (14)
Amortization of goodwill - 68 68
Nondeductible reorganization costs - - 2
Other (1) (47) 42
------------ ----------- -----------
Income tax expense $ 2,916 $ 1,983 $ 2,132
============ =========== ===========
Tax expense attributable to security gains totaled $3, $294 and $367 in 2002,
2001 and 2000.
Year-end deferred tax assets and liabilities were due to the following.
2002 2001
---- ----
Allowance for loan losses $ 1,816 $ 1,282
Deferred compensation 455 108
Intangible assets 1,112 42
Deferred loan fees 202 232
Pension costs 121 -
Other 8 4
-------------- --------------
Deferred tax asset 3,714 1,668
-------------- --------------
Tax depreciation in excess of book depreciation (410) (328)
Discount accretion on securities (45) (33)
Pension costs - (118)
Purchase accounting adjustments (986) (391)
FHLB stock dividends (823) (674)
Unrealized gain on securities available for sale (1,280) (795)
Leases (19) (10)
Other (136) (96)
-------------- --------------
Deferred tax liability (3,699) (2,445)
-------------- --------------
Net deferred tax asset (liability) $ 15 $ (777)
============== ==============
NOTE 14 - RETIREMENT PLANS
The Corporation sponsors a savings and retirement 401(k) plan, which covers all
employees who meet certain eligibility requirements and who choose to
participate in the plan. The matching contribution to the 401(k) plan was $76,
$58 and $64 in 2002, 2001 and 2000.
(Continued)
40
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
The Corporation and its subsidiaries also sponsor a pension plan which is a
noncontributory defined benefit retirement plan for all employees who have
attained the age of 20 1/2, completed six months of service and work 1,000 or
more hours per year. Annual payments, subject to the maximum amount deductible
for federal income tax purposes, are made to a pension trust fund.
Information about the pension plan was as follows.
2002 2001
---- ----
Change in benefit obligation:
Beginning benefit obligation $ 4,111 $ 3,595
Service cost 313 238
Interest cost 296 275
Actuarial (gain) loss 1,678 140
Benefits paid (216) (90)
Expenses paid (34) (47)
------------ ------------
Ending benefit obligation 6,148 4,111
Change in plan assets, at fair value:
Beginning plan assets 3,902 3,901
Actual return (140) (246)
Employer contribution 366 384
Benefits paid (216) (90)
Expenses paid (33) (47)
------------ ------------
Ending plan assets 3,879 3,902
------------ ------------
Funded status (2,269) (209)
Unrecognized net actuarial loss 2,980 826
Unrecognized prior service cost 64 77
Unrecognized net transition asset at January 1, 1989
being recognized over 17 years (258) (337)
Minimum additional liability adjustment (873) -
------------ ------------
Prepaid (accrued) benefit cost $ (356) $ 357
============ ============
(Continued)
41
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 14 - RETIREMENT PLANS (Continued)
The components of pension expense and related actuarial assumptions were as
follows.
2002 2001 2000
---- ---- ----
Service cost $ 313 $ 238 $ 281
Interest cost 296 276 270
Expected return on plan assets 173 293 (215)
Net amortization and deferral (576) (707) (189)
--------- ------- --------
Net $ 206 $ 100 $ 147
========= ======= ========
Discount rate on benefit obligation 7.00% 7.28% 7.83%
Long-term rate of return on plan assets 7.00 9.00 9.00
Rate of compensation increase 4.00 4.00 4.00
At December 31, 2002, the Corporation recorded an additional minimum liability
of $873, representing the excess of the accumulated benefit obligation over the
fair value of plan assets and accrued pension liabilities. The liability has
been offset by intangible assets to the extent of unrecognized prior service
cost of $64 with the remaining balance of $809 recorded as a separate reduction
of shareholders' equity, net of the recorded tax benefit.
NOTE 15 - STOCK OPTIONS
Options to buy stock are granted to directors, officers and employees under the
stock option plan, which provides for issue of up to 225,000 options. Exercise
price is the market price at date of grant, so there is no expense recognized in
the income statement. The maximum option term is ten years, and options vest
after three years.
A summary of the activity in the plan is as follows.
2002
----
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year - $ -
Granted 30,700 20.50
Exercised - -
Forfeited - -
---------
Outstanding at end of year 30,700 20.50
=========
Options exercisable at year-end - $ -
Weighted-average remaining contractual life 9.5 years
NOTE 16 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
(Continued)
42
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
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.
