EXHIBIT 13.1
First Citizens Banc Corp 2003 Annual Report to Shareholders
Dear Shareholder:
Profit performance for 2003 was disappointing and will continue to be a
challenge in the present interest-rate environment; the lowest interest
prime-rate environment reported by the Federal Reserve since September of 1958.
Management and the Board of Directors are committed to not taking actions that
may have short-term benefits but are detrimental for the long term. An example
would be a wholesale move away from variable-rate lending to fixed rates. This
would have a near-term positive impact on earnings, but when interest rates
increase, would have an adverse effect. Looking at our comparative balance
sheets you see that we are continuing to emphasize lending, specifically
commercial lending at variable rates, and moving away from investments. On the
deposit side, certificates of deposit are being replaced with lower cost Fed
Funds purchased. These changes have resulted in interest margins that are
favorable compared to peer companies, but below our budget and not sufficient to
absorb increased overhead for the year.
Increases in the overhead costs were attributable to regulatory requirements,
emphasis on our commercial lending staff, addition of new facilities, expanding
our courier banking services, and the creation of First Citizens Advisors.
Increased regulatory costs will add little to our shareholder profitability,
while the other expenses are investments in future profitability.
Regulation
Like all public companies, especially banking, we are subject to regulatory
controls. The Sarbanes-Oxley Act has resulted in increases in those expenses.
For example, we are examined by the Federal Reserve, FDIC, and State of Ohio,
and our external auditors Crowe Chizek and Company LLC. In addition, we have our
own internal audit department which answers directly to your board's Risk
Management Committee. The Sarbanes-Oxley Act, reacting to the abuses of a few
companies, will now require management of public companies to conduct an
additional review of internal control separate from external and internal
auditors. For banks this adds another layer of examination to an already heavily
reviewed and regulated business which will add additional costs to our company.
Commercial Lending
We have been fortunate to attract proven commercial lenders to our company.
These are the people responsible for our loan growth in 2003. Our commercial
lenders, rewarded with an incentive-based program, have established the First
Citizens affiliates as strong, community lenders. Commercial relationships
provide an avenue to many additional opportunities in trust, insurance,
investment services, and pension and 401k products. Commercial relationships can
also provide access to a customer's employee group, providing additional
opportunity to provide products and services.
Facilities
During 2003, affiliate offices were opened in Marion, Ohio; Mansfield, Ohio and
Crestline, Ohio. These offices are viewed as opportunities in new markets for
our companies. At the same time, we closed a Mr. Money facility in Norwalk Ohio,
and are closing a Citizens facility in Sandusky and a Citizens facility in
Norwalk. Changing customer-office preferences provided the opportunity to close
these offices and take advantage of the accompanying economies without
jeopardizing our customer base. At year end we also moved into our new
operations center in Margaretta Township. This facility houses loan, deposit,
and check processing. The new facility is expected to provide economies by
having all back-room functions under one roof.
Courier Banking
During 2003 we continued to expand our courier banking services. Using an
arrangement with a third-party vendor, the courier banking allows us to service
larger commercial customers and provides a competitive advantage. While there is
a cost to provide a courier, we can attract customers in adjoining communities
and outlying areas without the significant costs of increasing our branch
network.
The courier banking product, in combination with the electronic capabilities
through our "Net Teller" on-line banking, can provide our customers services
comparable to having a bank branch next door. We currently service loan and
deposit balances of over $50,000,000 with courier banking.
First Citizens Advisors
2003 was our year to introduce First Citizens Advisors. A combination of the
trust department acquired from the Citizens National Bank of Norwalk, our Select
Banking department, and the addition of four proven investment professionals is
the basis for the department. First Citizens Advisors provides our customers
access to fiduciary and asset management services, access to a breadth of
investment resources, access to insurance products through Dawson & Citizens
Insurance, and private banking with one-on-one personal service. Over the course
of the last year, the department has grown approximately $70,000,000. We have
reached the break-even point in this new venture and it should be a contribution
to profitability in 2004 and beyond.
New Opportunities
As we have stated in many of our communications, we are always looking for
partnership opportunities that will benefit our shareholders. On March 3, 2004,
we announced the signing of a definitive agreement with FNB Financial Corp of
Shelby, Ohio. FNB's affiliate First National Bank of Shelby is a $220,000,000
commercial bank servicing the residents of Richland and southern Huron Counties.
Our plan is to merge the First National Bank and our Farmers State Bank to
create a commercial bank of approximately $350,000,000. Subject to regulatory
approval and with the assistance of our investment bankers, Keefe, Bruette, &
Woods, our legal counsel, Squire Sanders & Dempsey, and our auditors Crowe
Chizek and Company LLC, we expect this transaction to close in the fourth
quarter of 2004.
As we move through 2004, our goal remains to develop customer relationships as a
community bank. We must leverage our new and existing customer relationships
into new products and offerings such as First Citizens Advisors to provide new
sources of non-interest income. Continuing to expand opportunities in
non-interest income will reduce the reliance on interest margin for the company.
And as we weather this interest-rate environment, we strive to balance the
control of overhead costs with costs that represent investment in future revenue
opportunity.
Lastly, we continue to look for partnership opportunities that are beneficial to
our shareholders. We believe that our philosophy of maintaining community
decision making and local board interaction, coupled with our ability to provide
backroom support in audit and accounting, compliance, personnel, and operations,
is attractive to potential partners.
Very truly yours,
David A. Voight
President/Chief Executive Officer
Five Year Consolidated Financial Summary
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
EARNINGS
Net Income (000) $ 5,567 $ 7,127 $ 5,293 $ 5,692 $ 6,063
Per Common Share (1)
Earnings (basic) $ 1.11 $ 1.48 $ 1.30 $ 1.39 $ 1.43
Earnings (diluted) $ 1.10 $ 1.48 $ 1.30 $ 1.39 $ 1.43
Book Value $ 13.73 $ 14.24 $ 11.94 $ 11.72 $ 11.58
Dividends Paid $ 1.30 $ 1.30 $ 1.24 $ 1.24 $ 1.15
BALANCES
Assets (millions) 636.4 651.6 487.7 489.3 472.2
Deposits (millions) 510.2 539.9 410.2 392.0 403.2
Net Loans (millions) 462.9 415.7 331.3 342.0 284.4
Shareholders' Equity (millions) 69.1 71.7 48.7 47.9 48.2
PERFORMANCE RATIOS
Return on Average Assets 0.87% 1.12% 1.06% 1.19% 1.24%
Return on Average Equity 7.82% 10.22% 10.65% 12.09% 11.58%
Equity to Assets Ratio 10.86% 11.00% 9.99% 9.80% 10.21%
Net Loans to Deposit Ratio 90.73% 76.99% 80.78% 87.25% 70.55%
Loss Allowance to Total Loans 1.34% 1.50% 1.45% 1.19% 1.48%
ANNUAL REPORT
CONTENTS
Five - Year Selected Consolidated Financial Data 1
Common Stock and Shareholder Matters 3
General Development of Business 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Quantitative and Qualitative Disclosures About Market Risk 19
Financial Statements
Report of Independent Auditors 23
Consolidated Balance Sheets 25
Consolidated Statements of Income 26
Consolidated Statements of Changes in Shareholders' Equity 27
Consolidated Statement of Cash Flows 28
Notes to Consolidated Financial Statements 30
FIVE-YEAR SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
Year ended December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Statements of income:
Total interest and dividend income $ 33,267 $ 36,007 $ 35,348 $ 34,190 $ 33,067
Total interest expense 8,417 11,724 15,453 15,756 15,130
---------- ---------- ---------- ---------- ----------
Net interest income 24,850 24,283 19,895 18,434 17,937
Provision for loan losses 1,944 1,178 1,803 807 266
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 22,906 23,105 18,092 17,627 17,671
Security gains (1) 301 8 863 1,080 1,602
Other noninterest income 7,423 6,823 5,254 4,583 3,927
---------- ---------- ---------- ---------- ----------
Total noninterest income 7,724 6,831 6,117 5,663 5,529
Total noninterest expense 22,925 19,893 16,933 15,466 14,771
---------- ---------- ---------- ---------- ----------
Income before federal income taxes 7,705 10,043 7,276 7,824 8,429
Federal income tax expense 2,138 2,916 1,983 2,132 2,366
---------- ---------- ---------- ---------- ----------
Net income $ 5,567 $ 7,127 $ 5,293 $ 5,692 $ 6,063
========== ========== ========== ========== ==========
Per share of common stock:
Basic earnings $ 1.11 $ 1.48 $ 1.30 $ 1.39 $ 1.43
Diluted earnings 1.10 1.48 1.30 1.39 1.43
Dividends 1.30 1.30 1.24 1.24 1.15
Book value 13.73 14.24 11.94 11.72 11.58
Average common shares outstanding:
Basic 5,033,203 4,811,591 4,082,879 4,107,269 4,242,546
Diluted (2) 5,041,877 4,812,664 4,082,879 4,107,269 4,242,546
Year-end balances:
Loans, net $ 462,878 $ 415,682 $ 334,347 $ 341,982 $ 284,446
Securities 116,733 161,962 113,726 115,792 150,661
Total assets 635,394 651,634 487,671 489,259 472,220
Deposits 510,172 539,899 410,178 391,968 403,160
Borrowings 53,529 36,692 25,842 46,153 18,000
Shareholders' equity 69,125 71,689 48,727 47,925 48,195
Average balances:
Loans, net $ 439,261 $ 424,947 $ 342,443 $ 309,878 $ 279,649
Securities 140,418 138,062 114,072 135,129 163,134
Total assets 642,300 638,664 499,109 476,874 487,242
Deposits 530,801 533,869 412,385 400,921 409,665
Borrowings 36,766 30,983 33,321 26,541 20,525
Shareholders' equity 71,192 69,767 49,693 47,062 52,347
(1) Partial recoveries of $10 and $10 were received in 2000 and 1999 for
securities that were written off in prior periods.
(2) Prior to 2002, there were no additional potential common shares issuable
under stock options.
1
FIVE-YEAR SELECTED RATIOS
(Dollars in thousands, except per share data)
Year ended December 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Net yield on average interest-earning assets 4.21% 4.09% 4.23% 4.10% 3.89%
Return on average total assets 0.87 1.12 1.06 1.19 1.24
Return on average shareholders' equity 7.82 10.22 10.65 12.09 11.58
Average shareholders' equity as a percent
of average total assets 11.08 10.92 9.96 9.87 10.74
Net loan charge-offs as a percent of
average total loans 0.44 0.27 0.30 0.31 0.20
Allowance for loan losses as a percent
of loans at year-end 1.34 1.50 1.45 1.19 1.48
Shareholders' equity as a percent
of total year-end assets 10.86 11.00 9.99 9.80 10.21
A copy of Form 10-K, as filed with the Securities and Exchange Commission, will
be furnished, free of charge, to shareholders, upon written request to the
Secretary of First Citizens Banc Corp, 100 East Water Street, Sandusky, Ohio
44870.
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COMMON STOCK AND SHAREHOLDER MATTERS
The common shares of First Citizens Banc Corp trade on The NASDAQ Stock Market
under the symbol "FCZA". As of December 31, 2003, there were 5,033,203 shares
outstanding held by approximately 1,085 shareholders of record (not including
the number of persons or entities holding stock in nominee or street name
through various brokerage firms). Information below is the range of sales prices
for each quarter for the last two years.
2003
- ------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- ------------------ ------------------ ------------------ -------------------
$23.73 to $32.50 $25.06 to $35.57 $24.39 to $30.31 $26.37 to $31.08
2002
- ------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- ------------------ ------------------ ------------------ -------------------
$19.85 to $24.50 $18.00 to $22.75 $20.25 to $24.25 $21.98 to $23.73
Dividends per share declared by the Corporation on common shares were as
follows:
2003 2002
----- -----
First quarter $ .26 $ .19
Second quarter .26 .25
Third quarter .26 .25
Fourth quarter .52 .61
----- -----
$1.30 $1.30
----- -----
GENERAL DEVELOPMENT OF BUSINESS
Dollars in thousands, except for per share data
FIRST CITIZENS BANC CORP (FCBC) was organized under the laws of the State of
Ohio on February 19, 1987 and is a registered financial holding company under
the Gramm-Leach-Bliley Act of 2000 (GLB Act), as amended. The Corporation's
office is located at 100 East Water Street, Sandusky, Ohio. The Corporation had
total consolidated assets of $636,423 at December 31, 2003. FCBC and its
subsidiaries are referred to together as the Corporation.
THE CITIZENS BANKING COMPANY (Citizens), owned by the Corporation since 1987,
opened for business in 1884 as The Citizens National Bank. In 1898, Citizens was
reorganized under Ohio banking law and was known as The Citizens Bank and Trust
Company. In 1908, Citizens surrendered its trust charter and began operation
under its current name. Citizens is an insured bank under the Federal Deposit
Insurance Act. Citizens maintains its main office at 100 East Water Street,
Sandusky, Ohio and operates three branch banking offices in Perkins Township
(Sandusky, Ohio), three branch banking offices in Norwalk, Ohio, one branch
banking office in Berlin Heights, Ohio, one branch banking office in Huron,
Ohio, one branch banking office in Castalia, Ohio and one loan production office
in Port Clinton, Ohio. As part of the acquisition, which was completed in April
2002, of Independent Community Banc Corp. (ICBC) and its subsidiary, The
Citizens National Bank of Norwalk, which was merged into Citizens, Citizens has
trust authority again. This subsidiary accounts for 77.8% of the Corporation's
consolidated assets at December 31, 2003.
3
THE FARMERS STATE BANK (Farmers), acquired by the Corporation in 1998, is
organized and chartered under the laws of the State of Ohio in 1916. Farmers is
an insured bank under the Federal Deposit Insurance Act. Farmers maintains its
main office at 102 South Kibler Street, New Washington, Ohio and operates branch
offices in Willard, Ohio, Crestline, Ohio, and the Ohio villages of Chatfield,
Tiro, Richwood and Green Camp. Farmers also has a loan production office in
Marion, Ohio. Farmers accounts for 19.4 of the Corporation's consolidated assets
at December 31, 2003.
SCC RESOURCES INC. (SCC) is organized under the laws of the State of Ohio. Begun
as a joint venture of three local Sandusky, Ohio banks in 1966, SCC provides
item-processing services for financial institutions, including the Banks, and
other nonrelated entities. The Corporation acquired total ownership of SCC in
February 1993. On June 19, 1999, SCC entered into an agreement with Jack Henry &
Associates, Inc. (JHA) to sell all of their contracts for providing data
processing services to community banks. JHA agreed to pay SCC a fee based upon
annual net revenue under a new JHA contract for each bank that signed a
five-year contract with JHA by January 31, 2000. This subsidiary accounts for
less than one percent of the Corporation's consolidated assets as of December
31, 2003.
R. A. REYNOLDS APPRAISAL SERVICE, INC. (Reynolds), owned by the Corporation
since 1993, was organized under the laws of the State of Ohio in September 1993.
Reynolds provides real estate appraisal services, for lending purposes, to the
Banks and to other financial institutions. Reynolds accounts for less than one
percent of the Corporation's consolidated assets as of December 31, 2003.
MR. MONEY FINANCE COMPANY (Mr. Money) was formed in year 2000 to provide
consumer lending products to customers who may not qualify for conventional
commercial bank lending products. Mr. Money has its main office in Sandusky,
Ohio and an office in Mansfield, Ohio. Loans for Mr. Money come from direct
consumer lending to customers and loans from third party home improvement
vendors. Mr. Money accounts for 2.3% of the Corporation's consolidated assets as
of December 31, 2003.
FIRST CITIZENS TITLE INSURANCE AGENCY INC. (Title Agency) has been formed to
provide customers with a seamless mortgage product with improved service. Assets
of the Title Agency are not significant at December 31, 2003.
FIRST CITIZENS INSURANCE AGENCY INC. (Insurance Agency) was formed to allow the
Corporation to participate in commission revenue generated through its third
party insurance agreement. Assets of the Insurance Agency are not significant at
December 31, 2003.
WATER STREET PROPERTIES (Water St.) was formed to hold properties repossessed by
FCBC subsidiaries. Assets of Water St. are not significant.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - AS OF DECEMBER 31, 2003 AND DECEMBER 31, 2002 AND FOR THE YEARS
ENDING DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands, except per share data)
General
The following paragraphs more fully discuss the significant highlights, changes
and trends as they relate to the Corporation's financial condition, results of
operations, liquidity and capital resources as of December 31, 2003 and 2002,
and during the three-year period ended December 31, 2003. This discussion should
be read in conjunction with the consolidated financial statements and notes to
the consolidated financial statements, which are included elsewhere in this
report.
Forward-Looking Statements
This report includes forward-looking statements by the Corporation relating to
such matters as anticipated operating results, business line results, credit
quality expectations, prospects for new lines of business, economic trends
(including interest rates) and similar matters. Such statements are based upon
the current beliefs and expectations of the Corporation's management and are
subject to risks and uncertainties. While the Corporation believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could prove to be inaccurate, and
accordingly, actual results and experience could differ materially from the
anticipated results or other expectations expressed by the Corporation in its
forward-looking statements. Factors that could cause actual results or
experience to differ from results discussed in the forward-looking statements
include, but are not limited to, regional and national economic conditions;
volatility and direction of market interest rates; credit risks of lending
activities, governmental legislation and regulation, including changes in
accounting regulation or standards; material unforeseen changes in the financial
condition or results of operations of the Corporation's clients; and other risks
identified from time-to-time in the Corporation's other public documents on file
with the Securities and Exchange Commission.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on its liquidity,
capital resources or operations except as discussed herein. The Corporation is
not aware of any current recommendations by regulatory authorities that would
have such effect if implemented. The Corporation does not undertake, and
specifically disclaims, any obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements, and the purpose of this section is to secure the use
of the safe harbor provisions.
Financial Condition
At December 31, 2003, total assets were $636,423, compared to $651,634 at
December 31, 2002. The decrease in assets is primarily due to a decline in
deposits which was not fully replaced by other funding sources.
Although total assets declined, net loans increased $47,196, or 11.4% from 2002
to 2003. Commercial real estate loans increased $41,451, or 35.5%, real estate
construction loans increased $9,529, or 72.3% and commercial and agricultural
loans increased $4,651, or 10.0% from 2002 to 2003. Residential real estate
loans decreased by $5,297, or 2.5%, from 2002 to 2003 to total $205,635.
Consumer loans decreased $5,513, or 18.2% from 2002 to total $24,765. Lease
loans increased $991, or 76.1%, from 2002 to 2003 to total
5
$2,293. Credit card and other loans, which include overdraft protection (ODP)
lines of credit, increased $1,277 from 2002 to total $4,977 in 2003. The
increase is net of the sale of the credit card portfolio in October 2003.
Management sold the portfolio to a third party provider so that we could offer a
choice of cards and features, along with increased service, to our customers.
In 2003, due to low interest rates, the demand for fixed rate residential real
estate loan products remained strong. However, FCBC continued to sell loans in
the secondary market and retain fewer in the portfolio to mitigate the interest
rate risk of holding longer term fixed-rate loans.
In 2003, management continued its emphasis on increasing the Corporation's share
of the local market for commercial and commercial real estate loans and expanded
into new markets, such as opening a loan office in Marion County. The
Corporation hired lending officers native to the new markets, and is taking a
proactive approach in contacting new and current clients. These lending
relationships generally offer more attractive returns than residential loans and
also offer opportunities for attracting larger balance deposit relationships.
However, the shift in loan portfolio mix from residential real estate to
commercial oriented loans may increase credit risk.
Both year-end and average 2003 deposit balances decreased from 2002. Year-end
deposit balances totaled $510,172 in 2003 compared to $539,899 in 2002, a
decrease of $29,727, or 5.5%. As the stock market experienced some gains in
2003, we saw that some investors who sought short-term financial institution
deposit products during the market declines of 2002 have started to move out of
deposits and into other financial instruments. Average deposit balances for 2003
were $530,801 compared to $533,869 for 2002, a decrease of $3,068, or 0.6%.
Noninterest-bearing deposits averaged $71,797 for 2003, compared to $62,707 for
2002, increasing $9,090, or 14.5%. Savings, NOW, and MMIA accounts averaged
$244,778 for 2003 compared to $238,066 for 2002. Average certificates of deposit
decreased $18,870 to total an average balance of $214,226 for 2003. The decrease
in certificates of deposit occurred as a result of management's decision to
allow higher rate certificates which were maturing to be withdrawn from the
Corporation rather than trying to retain these deposits by paying above market
rates.
To offset the decline in deposits, the Corporation utilized alternative funding
sources by drawing from the Corporation's cash management advance availability
for the Federal Home Loan Bank and by issuing subordinated debentures of $7,500.
In March 2003 and March 2002, the Corporation issued $7,500 of floating rate
4.41% and $5,000 of floating rate 5.59% trust preferred securities through
special purpose entities as part of pooled offerings of such securities. Prior
to 2003, the trust formed in 2002 was consolidated in the Corporation's
financial statements, with the trust preferred securities issued by the trust
reported in liabilities as "trust preferred securities" and the subordinated
debentures eliminated in consolidation. Under new accounting guidance, FASB
Interpretation No. 46, as revised December 2003, the trust is no longer
consolidated by the Corporation. Accordingly, the Corporation does not report
the securities issued by the trust as liabilities, and instead reports as
liabilities the subordinated debentures issued by the Corporation and held by
the trust, as these are no longer eliminated in consolidation. Amounts
previously reported as "trust preferred securities" in liabilities have been
recaptioned "subordinated debentures" and continue to be presented in
liabilities on the balance sheet.
Borrowings from the Federal Home Loan Bank of Cincinnati were $183 at December
31, 2002. As a result of scheduled pay downs, these borrowings were paid off in
2003, with the last advance paid off in May. At December 31, 2003, the
Corporation had utilized $18,975 of its $20,000 cash management advance line of
credit with the Federal Home Loan Bank to offset part of the decline in
deposits.
The Corporation also has a borrowing agreement for the purpose of funding loans
originated by Mr. Money. FCBC restructured this borrowing in 2002 into two
different loans, a $5,000 line of credit and a $10,000 term note. Total
borrowings under these loans were $9,000 at December 31, 2003 compared to
$13,000 at December 31, 2002. During 2003, the Corporation made its $1,000
scheduled payment on the term loan and paid off outstanding borrowings on the
line of credit. Note 11 in the consolidated financial statements provides
further details regarding the borrowing arrangement.
6
The Banks offer repurchase agreements in the form of sweep accounts to
commercial checking account customers. At December 31, 2003, total repurchase
agreements in the form of sweep accounts totaled $12,115. This compares to
$13,509 at December 31, 2002. U.S. Treasury securities and obligations of U.S.
government agencies maintained under the Banks' control are pledged as
collateral for the repurchase agreements.
Securities available for sale, securities held to maturity and Federal Home Loan
Bank (FHLB), Federal Reserve Bank (FRB), Great Lakes Bankers Bank (GLBB), and
Norwalk Community Development Corporation (NCDC) stock decreased a total of
$45,229, or 27.9% from $161,962 on December 31, 2002 to $116,733 on December 31,
2003. U.S. Treasury securities and obligations of U.S. government agencies
accounted for the majority of the decrease, declining from $102,780 at December
31, 2002 to $64,333 at December 31, 2003. Obligations of states and political
subdivisions available for sale decreased $6,422 from 2002 to 2003. Securities
decreased to help fund the growth of the loan portfolio that was experienced in
2003.
Mortgage-backed securities totaled $8,426 at December 31, 2003 and none are
considered unusual or "high risk" securities as defined by regulating
authorities. Of this total, $8,266 are pass-through securities issued by the
Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC); $123 are collateralized mortgage obligations (CMOs) and
real estate mortgage investment conduits (REMICs) issued by FNMA and FHLMC; and
$37 are privately issued and are collateralized by mortgage-backed securities
issued or guaranteed by FNMA, FHLMC, or Government National Mortgage Association
(GNMA). The average interest rate of the mortgage-backed portfolio at December
31, 2003 was 4.08%. The average maturity at December 31, 2003 was approximately
5.78 years. The Corporation has not invested in any derivative securities.
Securities held to maturity at December 31, 2003 had unrealized gains of
approximately $1. Since management intends to hold this portion of the portfolio
to maturity, the unrecognized gains have no impact on operations of the
Corporation. Securities available for sale had an estimated fair value at
December 31, 2003 of $109,508. This fair value includes unrealized gains of
approximately $2,220 and unrealized losses of approximately $64. Net unrealized
gains of $2,156 on December 31, 2003 was a decrease over net unrealized gains of
$3,766 at December 31, 2002 primarily due to changes in market interest rates.
Premises and equipment, net of accumulated depreciation, increased $2,262 from
December 31, 2002 to December 31, 2003. During 2003, a new $2,100 operations
center was constructed to house several departments of the Corporation. This
building should help the increase efficiency in several areas of the
Corporation.
Total shareholders' equity decreased $2,564, or 3.6% during 2003 to $69,125. The
change in shareholders' equity is made up of earnings of $5,567, less dividends
paid of $6,543 and the decrease in the market value of securities available for
sale, net of tax, of $1,063. Also, during 2003, the Corporation's additional
minimum pension liability, net of tax, increased $525, which decreased equity.
See Note 14 for further explanation. The Corporation paid cash dividends on
February 1, 2003, May 1, 2003, August 1, 2003 and November 1, 2003 each at a
rate of $.26 per share. Also on November 1, 2003, the Corporation paid a special
dividend of $.26 per share. Total outstanding common shares at December 31, 2003
were 5,033,203. The ratio of total shareholders' equity to total assets was
10.9% at December 31, 2003 compared to 11.0% at December 31, 2002.
Results of Operations
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation's cost of funds is influenced by interest rates on competing
investments and
7
general market rates of interest. Lending activities are influenced by the
demand for real estate loans, and other types of loans, which in turn is
affected by the interest rates at which such loans are made, general economic
conditions and the availability of funds for lending activities.
The Corporation's net income primarily depends on its net interest income, which
is the difference between the interest income earned on interest-earning assets,
such as loans and securities, and interest expense incurred on interest-bearing
liabilities, such as deposits and borrowings. The level of net interest income
is dependent on the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Net income is also
affected by provisions for loan losses, service charges, gains on the sale of
assets, other income, noninterest expense and income taxes.
Comparison of Results of Operations for the Year Ended December 31, 2003 and
December 31, 2002
Net Income The Corporation's net income for the year ended December 31, 2003 was
$5,567, compared to $7,127 for the year ended December 31, 2002, a decrease of
$1,560 or 21.9%. The decrease in net income was the result of the items
discussed in the following sections.
Net Interest Income
Net interest income for 2003 was $24,850, an increase of $567, or 2.3% from
2002. The change in net interest income for 2003 was the result of a larger
decrease in interest expense compared to the decrease in interest income. The
decline in the yield on interest earning assets and interest-bearing liabilities
is the result of continued repricing of assets and liabilities in the low
interest rate environment that existed throughout 2003. The Corporation
continues to examine its rate structure to ensure that its interest rates are
competitive and reflective of the current rate environment in which it competes.
Total interest income decreased $2,740, or 7.6% for 2003. The decline resulted
from average interest earning-assets decreasing from $596,228 in 2002 to
$592,863 in 2003 combined with a decline in yield earned on average earning
assets. Average loans increased $13,962 from 2002 to 2003. Income earned on the
loan portfolio decreased $1,557 from 2002 to 2003 due to the decline in yield
more than offsetting the impact of the higher average balance of loans. Although
the securities portfolio declined significantly from December 31, 2002 to
December 31, 2003, the average balance of the securities portfolio for 2002 and
2003 was similar. The decrease in interest income on securities was primarily
due to the decline in yields. Average balances of Federal Funds sold and
interest-bearing deposits in other banks declined which was the primary reason
for the interest earned on these assets declining $400. Funds that were sold in
the fed funds market in 2002 were used to help fund the increase the Corporation
had in its loan portfolio in 2003.
Total interest expense decreased $3,307, or 28.2% for 2003 compared to 2002. The
decrease in interest expense can be attributed to a decrease in the rate on
interest-bearing liabilities from 2.33% in 2002 to 1.70% in 2003, as well as a
decline in average balance of $6,375. Average interest-bearing deposits declined
$12,158 from 2002 to 2003. This decline combined with a 67 basis point drop in
the cost of deposits caused interest expense on deposits to decrease $3,320.