2002 2001
---- ----
Commitments to extend credit:
Lines of credit and construction loans $ 56,467 $ 36,828
Credit cards 6,127 7,005
Overdraft protection 5,258 -
Letters of credit 547 888
----------- -----------
$ 68,399 $ 44,721
=========== ===========
Commitments to make loans are generally made for a period of one year or less.
Fixed-rate loan commitments included above totaled $8,078 and had interest rates
ranging from 3.25% to 10.50% at December 31, 2002. Fixed-rate loan commitments
totaled $7,277 and had interest rates ranging from 4.75% to 10.00% at December
31, 2001. Maturities extend up to 30 years.
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, 2002 and
2001 approximated $6,843 and $4,670. These balances do not earn interest.
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS
The Corporation and the subsidiary Banks are subject to regulatory capital
requirements administered by the federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments by
the regulators. Failure to meet capital requirements can initiate regulatory
action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued)
The Corporation and the Banks were well capitalized at December 31, 2002 and
2001. 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)
43
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
At December 31, 2002 and 2001, 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)
2002
Total capital to risk-
weighted assets
Consolidated $ 61.2 14.9% $ 32.8 8.0% $ 41.0 10.0%
Citizens 37.5 12.8 23.4 8.0 29.2 10.0
Castalia 6.0 18.5 2.6 8.0 3.2 10.0
Farmers 15.3 19.4 6.3 8.0 7.9 10.0
Tier I (Core) capital to risk-
weighted assets
Consolidated 51.1 12.5 16.4 4.0 24.6 6.0
Citizens 33.9 11.6 11.7 4.0 17.5 6.0
Castalia 5.6 17.3 1.3 4.0 1.9 6.0
Farmers 14.3 18.2 3.1 4.0 4.7 6.0
Tier I (Core) capital to
average assets
Consolidated 51.1 8.0 25.6 4.0 32.0 5.0
Citizens 33.9 7.4 18.3 4.0 22.9 5.0
Castalia 5.6 11.0 2.0 4.0 2.5 5.0
Farmers 14.3 11.7 4.9 4.0 6.1 5.0
(Continued)
44
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Millions)
2001
Total capital to risk-
weighted assets
Consolidated $ 49.5 16.0% $ 24.8 8.0% $ 31.0 10.0%
Citizens 24.2 13.0 14.8 8.0 18.6 10.0
Castalia 5.5 17.3 2.6 8.0 3.2 10.0
Farmers 14.2 17.5 6.5 8.0 8.1 10.0
Tier I (Core) capital to risk-
weighted assets
Consolidated 45.6 14.7 12.4 4.0 16.6 6.0
Citizens 21.9 11.8 7.4 4.0 11.1 6.0
Castalia 5.1 16.0 1.3 4.0 1.9 6.0
Farmers 13.2 16.3 3.2 4.0 4.9 6.0
Tier I (Core) capital to
average assets
Consolidated 45.6 9.1 20.0 4.0 25.5 5.0
Citizens 21.9 7.2 12.2 4.0 15.3 5.0
Castalia 5.1 10.4 2.0 4.0 2.5 5.0
Farmers 13.2 9.8 5.4 4.0 6.7 5.0
FCBC's primary source of funds for paying dividends to its shareholders and for
operating expenses is dividends received from the Banks. Payment of dividends by
the Banks to FCBC is subject to restrictions by 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
$2,096 and $667 at December 31, 2002 and 2001.