Interest expense on the various borrowings remained relatively unchanged as the
increase in average balance from 2002 to 2003 more than offset the decrease in
cost by a slight margin.
Refer to "Distribution of Assets, Liabilities and Shareholders' Equity, Interest
Rates and Interest Differential" and "Changes in Interest Income and Interest
Expense Resulting from Changes in Volume and Changes in Rate" on pages 14
through 16 for further analysis of the impact of changes in interest-bearing
assets and liabilities on the Corporation's net interest income.
8
Provision and Allowance for Loan Losses
The following table contains information relating to the provision for loan
losses, activity in and analysis of the allowance for loan losses as of and for
each of the three-years in the period ended December 31, 2003.
As of and for year ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Net loan charge-offs $ 1,961 $ 1,144 $ 1,045
Provision for loan losses charged to expense 1,944 1,178 1,803
Net loan charge-offs as a percent of average
outstanding loans 0.44% 0.27% 0.30%
Allowance for loan losses $ 6,308 $ 6,325 $ 4,865
Allowance for loan losses as a percent
of year-end outstanding loans 1.34% 1.50% 1.45%
Allowance for loan losses as a percent
of impaired loans 99.10% 91.28% 136.47%
Impaired loans $ 6,365 $ 6,929 $ 3,565
Impaired loans as a percent of gross
year-end loans(1) 1.36% 1.64% 1.06%
Nonaccrual and 90 days or more past due loans
as a percent of gross year-end loans (1) 1.37% 1.39% 1.56%
(1) Nonperforming loans and impaired loans are defined differently. Some loans
may be included in both categories, whereas other loans may only be
included in one category.
The Corporation's policy is to maintain the allowance for loan losses at a level
to provide for probable incurred losses. Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions.
The provision for loan losses increased by $766 in 2003 from $1,178 in 2002 to
$1,944 in 2003. The increase in the provision was a result of a net increase in
net charge-offs of $817 from 2002 to 2003. As of December 31, 2003, impaired
loans have decreased $564 from December 31, 2002. Efforts are continually made
to examine both the level and mix of the reserve by loan type as well as the
overall level of the reserve. Management specifically evaluates loans that are
impaired, or graded as doubtful by the internal grading function for estimates
of loss. To evaluate the adequacy of the allowance for loan losses to cover
probable losses in the portfolio, management considers specific reserve
allocations for identified portfolio loans, reserves for delinquencies and
historical reserve allocations. The composition and overall level of the loan
portfolio and charge-off activity are also factors used to determine the amount
of the allowance for loan losses.
Management analyzes commercial and commercial real estate loans on an individual
basis and classifies a loan as impaired when an analysis of the borrower's
operating results and financial condition indicates that underlying cash flows
are not adequate to meet its debt service requirements. Often this is associated
with a delay or shortfall in payments of 90 days or more. Smaller-balance
homogeneous loans are evaluated for impairment in total. Such loans include
residential first mortgage loans secured by one- to four-family residences,
residential construction loans and consumer automobile, boat, home equity and
9
credit card loans. In addition, loans held for sale and leases are excluded from
consideration as impaired. Loans are generally moved to nonaccrual status when
90 days or more past due. These loans are also often considered impaired.
Impaired loans, or portions thereof, are charged-off when deemed uncollectible.
Noninterest Income
Noninterest income totaled $7,724 in 2003 compared to $6,831 in 2002, an
increase of 13.1%. The more significant items contributing to this change are as
follows.
During 2003, the Corporation recognized gains from calls and sales of securities
of $301. In 2002, the Corporation recognized gains from calls of securities of
$8. Sales of securities were utilized to assist in the funding of loans although
the overall sales activity as a percentage of the securities portfolio was not
significant.
Due to the continued low interest rates, customers continued to refinance their
loans to lower fixed-rate loans. Rather than add these lower fixed-rate loans to
the Corporation's loan portfolio, the loans were sold in the secondary loan
market. Net gains on the loans sold totaled $631 in 2003 compared to a net gain
of $333 in 2002. The additional gain is due to the increase in volume of loans
sold in 2003 compared to the volume sold in 2002. The volume of loans sold in
2003 approximately doubled the volume sold in 2002.
Service charges by the Banks increased $225 from 2002 to 2003. The full year in
2003 of the additional customer base created as a result of this merger with
ICBC in April 2002 was the primary cause of this increase. Check Protect, which
is the Corporation's courtesy pay program, generated an additional $228 in
additional service charge income in 2003. ATM fees increased $50 from 2002 to
2003. With the addition of the customer base acquired through the entering new
markets, additional fees were gained. Other noninterest income totaled $2,030 in
2003, compared to $1,976 in 2002. In November, Citizens sold its credit card
portfolio for a net gain of $152. Additionally, increases in other noninterest
income are a result of additional products and services introduced to generate
noninterest income. These products include brokerage and insurance commissions,
the sale of wholesale mortgages, and income from the Trust Department. The Trust
Department has developed into the cornerstone of wealth management services
provided by the Corporation.
Noninterest Expense
Noninterest expense totaled $22,925 in 2003, an increase of $3,032, or 15.2%
over 2002. The following discussion highlights the significant items that
resulted in increases or decreases in the components of noninterest expense.
Salaries, wages and benefits totaled $11,572 in 2003 compared to $9,460 in 2002
for an increase of $2,112. This increase can be attributed to several factors.
First, salaries for 2002 are reflective of nine months salary and benefits of
the Independent Community Banc Corp. acquisition compared to twelve months in
2003. Second, Mr. Money and Farmers opened offices in Marion, Ohio and
Mansfield, Ohio in 2003. Third, in 2003, the formation of First Citizens
Advisors as a department of Citizens, which serves the customer's trust and
investment needs, required the addition of staff. Fourth, pension expense
increased $483 from 2002 to 2003 which is further disclosed in Note 14. Finally,
2003 salaries, wages, and benefits includes $160 of severance payments to
employees as part of the Corporation's reassessment of staffing needs.
Net occupancy expense increased $163 from $1,073 in 2002 to $1,236 in 2003.
Equipment expense increased $131 from 2002 to 2003. The primary cause of these
increases was the expansion of the Corporation. With the addition of new
branches, costs paid for real estate taxes, rent expense, and repair and
maintenance costs, along with several smaller items, increased.
10
State of Ohio franchise taxes were $761 in 2003 compared to $642 in 2002. The
franchise taxes are based on the capital positions of the subsidiaries. The
addition of the Insurance Agency and Title Agency, along with two refunds
received in 2002 by FCBC, lead to the increase in franchise tax in 2003.
Professional fees represent legal, audit and outside consulting fees paid by the
Corporation. Professional fees totaled $817 in 2003 compared to $920 in 2002. In
2003, FCBC hired an in-house attorney to deal with legal matters that were
outsourced in the past. This helped reduce the fees paid to legal counsel, but
also contributed to the increase in salaries, wages and benefits.
Advertising expense increased from $410 in 2002 to $466 in 2003. Entering into
new markets with the merger as well as creating new branches is the primary
reason for the increase in advertising. The Corporation will continue our
marketing and advertising efforts to increase our customer base.
Contracted data processing increased from $899 in 2002, to $989 in 2003. The
additional customer base created through the expansion into new markets was the
primary reason for this increase. Also, data processing for the Trust Department
increased $51 from 2002 to 2003.
Other operating expenses totaled $5,240 in 2003, compared to $4,944 in 2002.
Other operating expenses related to the Trust department increased $67 compared
to 2002. Also, with new branches being opened in 2003, an increase of $95 was
experienced in courier expense. Along with the above items, the Corporation
increased its expenditures in employee education and training in customer
service and cross selling. These expenditures are expected to continue as the
Corporation seeks to increase its customer base and enhance customer service.
Income Tax Expense
Income before federal income taxes amounted to $7,705 in 2003 and $10,043 in
2002. The Corporation's effective income tax rate was 27.7% in 2003 compared to
29.0% in 2002. The decline in the effective tax rate resulted from the
relatively consistent total of interest income on tax exempt securities compared
to the decline in income before taxes.
Proposed Acquisition
On March 4, 2004, the Company signed a letter of intent to acquire FNB Financial
Corporation ("FNB"), a $215,000 bank holding company headquartered in Shelby,
Ohio. The merger would create a combined financial institution with assets of
approximately $860,000, total deposits of approximately $700,000, shareholders'
equity of approximately $91,000 and a market capitalization of $156,000. The
merger is expected to be completed in the fourth quarter of 2004.
Comparison of Results of Operations for the Year Ended December 31, 2002 and
December 31, 2001
Net Income
The Corporation's net income for the year ended December 31, 2002 was $7,127,
compared to $5,293 for the year ended December 31, 2001, an increase of $1,834,
or 34.6%. The increase in net income was the result of the items discussed in
the following sections.
11
Net Interest Income
Net interest income for 2002 was $24,283, an increase of $4,388, or 22.1% from
2001. The change in the net interest income for 2002 was the net result of an
increase in interest income of $659 and a decrease in interest expense of
$3,729.
Total interest income increased $659, or 1.9% for 2002. Average interest
earning-assets increased from $472,965 to $596,228 from 2001 to 2002. Average
loans increased $84,547 from 2001 to 2002. Income earned on the loan portfolio
increased $694 from 2001 to 2002 due to the increase in balance more than
offsetting a significant decline in yield. Other interest bearing assets
increased $38,716. However, the decline in the rate earned on other earning
assets more than offset the impact from the increase in average balance, causing
a reduction in interest income of $35.
Total interest expense decreased $3,729, or 24.1% for 2002. The decrease in
interest expense can be attributed to a decrease in the rate on interest-bearing
liabilities from 3.86% in 2001 to 2.33% in 2002. An increase in average
interest-bearing liabilities from $400,658 to $502,145, or $101,487 from 2001 to
2002 offset some of the decrease due to rate. The decline in the yield on
interest earning assets and interest-bearing liabilities is result of continued
repricing of assets and liabilities in the low interest rate environment that
existed throughout 2002.
Refer to "Distribution of Assets, Liabilities and Shareholders' Equity, Interest
Rates and Interest Differential" and "Changes in Interest Income and Interest
Expense Resulting from Changes in Volume and Changes in Rate" located on pages
14 through 16 for further analysis of the impact of changes in interest-bearing
assets and liabilities on the Corporation's net interest income.
Provisions and Allowance for Loan Losses
The provision for loan losses decreased by $625 in 2002, from $1,803 in 2001 to
$1,178 in 2002. Impaired loans have increased, which include those acquired in
ICBC's portfolio. ICBC already had specific allowances in place for its impaired
loans; therefore, management felt the allowance was adequate with no additional
provision for these loans. Efforts are continually made to examine both the
level and mix of the reserve by loan type as well as the overall level of the
reserve. Management specifically evaluates loans that are impaired, or graded as
doubtful by the internal grading function for estimates of loss. Other pools of
loans are evaluated for loss using historical experience and consideration of
changes in delinquency trends and portfolio composition.
Noninterest Income
Noninterest income totaled $6,831 in 2002 compared to $6,117 in 2001, an
increase of 11.7%. The more significant items contributing to this change are as
follows.
During 2002, the Corporation recognized gains from calls and sales of securities
of $8. In 2001, the Corporation recognized gains from calls of securities of $7
and net gains of $856 from the sales of securities available for sale. The gains
in 2001 were primarily from the sale of the majority of the remaining equity
securities at Farmers.
Due to the continued low interest rates, customers continued to refinance their
loans to lower fixed-rate loans. Net gains were $333 for 2002 compared to the
net gain of $438 in 2001. The decline in 2002 was due to many customers having
already refinanced in this low interest rate environment as the volume of loans
the Corporation sold in the secondary market declined in 2002.
ATM fees increased from $406 in 2001 to $468 in 2002. The additional customer
base acquired through the merger is the primary reason for this increase. The
Banks introduced a new deposit product called
12
Check Protect which helped generate $471 of additional service charge fee income
for the year compared to 2001. Customers acquired through the merger were not
qualified to enter Check Protect until December 2, 2002. The Corporation expects
the addition of these customers to increase the amount of service charge income
generated through Check Protect. Other noninterest income totaled $1,976 in 2002
compared to $1,438 in 2001. Increases in other noninterest income are a result
of additional products and services introduced to generate noninterest income.
These products include brokerage and insurance commissions, the sale of
wholesale mortgages, and income from the Trust Department which was acquired in
the ICBC merger. The Trust Department will be the cornerstone of wealth
management services currently being developed by the Corporation.
Noninterest Expense
Noninterest expense totaled $19,893 in 2002, an increase of $2,960, or 17.5%
over 2001. The following discussion highlights the significant items that
resulted in increases or decreases in the components of noninterest expense.
Salaries, wages and benefits totaled $9,460 in 2002 compared to $7,863 in 2001
for an increase of $1,597. The primary reason for the change in salaries and
benefits is due to the addition of approximately 40 employees through the merger
with ICBC.
Net occupancy expense increased $191 from 2001 to 2002. The primary cause of
this increase in expense was due to the addition of the branches assumed with
the ICBC merger.
Equipment expense also increased in 2002, from $1,110 in 2001 to $1,219 in 2002.
The primary cause of this increase was due to the ICBC merger and the costs
associated with equipping and maintaining new branches.
State of Ohio franchise taxes were $642 in 2002 compared to $759 in 2001. The
franchise taxes are based on the capital positions of the Banks.
Professional fees represent legal, audit and outside consulting fees paid by the
Corporation. Professional fees totaled $920 in 2002 compared to $719 in 2001.
The overall increase is due to services related to the acquisition of ICBC.
Contracted data processing increased from $736 in 2001, to $899 in 2002. The
additional customer base acquired through the ICBC merger was the primary reason
for this increase. Also, data processing for the Trust Department added $30 to
expense.
Amortization of goodwill declined from $201 in 2001 to $0 in 2002. Upon adoption
of Financial Accounting Standards Board (FASB) Statement No. 142 on January 1,
2002, goodwill was no longer amortized but rather assessed annually for
impairment. Amortization of intangible assets increased due to amortization of
core deposits related to the ICBC acquisition.
Advertising expense decreased $10 from 2001 to 2002. Other operating expenses
totaled $4,944 in 2002 compared to $4,118 in 2001. The ICBC merger was the
primary cause of this increase, along with increased expenditures in employee
education and training in customer service and cross selling. Training of the
employees to further service the Corporations customers will continue.
Income Tax Expense
Income before federal income taxes amounted to $10,043 in 2002 and $7,276 in
2001. The Corporation's effective income tax rate was 29.0% in 2002, compared to
27.3% in 2001. The shifting in the security portfolio from tax-free municipal
securities to taxable securities contributed to the increase in the Corporations
effective tax rate.
13
Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Rates and Interest Differential
The following table sets forth, for the years ended December 31, 2003, 2002 and
2001, the distribution of assets, including interest amounts and average rates
of major categories of interest-earning assets and interest-bearing liabilities
(Dollars in thousands):
2003 2002 2001
-------------------------------- ----------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
balance Interest rate balance Interest rate balance Interest rate
--------- --------- --------- --------- --------- ------ --------- -------- ------
Assets
Interest-earning assets:
Loans (1)(2)(3) $ 445,205 $ 28,045 6.30% $ 431,243 $ 29,602 6.86% $ 346,696 $ 28,908 8.34%
Taxable securities (4) 104,364 3,634 3.52% 100,819 4,318 4.33 72,856 4,345 6.13
Non-taxable
securities (4)(5) 36,054 1,502 4.28% 37,243 1,601 4.38 41,216 1,702 4.18
Federal funds sold 6,485 82 1.26% 26,699 476 1.78 11,013 360 3.27
Interest-bearing deposits
in other banks 755 4 0.53% 224 10 4.46 1,184 33 2.79
--------- --------- --------- --------- --------- --------
Total interest-earning
assets 592,863 33,267 5.63 596,228 36,007 6.06 472,965 35,348 7.51
Noninterest-earning assets:
Cash and due from
financial institutions 19,966 17,711 15,696
Premises and
equipment, net 9,038 8,377 7,217
Accrued interest
receivable 4,144 4,285 3,821
Intangible assets 17,831 11,795 1,716
Other assets 4,402 6,564 1,947
Less allowance for
loan losses (5,944) (6,296) (4,253)
--------- --------- ---------
Total $ 642,300 $ 638,664 $ 499,109
========= ========= =========
(1) For purposes of these computations, the daily average loan amounts
outstanding are net of unearned income and include loans held for sale.
(2) Included in loan interest income are loan fees of $1,162 in 2003, $988 in
2002 and $994 in 2001.
(3) Nonaccrual loans are included in loan totals and do not have a material
impact on the analysis presented.
(4) Average balance is computed using the carrying value of securities. The
average yield has been computed using the historical amortized cost average
balance for available-for-sale securities.
(5) Interest income is reported on a historical basis without tax-equivalent
adjustment.
14
Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Rates and Interest Differential (Continued)
The following table sets forth, for the years ended December 31, 2003, 2002 and
2001, the distribution of liabilities and shareholders' equity, including
interest amounts and average rates of major categories of interest-earning
assets and interest-bearing liabilities (Dollars in thousands):
2003 2002 2001
------------------------------ ----------------------------- -----------------------------
Liabilities and Average Yield/ Average Yield/ Average Yield/
Shareholders' Equity balance Interest rate balance Interest rate balance Interest rate
- -------------------------------- --------- ---------- ------ --------- ---------- ------ --------- ---------- ------
Interest-bearing liabilities:
Savings and interest-
bearing demand accounts $ 244,778 $ 1,629 0.66% $ 238,066 $ 3,340 1.40% $ 162,771 $ 4,189 2.57%
Certificates of deposit 214,226 5,827 2.72% 233,096 7,436 3.19 204,566 9,668 4.73
Federal Home Loan
Bank advances 1,809 23 1.27% 519 27 5.20 1,127 66 5.86
Securities sold under
repurchase agreements 12,277 103 0.84% 11,491 158 1.37 13,078 395 3.02
Federal funds purchased - - - - - - 4,493 141 3.14
Notes payable 10,564 329 3.11% 13,838 534 3.86 13,655 962 7.05
Subordinated debentures 11,108 498 4.48% 3,866 212 5.48 - - -
U.S. Treasury demand
notes payable 1,008 8 0.79% 1,269 17 1.34 968 32 3.31
--------- ---------- --------- ---------- --------- ----------
Total interest-
bearing liabilities 495,770 8,417 1.70 502,145 11,724 2.33 400,658 15,453 3.86
--------- ---------- --------- ---------- --------- ----------
Noninterest-bearing liabilities:
Demand deposits 71,797 62,707 45,048
Other liabilities 3,541 4,045 3,710
--------- --------- ---------
75,338 66,752 48,758
Shareholders' equity 71,192 69,767 49,693
--------- --------- ---------
Total $ 642,300 $ 638,664 $ 499,109
========= ========= =========
Net interest income and
interest rate spread $ 24,850 3.93% $ 24,283 3.73% $ 19,895 3.65%
========== ====== ========== ====== ========== ======
Net yield on interest-
earning assets 4.21% 4.09% 4.23%
====== ====== ======
15
Changes in Interest Income and Interest Expense
Resulting from Changes in Volume and Changes in Rate
The following table sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rate.
2003 compared to 2002 2002 compared to 2001
Increase (decrease) Increase (decrease)
due to (1) due to (1)
------------------------- ---------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------- ------- -------
(Dollars in thousands)
Interest income:
Loans $ 936 $(2,493) $(1,557) $ 6,327 $(5,633) $ 694
Taxable securities 157 (841) (684) 1,460 (1,487) (27)
Nontaxable securities (63) (36) (99) (181) 80 (101)
Federal funds sold (285) (109) (394) 336 (220) 116
Interest-bearing deposits
in other banks 8 (14) (6) (36) 13 (23)
----- ------- ------- ------- ------- -------
Total interest-
earning assets $ 753 $(3,493) $(2,740) $ 7,906 $(7,247) $ 659
===== ======= ======= ======= ======= =======
Interest expense:
Savings and interest-
bearing demand
accounts $ 92 $(1,803) $(1,711) $ 1,493 $(2,342) $ (849)
Certificates of deposit (571) (1,038) (1,609) 1,217 (3,449) (2,232)
Federal Home Loan
Bank advances 28 (32) (4) (32) (7) (39)
Securities sold under
repurchase agreements 10 (65) (55) (43) (194) (237)
Federal funds purchased - - - (141) - (141)
Note payable (113) (92) (205) 13 (441) (428)
Subordinated debentures 331 (45) 286 212 - 212
U.S. Treasury demand
notes payable (3) (6) (9) 8 (23) (15)
----- ------- ------- ------- ------- -------
Total interest-
bearing liabilities $(226) $(3,081) $(3,307) $ 2,727 $(6,456) $(3,729)
===== ======= ======= ======= ======= =======
Net interest income $ 979 $ (412) $ 567 $ 5,179 $ (791) $ 4,388
===== ======= ======= ======= ======= =======
(1) The change in interest income and interest expense due to changes in both
volume and rate, which cannot be segregated, has been allocated
proportionately to the change due to volume and the change due to rate.
16
Liquidity and Capital Resources
The Banks maintain a conservative liquidity position. Liquidity is evidenced by
all but $14 of securities being classified as available for sale. At December
31, 2003, securities with maturities of one year or less totaled $62,782. The
Consolidated Statements of Cash Flows contained in the consolidated financial
statements detail the Corporation's cash flows from operating activities
resulting from net earnings.
Cash from operations for 2003 was $9,111. This includes net income of $5,567
plus net adjustments of $3,544 to reconcile net earnings to net cash provided by
operations. Cash from investing activities was $8,508 in 2003, resulting from
security purchases and increases in loans which more than offset by maturities,
prepayments and sales of securities and a decrease in fed funds sold. Cash from
financing activities in 2003 totaled $(19,433). This includes the decrease in
deposits, increases of FHLB borrowings, the payments of dividends and changes in
other borrowings. Cash from operating and investing activities was less than
cash used by financing activities by $1,814, which resulted in a decrease in
cash and cash equivalents to $21,983.
Future loan demand of the Banks can be funded by increases in deposit accounts,
proceeds from payments on existing loans, the maturity of securities and the
sale of securities classified as available for sale. Additional sources of funds
may also come from borrowing in the federal funds market and/or borrowing from
the Federal Home Loan Bank (FHLB). As of December 31, 2003, the Banks had total
credit availability with the FHLB of $106,997 of which $18,975 was outstanding.
Future loan demand of Mr. Money can be funded by proceeds from payments on
existing loans, sales of existing loans on the secondary market as well as
borrowings from affiliates or other institutions. On a separate entity basis,
the Corporation's primary source of funds is dividends paid primarily by the
subsidiary Banks. The ability of the Banks to pay dividends is subject to
limitations under various laws and regulations, and to prudent and sound banking
principles. Generally, subject to applicable minimum capital requirements, the
Banks may declare a dividend without the approval of the State of Ohio
Department of Commerce, Division of Financial Institutions, provided the total
dividends in a calendar year do not exceed the total of its profits for that
year combined with its retained profits for the two preceding years. In 2003,
Citizens paid $6,530 and Farmers paid $1,109 in dividends to the Corporation.
The purpose of these dividends was to accumulate cash at the Corporation to be
used for general corporate purposes including the possible repurchase of its
common shares. The amount of unrestricted dividends available to be paid by the
Banks to the Corporation was approximately $1,565 at December 31, 2003.
Management believes the future earnings of the Banks will be sufficient to
support anticipated asset growth at the Banks and provide funds to the
Corporation to continue paying dividends at their current level.
Capital Adequacy
The Corporation's policy is, and always has been, to maintain its capital levels
above the well capitalized regulatory standards. Under the regulatory capital
standards, total capital has been defined as Tier I (core) capital and Tier II
(supplementary) capital. The Corporation's Tier I capital includes shareholders'
equity (net of unrealized security gains and losses) and Tier II capital
includes the allowance for possible loan losses. The definition of risk-adjusted
assets has also been modified to include items both on and off the balance
sheet. Each item is then assigned a risk weight or risk adjustment factor to
determine ratios of capital to risk adjusted assets. The standards require that
total capital (Tier I plus Tier II) be a minimum of 8.0% of risk-adjusted
assets, with at least 4.0% being in Tier I capital. To be well capitalized, a
company must have a minimum of 10.0% of risk adjusted assets, with at least 6.0%
being Tier I capital The Corporation's ratios as of December 31, 2003 and 2002
were 14.8% and 14.9% respectively for total risk-based capital, and 10.9% and
12.5% respectively for Tier I risk-based capital.
17
Additionally, the Federal Reserve Board has adopted minimum leverage-capital
ratios. These standards were established to supplement the previously issued
risk based capital standards. The leverage ratio standards use the existing Tier
I capital definition but the ratio is applied to average total assets instead of
risk-adjusted assets. The standards require that Tier I capital be a minimum of
4.0% of total average assets for high rated entities such as the Corporation and
a minimum of 5.0% of total average assets to be well capitalized. The
Corporation's leverage ratio was 8.1% and 8.0% at December 31, 2003 and 2002.
Effects of Inflation
The Corporation's balance sheet is typical of financial institutions and
reflects a net positive monetary position whereby monetary assets exceed
monetary liabilities. Monetary assets and liabilities are those which can be
converted to a fixed number of dollars and include cash assets, securities,
loans, money market instruments, deposits and borrowed funds.
During periods of inflation, a net positive monetary position may result in an
overall decline in purchasing power of an entity. No clear evidence exists of a
relationship between the purchasing power of an entity's net positive monetary
position and its future earnings. Moreover, the Corporation's ability to
preserve the purchasing power of its net positive monetary position will be
partly influenced by the effectiveness of its asset/liability management
program. Management does not believe that the effect of inflation on its
nonmonetary assets (primarily bank premises and equipment) is material as such
assets are not held for resale and significant disposals are not anticipated.
Fair Value of Financial Instruments
The Corporation has disclosed the estimated fair value of its financial
instruments at December 31, 2003 and 2002 in Note 19 to the consolidated
financial statements. The fair value of the Corporation's financial instruments
generally increased relative to their carrying values in 2002 as a result of a
decrease in the general level of longer-term interest rates. The fair value of
loans at December 31, 2003 was 104.5% of the carrying value compared to 103.6%
at December 31, 2002. The fair value of deposits at December 31, 2003 was 100.4%
of the carrying value compared to 100.5% at December 31, 2002.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table represents significant fixed and determinable contractual
obligations of the Corporation as of December 31, 2003.
One year One to Three to Over five
Contractual Obligations or less three years five years years Total
- ------------------------------------ -------- ----------- ---------- ----------- --------
Deposits without a stated maturity $ 73,391 $ - $ - $ - $ 73,391
Certificates of deposit 108,819 43,926 17,458 1,988 172,191
FHLB advances, securities sold under
agreements to repurchase and
U.S. Treasury interest-bearing
demand note 32,029 - - - 32,029
Subordinated debentures (1) - - - 12,500 12,500
Long-term debt 1,000 2,000 6,000 - 9,000
Operating leases 236 330 121 - 687
(1) The subordinated debentures consist of $5,000 and $7,500 debentures. See
Note 12 for additional information.
The Corporation has retail repurchase agreements with clients within its local
market areas. These borrowings are collateralized with securities owned by the
Corporation. See Note 8 for further detail.
18
The Corporation also has a cash management advance line of credit and
outstanding letters of credit with the FHLB. For further discussion, refer to
Note 9. The long-term debt consists of borrowing from a secured borrowing
agreement with LaSalle Bank, NA. See Note 11 for the terms of this borrowing.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risk exposure is interest-rate risk and, to a
lesser extent, liquidity risk. All of the Corporation's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure.
Interest-rate risk (IRR) is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and shareholder value. However, excessive
levels of IRR can pose a significant threat to the Corporation's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Corporation's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Corporation seeks to ensure that appropriate
policies, procedures, management information systems and internal controls are
in place to maintain IRR at prudent levels with consistency and continuity.
Evaluating the quantitative level of IRR exposure requires the Corporation to
assess the existing and potential future effects of changes in interest rates on
its consolidated financial condition, including capital adequacy, earnings,
liquidity and, where appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency
Policy Statement on interest-rate risk, effective June 26, 1996. The policy
statement provides guidance to examiners and bankers on sound practices for
managing interest-rate risk, which will form the basis for ongoing evaluation of
the adequacy of interest-rate risk management at supervised institutions. The
policy statement also outlines fundamental elements of sound management that
have been identified in prior Federal Reserve guidance and discusses the
importance of these elements in the context of managing interest-rate risk.