(Continued)
45
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of FCBC follows:
CONDENSED BALANCE SHEETS 2002 2001
---- ----
Assets:
Cash $ 821 $ 3,012
Securities available for sale 483 456
Investment in bank subsidiaries 74,264 43,289
Investment in nonbank subsidiaries 2,614 2,706
Note receivable from nonbank subsidiaries 11,650 13,500
Other assets 1,291 682
------------ -----------
Total assets $ 91,123 $ 63,645
============ ===========
Liabilities and Shareholders' Equity:
Deferred income taxes and other liabilities $ 1,279 $ 918
Subordinated note payable to First Citizens Statutory Trust I 5,155 -
Note payable 13,000 14,000
Common stock 47,370 23,258
Retained earnings 29,588 28,844
Treasury Stock (7,241) (4,919)
Accumulated other comprehensive income 1,972 1,544
------------ -----------
Total liabilities and shareholders' equity $ 91,123 $ 63,645
============ ===========
CONDENSED STATEMENTS OF INCOME 2002 2001 2000
---- ---- ----
Dividends from bank subsidiaries $ 3,495 $ 8,900 $ 6,060
Interest income 514 789 258
Other income 6 8 241
Interest expense (695) (787) (208)
Other expense, net (771) (569) (510)
---------- ---------- -----------
Earnings before equity in undistributed
net earnings of subsidiaries 2,549 8,341 5,841
Income tax benefit 322 241 75
(Distributions in excess of earnings of
subsidiaries) / equity in undistributed net
earnings of subsidiaries 4,256 (3,289) (224)
---------- ---------- -----------
Net income $ 7,127 $ 5,293 $ 5,692
========== ========== ===========
(Continued)
46
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS 2002 2001 2000
---- ---- ----
Operating activities:
Net income $ 7,127 $ 5,293 $ 5,692
Adjustment to reconcile net income to net
cash provided by operating activities:
Change in other assets and other liabilities (2,362) (1,643) (437)
Distributions in excess of/(equity in
undistributed) net earnings of subsidiaries (4,256) 3,289 224
-------------- -------------- ---------------
Net cash from operating activities 509 6,939 5,479
-------------- -------------- ---------------
Investing activities:
Purchase of securities - - (67)
Change in loan to nonbank subsidiaries 1,850 (2,900) (10,600)
-------------- -------------- ---------------
Net cash from investing activities 1,850 (2,900) (10,667)
-------------- -------------- ---------------
Financing activities:
Net change in short term note payable (11,000) 3,400 10,600
Proceeds from long-term borrowings 10,000 - -
Proceeds from subordinated note payable to
First Citizens Statutory Trust I 5,155 - -
Cash paid for treasury stock (2,322) (101) (1,941)
Cash dividends paid (6,383) (5,063) (5,088)
-------------- -------------- ---------------
Net cash from financing activities (4,550) (1,764) 3,571
-------------- -------------- ---------------
Net change in cash and cash equivalents (2,191) 2,275 (1,617)
Cash and cash equivalents at beginning of year 3,012 737 2,354
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 821 $ 3,012 $ 737
============== ============== ===============
(Continued)
47
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of financial instruments were as
follows:
December 31, 2002 December 31, 2001
----------------- -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash and due from banks $ 23,797 $ 23,797 $ 19,227 $ 19,227
Federal funds sold 12,700 12,700 6,025 6,025
Securities available for sale 155,168 155,168 108,230 108,230
Securities held to maturity 42 44 139 143
Loans held for sale 1,390 1,390 2,307 2,307
Loans, net of allowance for
loan losses 415,682 430,555 331,347 340,784
FHLB, FRB and GLBB stock 6,752 6,752 5,357 5,357
Accrued interest receivable 4,795 4,795 3,883 3,883
Financial liabilities:
Deposits (539,899) (542,786) (410,178) (412,421)
Federal Home Loan Bank
borrowings (183) (174) (811) (809)
U.S. Treasury interest-bearing
demand note payable (5,000) (5,000) (720) (720)
Securities sold under
repurchase agreements (13,509) (13,509) (10,311) (10,311)
Note payable (13,000) (13,000) (14,000) (14,000)
Trust Preferred Securities (5,000) (5,000) - -
Accrued interest payable (833) (833) (885) (885)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the cash flow analysis or underlying
collateral values. Fair value of loans held for sale is based on market quotes.
Fair value of debt is based on current rates for similar financing. The fair
value of off-balance-sheet items is based on the current fees or cost that would
be charged to enter into or terminate such arrangements and are considered
nominal.
(Continued)
48
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Amounts in thousands, except share data)
NOTE 20 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
2002 2001 2000
---- ---- ----
Unrealized holding gains on
available for sale securities $ 1,435 $ 1,882 $ 2,697
Reclassification adjustments for gains
later recognized in income (8) (863) (1,080)
------------ ------------ ------------
Net unrealized gains 1,427 1,019 1,617
Minimum pension liability adjustment (809) - -
Tax effect (190) (346) (550)
------------ ------------ ------------
Other comprehensive income $ 428 $ 673 $ 1,067
============ ============ ============
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Basic and Diluted
Interest Net Interest Net Earnings per
Income Income Income Common Share
------ ------ ------ ------------
2002
First quarter * $ 7,710 $ 4,936 $ 1,419 $ .35
Second quarter 9,506 6,272 1,901 .37
Third quarter 9,629 6,613 2,072 .41
Fourth quarter 9,162 6,462 1,735 .35
2001
First quarter $ 9,163 $ 4,865 $ 1,181 $ .29
Second quarter 9,054 4,930 1,160 .28
Third quarter 8,924 5,056 1,504 .37
Fourth quarter 8,207 5,044 1,448 .36
* Amounts for the first quarter 2002 are prior to the merger with ICBC.
(Continued)
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