Specifically, the guidance emphasizes the need for active board of director and
senior management oversight and a comprehensive risk-management process that
effectively identifies, measures, and controls interest-rate risk. Financial
institutions derive their income primarily from the excess of interest collected
over interest paid. The rates of interest an institution earns on its assets and
owes on its liabilities generally are established contractually for a period of
time. Since market interest rates change over time, an institution is exposed to
lower profit margins (or losses) if it cannot adapt to interest-rate changes.
For example, assume that an institution's assets carry intermediate- or
long-term fixed rates and that those assets were funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will have either lower net
interest income or, possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest-rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate
environment.
Several techniques may be used by an institution to minimize interest-rate risk.
One approach used by the Corporation is to periodically analyze its assets and
liabilities and make future financing and investment decisions based on payment
streams, interest rates, contractual maturities, and estimated sensitivity to
actual or potential changes in market interest rates. Such activities fall under
the broad definition of asset/liability management. The Corporation's primary
asset/liability management technique is the measurement of the Corporation's
asset/liability gap, that is, the difference between the cash flow amounts of
interest sensitive assets and liabilities that will be refinanced (or repriced)
during a given period. For example, if the asset amount to be repriced exceeds
the corresponding liability amount for a certain day, month, year, or longer
period, the institution is in an asset sensitive gap position. In this
19
situation, net interest income would increase if market interest rates rose or
decrease if market interest rates fell. If, alternatively, more liabilities than
assets will reprice, the institution is in a liability sensitive position.
Accordingly, net interest income would decline when rates rose and increase when
rates fell. Also, these examples assume that interest rate changes for assets
and liabilities are of the same magnitude, whereas actual interest rate changes
generally differ in magnitude for assets and liabilities.
Several ways an institution can manage interest-rate risk include selling
existing assets or repaying certain liabilities; matching repricing periods for
new assets and liabilities, for example, by shortening terms of new loans or
securities; and hedging existing assets, liabilities, or anticipated
transactions. An institution might also invest in more complex financial
instruments intended to hedge or otherwise change interest-rate risk. Interest
rate swaps, futures contracts, options on futures, and other such derivative
financial instruments often are used for this purpose. Because these instruments
are sensitive to interest rate changes, they require management expertise to be
effective. Financial institutions are also subject to prepayment risk in falling
rate environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refund its obligations at new, lower
rates. The Corporation has not purchased derivative financial instruments in the
past and does not intend to purchase such instruments in the near future.
Prepayments of assets carrying higher rates reduce the Corporation's interest
income and overall asset yields. A large portion of an institution's liabilities
may be short term or due on demand, while most of its assets may be invested in
long term loans or securities. Accordingly, the Corporation seeks to have in
place sources of cash to meet short-term demands. These funds can be obtained by
increasing deposits, borrowing, or selling assets. Also, FHLB advances and
wholesale borrowings may also be used as important sources of liquidity for the
Corporation.
The following table provides information about the Corporation's financial
instruments that are sensitive to changes in interest rates as of December 31,
2003 and 2002, based on certain prepayment and account decay assumptions that
management believes are reasonable. The Corporation had no derivative financial
instruments or trading portfolio as of December 31, 2003 or 2002. Expected
maturity date values for interest-bearing core deposits were calculated based on
estimates of the period over which the deposits would be outstanding. From a
risk management perspective, the Corporation believes that repricing dates for
adjustable-rate instruments, as opposed to expected maturity dates, may be a
more relevant measure in analyzing the value of such instruments. The
Corporation's borrowings were tabulated by contractual maturity dates and
without regard to any conversion or repricing dates.
NET PORTFOLIO VALUE - DECEMBER 31, 2003
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
- --------------- -------- -------- --------
+200 bp $ 60,788 $ (7,659) (11)%
+100 bp 64,511 (3,936) (6)%
Base 68,447 - -
-100 bp 71,409 2,962 4%
-200 bp 74,350 5,903 9%
NET PORTFOLIO VALUE - DECEMBER 31, 2002
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
- --------------- -------- -------- --------
+200 bp $ 64,806 $(10,373) (14)%
+100 bp 70,702 (4,477) (6)%
Base 75,179 - -
-100 bp 79,921 4,742 6%
-200 bp 84,492 9,313 12%
20
The relatively minor change in net portfolio value from December 31, 2002 to
December 31, 2003, is primarily a result of the following factors. First,
short-term interest rates have decreased only slightly during 2003, while
long-term rates have increased. As a result, the Corporation has seen a decrease
in the base level of net portfolio value due to an increase in the fair value of
loans, a decrease in the fair value of investments, as well as a decrease in the
fair value of deposits.
CRITICAL ACCOUNTING POLICIES
Allowance for Loan Losses
The allowance for loan losses is regularly reviewed by management to determine
whether or not the amount is considered adequate to absorb probable losses in
the loan portfolio. If not, an additional provision is made to increase the
allowance. This evaluation includes specific loss estimates on certain
individually reviewed loans, statistical loss estimates for loan groups or pools
that are based on historical loss experience and general loss estimates that are
based upon the size, quality, and concentration characteristics of the various
loan portfolios, adverse situations that may affect a borrower's ability to
repay, and current economic and industry conditions, among other items.
Those judgments and assumptions that are most critical to the application of
this accounting policy are the initial and on-going credit-worthiness of the
borrower, the amount and timing of future cash flows of the borrower that are
available for repayment of the loan, the sufficiency of underlying collateral,
the enforceability of third-party guarantees, the frequency and subjectivity of
loan reviews and risk gradings, emerging or changing trends that might not be
fully captured in the historical loss experience, and charges against the
allowance for actual losses that are greater than previously estimated. These
judgments and assumptions are dependent upon or can be influenced by a variety
of factors including the breadth and depth of experience of lending officers,
credit administration and the corporate loan review staff that periodically
review the status of the loan, changing economic and industry conditions,
changes in the financial condition of the borrower and changes in the value and
availability of the underlying collateral and guarantees. Note 1 and Note 4 in
the Notes to Consolidated Financial Statements provide additional information
regarding Allowance for Loan Losses.
21
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22
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
First Citizens Banc Corp
Sandusky, Ohio
We have audited the accompanying consolidated balance sheets of First Citizens
Banc Corp as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Citizens Banc
Corp as of December 31, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
Crowe Chizek and Company LLC
Cleveland, Ohio
January 29, 2004, except for Note 22
as to which the date is March 4, 2004
23
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24
FIRST CITIZENS BANC CORP
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(In thousands, except share data)
2003 2002
--------- ---------
ASSETS
Cash and due from financial institutions $ 21,983 $ 23,797
Federal funds sold - 12,700
Securities available for sale 109,508 155,168
Securities held to maturity (Fair value of $15 in
2003 and $44 in 2002) 14 42
Loans held for sale 159 1,390
Loans, net of allowance of $6,308 and $6,325 462,878 415,682
FHLB, FRB, GLBB and NCDC stock 7,211 6,752
Premises and equipment, net 10,481 8,219
Accrued interest receivable 4,143 4,795
Goodwill 15,052 15,052
Core deposit and other intangibles 2,506 3,000
Other assets 2,488 5,037
--------- ---------
Total assets $ 636,423 $ 651,634
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 73,391 $ 70,527
Interest-bearing 436,781 469,372
--------- ---------
Total deposits 510,172 539,899
Federal Home Loan Bank advances 18,975 183
Securities sold under agreements to repurchase 12,115 13,509
U. S. Treasury interest-bearing demand note payable 939 5,000
Notes payable 9,000 13,000
Subordinated debentures 12,500 5,000
Accrued expenses and other liabilities 3,597 3,354
--------- ---------
Total liabilities 567,298 579,945
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized,
5,326,441 shares issued 47,370 47,370
Retained earnings 28,612 29,588
Treasury stock, 293,238 shares at cost (7,241) (7,241)
Accumulated other comprehensive income 384 1,972
--------- ---------
Total shareholders' equity 69,125 71,689
--------- ---------
Total liabilities and shareholders' equity $ 636,423 $ 651,634
========= =========
See accompanying notes to consolidated financial statements.
25
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
---- ---- ----
Interest and dividend income
Loans, including fees $ 28,045 $ 29,602 $ 28,908
Taxable securities 3,634 4,318 4,345
Tax-exempt securities 1,502 1,601 1,702
Federal funds sold 82 476 360
Other 4 10 33
---------- ---------- ----------
33,267 36,007 35,348
Interest expense
Deposits 7,456 10,776 13,857
Federal Home Loan Bank advances 23 27 66
Subordinated debentures 498 212 -
Other 440 709 1,530
---------- ---------- ----------
8,417 11,724 15,453
---------- ---------- ----------
Net interest income 24,850 24,283 19,895
Provision for loan losses 1,944 1,178 1,803
---------- ---------- ----------
Net interest income after provision for
loan losses 22,906 23,105 18,092
---------- ---------- ----------
Noninterest income
Computer center item processing fees 1,157 1,184 1,173
Service charges 3,087 2,862 1,799
Net gains on sale of securities 301 8 863
Net gain (loss) on sale of loans 631 333 438
ATM fees 518 468 406
Other 2,030 1,976 1,438
---------- ---------- ----------
7,724 6,831 6,117
Noninterest expense
Salaries, wages and benefits 11,572 9,460 7,863
Net occupancy expense 1,236 1,073 882
Equipment expense 1,350 1,219 1,110
Contracted data processing 989 899 736
State franchise tax 761 642 759
Professional services 817 920 719
Amortization of goodwill - - 201
Amortization of intangible assets 494 326 125
Advertising expense 466 410 420
Other operating expenses 5,240 4,944 4,118
---------- ---------- ----------
Total noninterest expense 22,925 19,893 16,933
---------- ---------- ----------
Income before income taxes 7,705 10,043 7,276
Income tax expense 2,138 2,916 1,983
---------- ---------- ----------
Net income $ 5,567 $ 7,127 $ 5,293
========== ========== ==========
Earnings per common share, basic $ 1.11 $ 1.48 $ 1.30
========== ========== ==========
Earnings per common share, diluted $ 1.10 $ 1.48 $ 1.30
========== ========== ==========
Weighted average basic common shares 5,033,203 4,811,591 4,082,879
========== ========== ==========
Weighted average diluted common shares 5,041,877 4,812,664 4,082,879
========== ========== ==========
See accompanying notes to consolidated financial statements.
26
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
(In thousands, except share data)
Accumulated
Other Total
Common Stock Retained Treasury Comprehensive Shareholders'
Shares Amount Earnings Stock Income (Loss) Equity
------ ------ -------- ----- ------------- ------
Balance, January 1, 2001 4,087,619 $ 23,258 $ 28,614 $ (4,818) $ 871 $ 47,925
Comprehensive Income:
Net Income 5,293 5,293
Change in unrealized gain/(loss) on
securities available for sale, net
of reclassification and tax effects 673 673
-------------
Total comprehensive income 5,966
Cash dividends ($1.24 per share) (5,063) (5,063)
Purchase of treasury stock, at cost (5,000) (101) (101)
--------- -------- --------- ---------- ------------- -------------
Balance, December 31, 2001 4,082,619 23,258 28,844 (4,919) 1,544 48,727
Comprehensive Income:
Net Income 7,127 7,127
Change in minimum additional
pension liability, net of tax (513) (513)
Change in unrealized gain/(loss) on
securities available for sale, net
of reclassification and tax effects 941 941
-------------
Total comprehensive income 7,555
Cash dividends ($1.30 per share) (6,383) (6,383)
Issuance of common stock for
merger, net of issuance costs 1,063,040 24,112 24,112
Purchase of treasury stock, at cost (112,456) (2,322) (2,322)
--------- -------- --------- ---------- ------------- -------------
Balance, December 31, 2002 5,033,203 47,370 29,588 (7,241) 1,972 71,689
Comprehensive Income:
Net Income 5,567 5,567
Change in minimum additional
pension liability, net of tax (525) (525)
Change in unrealized gain/(loss) on
securities available for sale, net
of reclassification and tax effects (1,063) (1,063)
-------------
Total comprehensive income 3,979
Cash dividends ($1.30 per share) (6,543) (6,543)
--------- -------- --------- ---------- ------------- -------------
Balance, December 31, 2003 5,033,203 $ 47,370 $ 28,612 $ (7,241) $ 384 $ 69,125
========= ======== ========= ========== ============= =============
(Continued)
27
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income $ 5,567 $ 7,127 $ 5,293
Adjustments to reconcile net income to net cash
from operating activities
Security amortization, net of accretion 317 1,303 457
Depreciation 997 1,033 851
Amortization of intangible assets 494 326 326
Amortization of and valuation allowance on servicing rights 307 121 74
Net realized gain on sale of securities (301) (8) (863)
FHLB stock dividends (229) (247) (351)
Provision for loan losses 1,944 1,178 1,803
Loans originated for sale (20,543) (8,285) (15,420)
Proceeds from sale of loans 18,020 9,405 13,412
Gain on sale of loans (631) (333) (438)
(Gain) loss on sale of OREO properties 47 (19) 52
Deferred income taxes 66 95 (38)
Change in
Net deferred loan fees (86) (302) (109)
Accrued interest receivable 652 (912) 180
Other assets 2,926 (1,665) (638)
Accrued interest, taxes and other expenses (436) (1,982) (250)
-------- -------- --------
Net cash from operating activities 9,111 6,835 4,341
Cash flows from investing activities
Cash and cash equivalents received in bank acquisition - 3,079 -
Securities available for sale
Maturities, prepayments and calls 73,601 58,382 37,097
Purchases (36,690) (89,835) (34,845)
Sales 7,124 4 1,452
Securities held for maturity
Maturities, prepayments and calls 28 97 139
Purchases of FRB stock (230) (406) -
Loan originations, net of loan payments (45,006) 12,773 8,941
Proceeds from sale of OREO properties 240 140 239
Property and equipment expenditures (3,259) (740) (633)
Change in federal funds sold 12,700 (2,175) (6,025)
Maturity of interest bearing deposit - - 51
-------- -------- --------
Net cash from investing activities 8,508 (18,681) 6,416
(Continued)
28
FIRST CITIZENS BANC CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from financing activities
Change in deposits (29,727) 16,771 18,210
Repayment of Federal Home Loan Bank advances (183) (628) (589)
Net change in short-term FHLB advances 18,975 - -
Change in securities sold under repurchase agreements (1,394) 3,198 (2,635)
Change in U.S. Treasury interest-bearing notes payable (4,061) 4,280 (487)
Change in short-term note payable (3,000) (13,500) 3,400
Proceeds from long-term note payable - 10,000 -
Repayment of long-term note payable (1,000) - -
Change in federal funds purchased - - (20,000)
Cash dividends paid (6,543) (6,383) (5,063)
Net proceeds from issuance of subordinated debentures 7,500 5,000 -
Purchase of treasury stock - (2,322) (101)
-------- -------- --------
Net cash from financing activities (19,433) 16,416 (7,265)
-------- -------- --------
Net change in cash and cash equivalents (1,814) 4,570 3,492
Cash and cash equivalents at beginning of year 23,797 19,227 15,735
-------- -------- --------
Cash and cash equivalents at end of year $ 21,983 $ 23,797 $ 19,227
======== ======== ========
Supplemental cash flow information:
Interest paid 8,729 11,722 15,651
Income taxes paid 2,385 3,027 1,913
Supplemental non-cash disclosures:
Transfer of loans held for sale to portfolio $ 4,167 $ - $ -
Acquisition of ICBC through issuance of
common stock - 24,405 -
Transfer of loans from portfolio to other real estate owned 119 341 145
Change in minimum additional pension liability, net of
intangible for prior service cost 791 809 -
See accompanying notes to consolidated financial statements.
29
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the accounting policies adopted by First Citizens
Banc Corp, which have a significant effect on the financial statements.
Consolidation Policy: The consolidated financial statements include the accounts
of First Citizens Banc Corp (FCBC) and its wholly-owned subsidiaries, The
Citizens Banking Company (Citizens), The Farmers State Bank (Farmers), SCC
Resources, Inc. (SCC), R. A. Reynolds Appraisal Service, Inc. (Reynolds), Mr.
Money Finance Company (Mr. Money), First Citizens Title Insurance Agency Inc.
(Title Agency), First Citizens Insurance Agency Inc. (Insurance Agency), and
Water Street Properties, Inc. (Water St.) together referred to as the
Corporation. Intercompany balances and transactions are eliminated in
consolidation. As further discussed in Note 12, a trust that had previously been
consolidated with the Corporation is now reported separately as of December 31,
2003. As of January 2, 2003, another wholly-owned subsidiary bank, The Castalia
Banking Company, was merged into Citizens.
Nature of Operations: The Corporation provides financial services through its
offices in the Ohio counties of Erie, Crawford, Huron, Marion, Ottawa, Richland
and Union. Its primary deposit products are checking, savings, and term
certificate accounts, and its primary lending products are residential mortgage,
commercial, and installment loans. Substantially all loans are secured by
specific items of collateral including business assets, consumer assets and
commercial and residential real estate. Commercial loans are expected to be
repaid from cash flow from operations of businesses. Other financial instruments
that potentially represent concentrations of credit risk include deposit
accounts in other financial institutions and Federal Funds sold. In 2003, SCC
provided item processing for nine financial institutions in addition to the two
subsidiary banks. SCC accounted for 2.8% of the Corporation's total revenues.
Reynolds provides real estate appraisal services for lending purposes to the
subsidiary banks and other financial institutions. Reynolds accounts for less
than 1.0% of total Corporation revenues. Mr. Money provides consumer finance
loans and real estate loans that the Banks would not normally provide to B and C
credits at a rate commensurate with the risk and accounted for approximately
4.2% of the Corporation's total revenue. First Citizens Title Insurance Agency
Inc. was formed to provide customers with a seamless mortgage product with
improved service. First Citizens Insurance Agency Inc. was formed to allow the
Corporation to participate in commission revenue generated through its third
party insurance agreement. Insurance commission revenue is less than 1.0% of
total revenue for the year ended December 31, 2003. Water Street Properties,
Inc. was formed to hold repossessed assets of FCBC's subsidiaries. Water St.
revenue was less than 1% of total revenue for the year ended December 31, 2003.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, fair values of financial instruments, and status of contingencies are
particularly subject to change.
Cash Flows: Cash and cash equivalents include cash on hand and demand deposits
with financial institutions. Net cash flows are reported for federal funds
purchased or sold, customer loan transactions, deposit transactions, securities
sold under agreements to repurchase and other short-term borrowings.
(Continued)
30
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Debt securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Debt securities are classified as available for sale when they
might be sold before maturity. Equity securities with readily determinable fair
values are classified as available for sale. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income. Other securities such as Federal Home Loan Bank
(FHLB) stock, Federal Reserve Bank (FRB) stock and Great Lake Bankers' Bank
(GLBB) stock, and Norwalk Community Development Corp (NCDC) stock are carried at
cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans Held for Sale: Loans originated and intended for sale in the secondary
market are carried at the lower of cost or market in the aggregate. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, deferred loan fees and costs, and an allowance for loan
losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees over the loan term. Interest income on real estate loans
is discontinued at the time the loan is 90 days delinquent. Interest income on
commercial loans is also discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of collection. Interest income
on consumer loans is not discontinued when the loan is 90 days delinquent, as
the interest income recognized is not significant. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
Interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, risks in the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off. Loan losses are charged against the allowance when
management believes the loan balance is uncollectible.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
(Continued)
31
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is impaired when full payment under the loan terms is not expected.
Smaller-balance loans of similar nature such as residential mortgage, consumer,
and credit card loans are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosures.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
the loan is reported, net, at the present value of estimated future cash flows
using the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. If the collateral is greater than the
outstanding balance of the loan, no specific allowance is allocated for the
loan.
Premises and Equipment: Land is carried at cost. Buildings and improvements and
furniture and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both accelerated and straight-line methods over
the estimated useful life of the asset, ranging from three to seven years for
furniture and equipment and seven to fifty years for buildings and improvements.
Other Real Estate: Other real estate acquired through or instead of loan
foreclosure is initially recorded at fair value when acquired, establishing a
new cost basis. Any reduction from carrying value of the related loan to fair
value at the time of acquisition is accounted for as a loan loss. Any subsequent
reduction in fair value is recognized in a valuation allowance by a charge to
income. Other real estate owned included in other assets totaled approximately
$725 at December 31, 2003 and $341 at December 31, 2002.
Servicing Rights: Servicing rights are recognized as assets for the allocated
value of retained servicing rights on loans sold. Servicing rights are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Fair value is determined using prices
for similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance to the extent that fair value is
less than the capitalized asset for the grouping.
Goodwill and Other Intangible Assets: Goodwill results from prior business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Upon adopting new accounting guidance on January 1, 2002, the Corporation ceased
amortizing goodwill. Goodwill is assessed at least annually for impairment and
any such impairment will be recognized in the period identified.
Other intangible assets consist of core deposit intangible assets and a
non-compete agreement arising from whole bank and branch acquisitions. The core
deposit intangible assets are measured at fair value and then amortized on an
accelerated method over their estimated useful lives, which range from ten to
twelve years. The non-compete agreement is amortized on a straight-line basis
over two years.
Long-term Assets: Premises and equipment, core deposit intangible asset,
non-compete agreement, and other long-term assets are reviewed for impairment
when events indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair value.
(Continued)
32
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax basis of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Retirement Plans: The Corporation sponsors a noncontributory defined benefit
retirement plan for all full-time employees who have attained the age of 20-1/2
and have a minimum of six months of service. Pension expense is the net of
service and interest cost, return on plan assets and amortization of gains and
losses not immediately recognized. Accrued pension costs are funded to the
extent deductible for federal income tax purposes.
The Corporation also provides a savings and retirement 401(k) plan for all
eligible employees who elect to participate. The decision to make contributions
to the plan, which represents a match of a portion of the salary deferred by
participants, is made annually by the Board of Directors. Such contributions are
funded as they are accrued.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation. No stock options were granted prior to 2002.
2003 2002
------------ ---------
Net income as reported $ 5,567 $ 7,127
Deduct: Stock-based compensation expense
determined under fair value based method 64 17
------------ ---------
Pro forma net income $ 5,503 $ 7,110
============ =========
Basic earnings per share as reported $ 1.11 $ 1.48
Pro forma basic earnings per share 1.09 1.48
Diluted earnings per share as reported $ 1.10 $ 1.48
Pro forma diluted earnings per share 1.09 1.48
(Continued)
33
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The pro forma effects are computed using option pricing models, utilizing the
following weighted-average assumptions as of grant date.
2003 2002
--------- ---------
Risk-free interest rate 3.98% 4.77%
Expected option life 10 years 10 years
Expected stock price volatility 22.62% 19.37%
Dividend yield 2.97% 4.44%
Calculated fair value $ 8.23 $ 3.33
Off-Balance-Sheet Financial Instruments: Financial instruments include
off-balance-sheet credit instruments, such as commitments to make loans and
commercial letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale and changes in minimum pension
liability, which are also recognized as separate components of shareholders'
equity.
Adoption of New Accounting Standards: During 2003, the Corporation adopted
Financial Accounting Standards Board (FASB) Statement 143, Accounting for Asset
Retirement Obligations, Statement 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, Statement
146, Accounting for Costs Associated with Exit or Disposal Activities, Statement
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, FASB Statement 132 (revised 2003), Employers' Disclosures about
Pensions and Other Postretirement Benefits, FASB Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, and FASB Interpretation
46, Consolidation of Variable Interest Entities. Adoption of these new standards
did not materially affect the Corporation's operating results or financial
condition.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Restrictions on Cash: The subsidiary Banks are required to maintain certain
daily reserve balances on hand in accordance with Federal Reserve Board
requirements. The average reserve balance maintained in accordance with such
requirements at December 31, 2003 and 2002 approximated $9,293 and $6,843. These
balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Banks to FCBC or by FCBC to
shareholders. These restrictions pose no practical limit on the ability of the
Banks or FCBC to pay dividends at historical levels.
(Continued)
34
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect these estimates.
Earnings per Common Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share include the dilutive effect of additional potential
common shares issuable under stock option, which were 8,674 shares for 2003 and
1,073 shares for 2002. Stock options for 16,000 shares of common stock were not
consolidated in computing diluted earnings per share for 2003 because they were
antidilutive. The Corporation had no potentially dilutive common shares in 2001.
Operating Segments: While the Corporation's chief decision makers monitor the
revenue streams of the various products and services, the identifiable segments
are not material and operations are managed and financial performance is
evaluated on a Corporation-wide basis. Accordingly, all of the Corporation's
financial service operations are considered by management to be aggregated in
one reportable operating segment.
Financial Statement Presentation: Certain items in the 2001 and 2002 financial
statements have been reclassified to conform to the 2003 presentation.
(Continued)
35
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows.
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- ---------- ----------
2003
U.S. Treasury securities and obligations
of U.S. government agencies $ 64,333 $ 636 $ (2)
Corporate bonds
Obligations of states and political 1,030 1 (8)
subdivisions 35,036 1,408 (3)
Mortgage-back securities 8,426 82 (51)
-------- ---------- ----------
Total debt securities 108,825 2,127 (64)
Equity securities 683 93 -
-------- ---------- ----------
Total $109,508 $ 2,220 $ (64)
======== ========== ==========
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- ---------- ----------
2002
U.S. Treasury securities and obligations
of U.S. government agencies $102,780 $ 1,822 $ -
Corporate bonds 2,475 45 -
Obligations of states and political
subdivisions 41,458 1,688 (36)
Mortgage-back securities 7,803 185 -
-------- ---------- ----------
Total debt securities 154,516 3,740 (36)
Equity securities 652 62 -
-------- ---------- ----------
Total $155,168 $ 3,802 $ (36)
======== ========== ==========
Continued
36
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 2 - SECURITIES (Continued)
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows.
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------- ------------ ----------- -----
2003
Mortgage-backed securities $ 14 $ 1 $ - $ 15
======= ============ =========== =====
2002
Mortgage-backed securities $ 42 $ 2 $ - $ 44
======= ============ =========== =====
The fair value of securities and carrying amount, if different, at year end 2003
by contractual maturity were as follows. Securities not due at a single maturity
date, primarily mortgage-backed securities, are shown separately.
Held to maturity Available for sale
----------------------------- ------------------
Amortized Cost Fair Value Fair Value
-------------- ---------- ----------
Due in one year or less $ - $ - $ 62,782
Due from one to five years - - 31,885
Due from five to ten years - - 4,425
Due after ten years - - 1,307
Mortgage-backed 14 15 8,426
Equity securities - - 683
--------------- ---------- ----------
Total $ 14 $ 15 $ 109,508
=============== ========== ==========
Securities with a carrying value of $83,813 and $102,072 were pledged as of
December 31, 2003 and 2002, to secure public deposits and other deposits and
liabilities as required or permitted by law.
Proceeds from sales of securities, gross realized gains and gross realized
losses were as follows.
2003 2002 2001
---- ---- ----
Sale proceeds $ 7,124 $ 4 $ 1,452
Gross realized gains 292 - 856
Gross realized losses - - -
Gains from securities called or settled by the issuer 9 8 7
(Continued)
37
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 2 - SECURITIES (Continued)
Securities with unrealized losses at year end 2003 not recognized in income are
as follows.
12 Months or less More than 12 months Total
----------------------- --------------------- ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- -----
U.S. Treasury securities and $ 3,002 $ 2 $ - $ - $ 3,002 $ 2
obligations of U.S.
government agencies
Corporate bonds 529 8 - - 529 8
Obligations of states and
political subdivisions 2,194 3 - - 2,194 3
Mortgage-backed securities 5,517 51 - - 5,517 51
-------- ---------- ----- ---------- ------- ----------
Total temporarily impaired $ 11,242 $ 64 $ - $ - $11,242 $ 64
======== ========== ===== ========== ======= ==========
Unrealized losses on corporate bonds and obligations of states and political
subdivisions have not been recognized into income because the issuers' bonds are
of high credit quality. In addition, management has the intent and ability to
hold these securities as well as U.S. securities and obligations of U.S.
government agencies and mortgage-backed securities for the foreseeable future,
and the decline in fair value is largely due to increase in market interest
rates. The fair value is expected to recover as the bonds approach their
maturity date or reset date.
NOTE 3 - LOANS
Loans at year-end were as follows.
2003 2002
---- ----
Commercial and agricultural $ 51,146 $ 46,495
Commercial real estate 158,125 116,674
Residential real estate 205,635 210,931
Real estate construction 22,708 13,179
Consumer 24,765 30,278
Credit card and other 4,977 3,700
Leases 2,293 1,302
--------- ----------
Total Loans 469,649 422,559
Allowance for loan losses (6,308) (6,325)
Net deferred loan fees (460) (546)
Unearned interest (3) (6)
--------- ----------
Net loans $ 462,878 $ 415,682
========= ==========
(Continued)
38
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 3 - LOANS (Continued)
Loans to directors and executive officers, including their immediate families
and companies in which they are principal owners during 2003 were as follows.
Balance - January 1, 2003 $ 3,814
New loans and advances 4,545
Repayments (1,686)
Effect of changes in related parties (3,113)
--------------
Balance - December 31, 2003 $ 3,560
==============
Deposits from principal officers, directors, and their affiliates at year-end
2003 and 2002 were $5,650 and $5,603.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses was as follows.
2003 2002 2001
---- ---- ----
Balance - January 1 $ 6,325 $ 4,865 $ 4,107
Provision for loan losses 1,944 1,178 1,803
Balance from acquisition - 1,426 -
Loans charged-off (2,356) (1,517) (1,460)
Recoveries 395 373 415
-------- ------- -------
Balance - December 31 $ 6,308 $ 6,325 $ 4,865
======== ======= =======
Impaired loans were as follows.
2003 2002
---- ----
Year-end loans with no allocated allowance
for loan losses $ 924 $ 930
Year-end loans with allocated allowance
for loan losses 5,441 5,999
Amount of allowance for loan losses allocated 1,181 1,033
2003 2002 2001
---- ---- ----
Average balance of impaired
loans during year $ 6,768 $ 5,567 $ 3,107
Interest income recognized
during impairment 409 346 184
Interest income recognized on
a cash basis 409 346 184
(Continued)
39
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
Nonperforming loans were as follows.
2003 2002
---- ----
Loans past due over 90 days still on accrual $ 3,206 $ 2,414
Nonaccrual loans 3,204 3,468
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individual classified impaired loans.
NOTE 5 - SERVICING RIGHTS
Activity for capitalized mortgage servicing rights and the related valuation
allowance follows.
2003 2002 2001
---- ---- ----
Servicing rights:
Beginning of year $ 292 $ 283 $ 183
Additions 218 130 174
Amortized to expense (168) (121) (74)
Direct write-downs - - -
------ ------ ------
End of year $ 342 $ 292 $ 283
====== ====== ======
Valuation allowance:
Beginning of year $ - $ - $ -
Additions expensed (139) - -
Reductions credited to expense - - -
------ ------ ------
End of year $ (139) $ - $ -
====== ====== ======
NOTE 6 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
2003 2002
---- ----
Land and improvements $ 1,434 $ 1,327
Buildings and improvements 10,938 8,894
Furniture and equipment 8,854 7,925
--------------- ----------------
Total 21,226 18,146
Accumulated depreciation (10,745) (9,927)
--------------- ----------------
Premises and equipment, net $ 10,481 $ 8,219
=============== ================
Depreciation expense was $997, $1,033, and $851 for 2003, 2002, and 2001.
(Continued)
40
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
Rent expense was $276, $217 and $227 for 2003, 2002, and 2001. Rent commitments
under non-cancelable operating leases were as follows, before considering
renewal options that generally are present.
2004 $ 236
2005 189
2006 141
2007 121
---------------
TOTAL $ 687
===============
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
There was no change in the carrying amount of goodwill during the year-ended
December 31, 2003. Goodwill is no longer amortized starting in 2002. The effect
of not amortizing goodwill is summarized as follows.
2003 2002 2001
---- ---- ----
Reported net income $ 5,567 $ 7,127 $ 5,293
Add back: goodwill amortization - - 201
------------- --------------- ------------
Adjusted net income $ 5,567 $ 7,127 $ 5,494
============= =============== ============
Basic earnings per share
Reported net income $ 1.11 $ 1.48 $ 1.30
Goodwill amortization - - .05
------------- --------------- ------------
Adjusted net income $ 1.11 $ 1.48 $ 1.35
============= =============== ============
Diluted earnings per share
Reported net income $ 1.10 $ 1.48 $ 1.30
Goodwill amortization - - .05
------------- --------------- ------------
Adjusted net income $ 1.10 $ 1.48 $ 1.35
============= =============== ============
(Continued)
41
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS (Continued)
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets were as follows as of year end.
2003 2002
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- ------------ ------ ------------
Core deposit intangibles $ 3,735 $ 1,336 $ 3,735 $ 949
Noncompete agreement 214 107 214 -
----------- ------------- --------------- ----------------
$ 3,949 $ 1,443 $ 3,949 $ 949
=========== ============= =============== ================
Aggregate amortization expense was $494, $326 and $326 for 2003, 2002, and 2001.
Estimated amortization expense for each of the next five years and thereafter is
as follows.
2004 $ 486
2005 370
2006 362
2007 343
2008 331
Thereafter 614
-------------
$ 2,506
=============
NOTE 8 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits as of December 31, 2003 and 2002 were as follows.
2003 2002
---- ----
Demand $ 68,903 $ 64,746
Statement and passbook savings 168,835 183,339
Certificates of deposit:
In excess of $100,000 42,002 46,830
Other 130,189 146,789
Individual Retirement Accounts 26,852 27,668
----------------- -----------------
Total $ 436,781 $ 469,372
================= =================
(Continued)
42
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 8 - INTEREST-BEARING DEPOSITS (Continued)
Scheduled maturities of certificates of deposit at December 31, 2003 were as
follows.
2004 $ 108,819
2005 32,014
2006 11,912
2007 16,421
2008 1,037
Thereafter 1,988
----------------
Total $ 172,191
================
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
The Corporation has a $20 million cash management advance line of credit with
the Federal Home Loan Bank. The Corporation had $18,975 in advances outstanding
on this line as of December 31, 2003 at a rate of 1.11%. No advances were
outstanding on this line as of December 31, 2002.
The Corporation has fixed-rate mortgage-matched advances from the Federal Home
Loan Bank. Mortgage-matched advances are utilized to fund specific fixed-rate
loans with certain prepayment of principal permitted without penalty.
At December 31, 2003 and 2002, Federal Home Loan Bank borrowings were as
follows. The notes outstanding at December 31, 2002 matured in 2003.
2003 2002
---- ----
5.80 percent secured note $ - $ 22
5.60 percent secured note - 81
5.55 percent secured note - 80
--------------- ----------------
$ - $ 183
=============== ================
In addition to the borrowing, the Corporation has outstanding letters of credit
with the Federal Home Loan Bank totaling $15,700 at year-end 2003 and $12,300 at
year-end 2002 used for pledging against public funds. Federal Home Loan Bank
borrowings and the letters of credit are collateralized by Federal Home Loan
Bank stock and by $46,811 and $16,915 of residential mortgage loans under a
blanket lien arrangement at year-end 2003 and 2002.
(Continued)
43
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 10 - OTHER BORROWINGS
Information concerning securities sold under agreements to repurchase and
treasury tax and loan deposits was as follows.
2003 2002
---- ----
Average balance during the year $ 13,285 $ 12,760
Average interest rate during the year 0.89% 1.37%
Maximum month-end balance during the year $ 16,119 $ 19,301
Weighted average interest rate at year end 0.80% 1.10%
Securities underlying repurchase agreements had a fair value of $15,756 at
December 31, 2003 and $17,984 at December 31, 2002.
NOTE 11 - NOTE PAYABLE
FCBC has a secured borrowing agreement with LaSalle Bank, NA for up to $15,000.
The agreement is split into two pieces; a $5,000 secured revolving line of
credit which matures July 30, 2004, and a $10,000 term loan. The term loan
matures July 30, 2007 and requires annual principal payments of $1,000 with a
$6,000 balloon principal payment at maturity. At December 31, 2003, no amounts
were outstanding on the line of credit balance and the term loan had a balance
of $9,000. At December 31, 2002, the line of credit balance was $3,000 and the
term loan was $10,000. The interest rate is LIBOR plus 1.75%, or 2.91% at
December 31, 2003 and adjusts quarterly. The borrowings are secured by 100% of
the common stock of Citizens.
Maturities over the next four years were as follows.
2004 $ 1,000
2005 1,000
2006 1,000
2007 6,000
----------------
Total $ 9,000
================
NOTE 12 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES
Trusts formed by the Corporation, in March 2003 and March 2002, issued $7,500 of
4.41% floating rate and $5,000 of 5.59% floating rate trust preferred securities
through special purpose entities as part of pooled offerings of such securities.
The Corporation issued subordinated debentures to the trusts in exchange for the
proceeds of the offerings, which debentures represent the sole assets of the
trusts. The Corporation may redeem the subordinated debentures, in whole but not
in part, any time prior to March 26, 2008 and March 26, 2007, respectively at a
price of 107.50% of face value for those issued in 2003 and 2002. After March
26, 2008 and March 26, 2007, respectively, subordinated debentures may be
redeemed at face.
(Continued)
44
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 12 - TRUST PREFERRED SUBORDINATED DEBENTURES (Continued)
Prior to December 31, 2003, the trusts were consolidated in the Corporation's
financial statements, with the trust preferred securities issued by the trusts
reported in liabilities as "trust preferred securities" and the subordinated
debentures eliminated in consolidation. Under new accounting guidance, FASB
Interpretation No. 46, as revised in December 2003, the trusts are no longer
consolidated with the Corporation. Accordingly, the Corporation does not report
the securities issued by the trusts as liabilities, and instead reports as
liabilities the subordinated debentures issued by the Corporation and held by
the trusts, as these are no longer eliminated in consolidation. Amounts
previously reported as "trust preferred securities" in liabilities have been
recaptioned "subordinated debentures" and continue to be presented in
liabilities on the balance sheet. The effect of no longer consolidating the
trusts does not significantly change the amounts reported as the Corporation's
assets, liabilities, equity, or interest expense.
NOTE 13 - INCOME TAXES
Income tax expense was as follows.
Current $ 2,072 $ 2,821 $ 2,021
Deferred 66 95 (38)
------------ ------------ ------------
Income tax expense $ 2,138 $ 2,916 $ 1,983
============ ============ ============
Effective tax rates differ from the statutory federal income tax rate of 34% due
to the following.
2003 2002 2001
---- ---- ----
Income taxes computed at the
statutory federal tax rate $ 2,620 $ 3,415 $ 2,474
Add (subtract) tax effect of
Nontaxable interest income, net
of nondeductible interest expense (481) (498) (503)
Dividends received deduction (1) - (9)
Amortization of goodwill - - 68
Other - (1) (47)
------------ ---------- -----------
Income tax expense $ 2,138 $ 2,916 $ 1,983
============ ========== ===========
Tax expense attributable to security gains totaled $102, $3 and $294 in 2003,
2002, 2001
45
(Continued)
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 13 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following.
2003 2002
------ -------
Deferred tax assets
Allowance for loan losses $1,884 $ 1,816
Deferred compensation 509 455
Intangible assets 1,022 1,112
Deferred loan fees 155 202
Pension costs 473 121
Other 8 8
------ -------
Deferred tax asset 4,051 3,714
------ -------
Deferred tax liabilities
Tax depreciation in excess of book depreciation (596) (410)
Discount accretion on securities (21) (45)
Purchase accounting adjustments (936) (986)
FHLB stock dividends (901) (823)
Unrealized gain on securities available for sale (733) (1,280)
Leases (23) (19)
Other (106) (136)
------ -------
Deferred tax liability (3,316) (3,699)
------ -------
Net deferred tax asset $ 735 $ 15
====== =======
NOTE 14 - RETIREMENT PLANS
The Corporation sponsors a savings and retirement 401(k) plan, which covers all
employees who meet certain eligibility requirements and who choose to
participate in the plan. The matching contribution to the 401(k) plan was $95,
$76 and $58 in 2003, 2002 and 2001.
The Corporation and its subsidiaries also sponsor a pension plan which is a
noncontributory defined benefit retirement plan for all employees who have
attained the age of 20-1/2, completed six months of service and work 1,000 or
more hours per year. Annual payments, subject to the maximum amount deductible
for federal income tax purposes, are made to a pension trust fund.
The Corporation uses a September 30 measurement date for its plan.
(Continued)
46
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 14 - RETIREMENT PLANS (Continued)
Information about the pension plan is as follows.
2003 2002
------------ ------------
Change in benefit obligation:
Beginning benefit obligation $ 6,148 $ 4,111
Service cost 455 313
Interest cost 423 296
Actuarial (gain) loss 1,326 1,678
Benefits paid (298) (216)
Expenses paid (41) (33)
------------ ------------
Ending benefit obligation 8,013 6,148
Change in plan assets, at fair value:
Beginning plan assets 3,879 3,902
Actual return 576 (140)
Employer contribution 430 366
Benefits paid (298) (216)
Expenses paid (41) (33)
------------ ------------
Ending plan assets 4,546 3,879
------------ ------------
Funded status (3,467) (2,269)
Unrecognized net actuarial loss 3,854 2,980
Unrecognized prior service cost 51 64
Unrecognized net transition asset at January 1, 1989
being recognized over 17 years (179) (258)
Minimum additional liability adjustment (1,651) (873)
------------ ------------
Accrued benefit cost $ (1,392) $ (356)
============ =============
Pension amounts recognized in the consolidated balance sheets were as follows.
Pension Benefits
---------------------------
2003 2002
------------ ------------
Accrued benefit cost (1,392) (356)
Intangible assets 51 64
Accumulated other comprehensive income (1,038) (513)
------------ ------------
Net amount recognized $ (2,379) $ (805)
============ ============
The accumulated benefit obligation for the defined benefit pension plan was
$5,938 in 2003 and $4,236 in 2002.
(Continued)
47
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 14 - RETIREMENT PLANS (Continued)
The components of net periodic pension expense were as follows.
2003 2002 2001
------------- ------------ ------------
Service cost $ 455 $ 313 $ 238
Interest cost 423 296 276
Expected return on plan assets (534) 173 293
Net amortization and deferral 344 (576) (707)
------------- ------------ ------------
Net $ 688 $ 206 $ 100
============= ============ ============
Additional information
Increase in minimum liability included
in other comprehensive income $ 791 $ 809 $ -
The weighted average assumptions used to determine benefit obligations at
year-end were as follows.
2003 2002 2001
---- ---- ----
Discount rate on benefit obligation 5.86% 7.00% 7.28%
Long-term rate of return on plan assets 7.00 7.00 9.00
Rate of compensation increase 3.00 4.00 4.00
The weighted average assumptions used to net periodic pension cost were as
follows.
2003 2002 2001
---- ---- ----
Discount rate on benefit obligation 7.00% 7.28% 7.83%
Long-term rate of return on plan assets 7.00 9.00 9.00
Rate of compensation increase 4.00 4.00 4.00
The expectation for long-term rate of return on the pension assets and the
expected rate of compensation increases are reviewed periodically by management
in consultation with outside actuaries and primary investment consultants.
Factors considered in setting and adjusting these rates are historic and
projected rates of return on the portfolio and historic and estimated rates of
increases of compensation.
(Continued)
48
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 14 - RETIREMENT PLANS (Continued)
The Corporation's pension plan asset allocation at year-end 2003, and 2002,
target allocation for 2004, and expected long-term rate of return by asset
category are as follows.
Percentage of Plan Weighted-
Target Assets Average Expected
Allocation at Year-end Long-Term Rate
Asset Category 2004 2003 2002 of Return - 2003
- ------------------ ---------- -------- -------- ----------------
Equity securities 20-50% 55.0% 55.9% 3.0%
Debt securities 30-60 17.4 18.6 4.0
Money market funds 0.7 0.9 0.5
Other 20-30 26.9 24.6 10.0
-------- -------- ----------------
Total 100.0% 100.0% 7.0%
======== ======== ================
The Corporation developed the pension plan investment policies and strategies
for plan assets with its pension management firm. The long-term guidelines from
above were created to maximize the return on portfolio assets while reducing the
risk of the portfolio. Using a combination of equity and debt securities, money
market funds, and other funds, such as mutual funds, the Corporation believes
the plan has followed the policy and strategy of plan assets. The management
firm may allocate assets among the separate accounts with the established
long-term guidelines. Transfers among these accounts will be at the management
firms discretion based on their investment outlook and the investment strategies
that are outlined at periodic meetings with the Corporation.
The Corporation expects to contribute $598 to its pension plan in 2004.
NOTE 15 - STOCK OPTIONS
Options to buy stock are granted to directors, officers and employees under the
stock option plan, which provides for issue of up to 225,000 options. Exercise
price is the market price at date of grant, so there is no expense recognized in
the income statement. The maximum option term is ten years, and options vest
after three years.
(Continued)
49
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 15 - STOCK OPTIONS (Continued)
A summary of the activity in the plan is as follows.
2003 2002
------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- --------- ----------
Outstanding at beginning of year 30,700 $ 20.50 - $ -
Granted 16,000 35.00 30,700 20.50
Exercised - - - -
Forfeited - - - -
-------- -------- --------- ----------
Outstanding at end of year 46,700 $ 25.47 30,700 $ 20.50
======== ======== ========= ==========
Options exercisable at year-end - -
======== =========
Weighted average fair value of
options granted during year $ 8.23 $ 3.33
======== =========
Options outstanding at year-end 2003 were as follows.
Outstanding
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Exercise price Number Life Price
- ----------------------- -------- -------------- --------
$20.50 30,700 8 yrs 5 mos. $ 20.50
35.00 16,000 9 yrs 3.5 mos. 35.00
-------- --------------
Outstanding at year-end 46,700 8 yrs 8 mos. $ 25.47
======== ========
NOTE 16 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
(Continued)
50
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 16 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK (Continued)
The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year-end.
2003 2002
----------------- --------------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
------ -------- --------- --------
Commitments to extend credit:
Lines of credit and construction loans $4,199 $ 46,956 $ 7,983 $ 48,484
Credit cards - - - 6,127
Overdraft protection - 6,658 - 5,258
Letters of credit 70 3,377 95 452
------ -------- --------- --------
$4,269 $ 56,991 $ 8,078 $ 60,321
====== ======== ========= ========
Commitments to make loans are generally made for a period of one year or less.
Fixed-rate loan commitments included above had interest rates ranging from 3.25%
to 8.00% at December 31, 2003 and 3.25% to 10.50% at December 31, 2002.
Maturities extend up to 30 years.
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS
The Corporation and the subsidiary Banks are subject to regulatory capital
requirements administered by the federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments by
the regulators. Failure to meet capital requirements can initiate regulatory
action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
The Corporation and the Banks were well capitalized at December 31, 2003 and
2002. No conditions or events have occurred since the last notification from
regulators that management believes have changed the Corporation's or the Banks'
classification.
(Continued)
51
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued)
At December 31, 2003 and 2002, the Corporation's and the Banks' actual capital
levels and minimum required levels were as follows.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- --------- -------- --------- -------
(Dollars in Millions)
2003
Total capital to risk-
weighted assets
Consolidated $ 69.1 14.8% $ 36.9 8.0% $ 46.1 10.0%
Citizens 43.4 13.0 26.7 8.0 33.4 10.0
Farmers 15.7 15.1 8.3 8.0 10.4 10.0
Tier I (Core) capital to risk-
weighted assets
Consolidated 50.1 10.9 18.4 4.0 27.7 6.0
Citizens 39.5 11.8 13.4 4.0 20.0 6.0
Farmers 14.4 13.9 4.2 4.0 6.2 6.0
Tier I (Core) capital to
average assets
Consolidated 50.1 8.1 24.7 4.0 30.9 5.0
Citizens 39.5 8.3 19.1 4.0 23.9 5.0
Farmers 14.4 10.4 5.5 4.0 6.9 5.0
(Continued)
52
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 17 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued)
To Be Well
Capitalized Under
Prompt Corrective
For Capital Action Provisions
Actual Adequacy Purposes -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- --------------------- ------ -----
(Dollars in Millions)
2002
Total capital to risk-
weighted assets
Consolidated $ 61.2 14.9% $ 32.8 8.0% $ 41.0 10.0%
Citizens 37.5 12.8 23.4 8.0 29.2 10.0
Castalia 6.0 18.5 2.6 8.0 3.2 10.0
Farmers 15.3 19.4 6.3 8.0 7.9 10.0
Tier I (Core) capital to risk-
weighted assets
Consolidated 51.1 12.5 16.4 4.0 24.6 6.0
Citizens 33.9 11.6 11.7 4.0 17.5 6.0
Castalia 5.6 17.3 1.3 4.0 1.9 6.0
Farmers 14.3 18.2 3.1 4.0 4.7 6.0
Tier I (Core) capital to
average assets
Consolidated 51.1 8.0 25.6 4.0 32.0 5.0
Citizens 33.9 7.4 18.3 4.0 22.9 5.0
Castalia 5.6 11.0 2.0 4.0 2.5 5.0
Farmers 14.3 11.7 4.9 4.0 6.1 5.0
FCBC's primary source of funds for paying dividends to its shareholders and for
operating expenses is dividends received from the Banks. Payment of dividends by
the Banks to FCBC is subject to restrictions by the Banks' regulatory agencies.
These restrictions generally limit dividends to the current and prior two years
retained earnings as defined by the regulations. In addition, dividends may not
reduce capital levels below minimum regulatory requirements. Under the most
restrictive of these requirements, the Corporation estimates that retained
earnings available for payment of dividends by the Banks to FCBC approximated
$1,565 and $2,096 at December 31, 2003 and 2002.
(Continued)
53
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of FCBC follows.
CONDENSED BALANCE SHEETS 2003 2002
--------- ---------
Assets:
Cash $ 3,115 $ 821
Securities available for sale 483 483
Loans, net of allowance of $229 and $0 690 929
Investment in bank subsidiaries 72,855 74,264
Investment in nonbank subsidiaries 2,117 2,614
Note receivable from nonbank subsidiaries 12,250 11,650
Other assets 818 362
--------- ---------
Total assets $ 92,328 $ 91,123
========= =========
Liabilities and Shareholders' Equity:
Deferred income taxes and other liabilities $ 1,703 $ 1,434
Subordinated debentures 12,500 5,000
Note payable 9,000 13,000
Common stock 47,370 47,370
Retained earnings 28,612 29,588
Treasury Stock (7,241) (7,241)
Accumulated other comprehensive income 384 1,972
--------- ---------
Total liabilities and shareholders' equity $ 92,328 $ 91,123
========= =========
CONDENSED STATEMENTS OF INCOME 2003 2002 2001
--------- --------- ---------
Dividends from bank subsidiaries $ 7,639 $ 3,495 $ 8,900
Interest income 395 514 789
Other income 3 6 8
Provision for loan losses (229) - -
Interest expense (828) (695) (787)
Other expense, net (1,214) (771) (569)
--------- --------- ---------
Earnings before equity in undistributed
net earnings of subsidiaries 5,766 2,549 8,341
Income tax benefit 637 322 241
(Distributions in excess of earnings of
subsidiaries) / equity in undistributed net
earnings of subsidiaries (836) 4,256 (3,289)
--------- --------- ---------
Net income $ 5,567 $ 7,127 $ 5,293
========= ========= =========
(Continued)
54
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 18 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS 2003 2002 2001
-------- --------- ---------
Operating activities:
Net income $ 5,567 $ 7,127 $ 5,293
Adjustment to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 229 - -
Change in other assets and other liabilities (1,905) (1,278) (1,643)
Distributions in excess of/(equity in
undistributed) net earnings of subsidiaries 836 (4,256) 3,289
-------- --------- ---------
Net cash from operating activities 4,727 1,593 6,939
Investing activities:
Loan originations, net of loan payments 10 (929) -
Change in loan to nonbank subsidiaries 600 1,850 (2,900)
-------- --------- ---------
Net cash from investing activities 610 921 (2,900)
Financing activities:
Net change in short term note payable (3,000) (11,000) 3,400
Repayment of long-term note payable (1,000) - -
Proceeds from long-term borrowings - 10,000 -
Proceeds from subordinated debentures payable
to First Citizens Statutory Trust I and II 7,500 5,000 -
Cash paid for treasury stock - (2,322) (101)
Cash dividends paid (6,543) (6,383) (5,063)
-------- --------- ---------
Net cash from financing activities (3,043) (4,705) (1,764)
-------- --------- ---------
Net change in cash and cash equivalents 2,294 (2,191) (2,275)
Cash and cash equivalents at beginning of year 821 3,012 737
-------- ---------- ---------
Cash and cash equivalents at end of year $ 3,115 $ 821 $ 3,012
======== ========== =========
(Continued)
55
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of financial instruments were as
follows.
December 31, 2003 December 31, 2002
----------------- -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ----------- ---------- ----------
Financial assets:
Cash and due from financial
institutions $ 21,983 $ 21,983 $ 23,797 $ 23,797
Federal funds sold - - 12,700 12,700
Securities available for sale 109,508 109,508 155,168 155,168
Securities held to maturity 14 15 42 44
Loans held for sale 159 159 1,390 1,390
Loans, net of allowance for
loan losses 462,878 483,583 415,682 430,555
FHLB, FRB, GLBB, and
NCDC stock 7,211 7,211 6,752 6,752
Accrued interest receivable 4,143 4,143 4,795 4,795
Financial liabilities:
Deposits (510,172) (512,090) (539,899) (542,786)
Federal Home Loan Bank
advances (18,975) (18,975) (183) (174)
U.S. Treasury interest-bearing
demand note payable (939) (939) (5,000) (5,000)
Securities sold under
agreements to repurchase (12,115) (12,115) (13,509) (13,509)
Notes payable (9,000) (9,000) (13,000) (13,000)
Subordinated debentures (12,500) (12,500) (5,000) (5,000)
Accrued interest payable (521) (521) (833) (833)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the cash flow analysis or underlying
collateral values. Fair value of loans held for sale is based on market quotes.
Fair value of debt is based on current rates for similar financing. The fair
value of off-balance-sheet items is based on the current fees or cost that would
be charged to enter into or terminate such arrangements and are considered
nominal.
(Continued)
56
FIRST CITIZENS BANC CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Amounts in thousands, except share data)
NOTE 20 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows.
2003 2002 2001
--------- -------- --------
Unrealized holding gains (losses) on
available for sale securities $ (1,309) $ 1,435 $ 1,882
Reclassification adjustments for gains
later recognized in income (301) (8) (863)
--------- -------- --------
Net unrealized gains (losses) (1,610) 1,427 1,019
Minimum pension liability adjustment (791) (809) -
Tax effect 813 (190) (346)
--------- -------- --------
Other comprehensive income (loss) $ (1,588) $ 428 $ 673
========= ======== ========
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Basic Diluted
Interest Net Interest Net Earnings per Earnings per
Income Income Income Common Share Common Share
-------- ------------ --------- ------------ ------------
2003
First quarter $ 8,594 $ 6,260 $ 1,850 $ 0.37 $ 0.37
Second quarter 8,490 6,304 1,703 0.34 0.34
Third quarter 8,182 6,180 1,307 0.26 0.26
Fourth quarter * 8,001 6,106 707 0.14 0.13
2002
First quarter ** $ 7,710 $ 4,936 $ 1,419 $ 0.35 $ 0.35
Second quarter 9,506 6,272 1,901 0.37 0.37
Third quarter 9,629 6,613 2,072 0.41 0.41
Fourth quarter 9,162 6,462 1,735 0.35 0.35
* Net income in the fourth quarter of 2003 reflects $160 of severance expense
for employees terminated as part of a reassessment of staffing needs.
Also, in the fourth quarter of 2003, an additional provision for loan losses
of $420 was expensed. The provision related to management's analysis of the
loss reserve for adequacy and also to the establishment of a reserve at FCBC
for a loan participated with Farmers.
** Amounts for the first quarter 2002 are prior to the merger with ICBC
(Continued)
57
NOTE 22 - PROPOSED ACQUISITION
On March 4, 2004, the Corporation signed a letter of intent to acquire FNB
Financial Corporation ("FNB"), a $215,000 bank holding company headquartered in
Shelby, Ohio. The shareholders of FNB will be able to elect to receive 2.62
shares of First Citizens common shares, $72.00 in cash or a combination of 60%
stock and 40% cash, subject to an overall limitation. At the time of the merger,
FNB's subsidiary, First National Bank of Shelby, will be merged into Farmers.
The merger is subject to shareholder and regulatory approval and is expected to
be consummated in the fourth quarter of 2004.
58