1 FIRST CITIZENS BANC CORP SANDUSKY, OHIO ANNUAL REPORT December 31, 1997
2 FIRST CITIZENS BANC CORP CONTENTS INSIDE <TABLE> <CAPTION> Message to Shareholders Five Year Consolidated Financial Summary <S> <C> <C> Form 10-K ............................................................................................ 1 Index ............................................................................................... 2 PART I Item 1. Business.................................................................................... 3 Item 2. Properties.................................................................................. 19 Item 3. Legal Proceedings........................................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders....................................................................... 19 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................................................... 20 Item 6. Selected Financial Data..................................................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 22 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................. 29 Item 8. Financial Statements and Supplementary Data Independent Auditors' Report................................................................ 33 Financial Statements........................................................................ 34 Notes to Consolidated Financial Statements ................................................. 38 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................... 55 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 56 Item 11. Executive Compensation...................................................................... 57 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................................................ 57 Item 13. Certain Relationships and Related Transactions.............................................. 57 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................................... 58 Signatures ........................................................................................ 59 </TABLE> First Citizens Banc Corp Directors and Officers Directors of Affiliated Companies Officers of Affiliated Companies First Citizens Banc Corp Shareholder Information
3 [FIRST CITIZENS BANC CORP LETTERHEAD] Dear Shareholders: The year 1997 was one of transition for First Citizens Banc Corp. January brought the acquisition of two branches from EST First Merit and July brought the merger agreement with the Farmers State Bank of New Washington, Ohio. In addition to expansion of the corporation's market area through acquisition, the banks have introduced new products and product lines to better serve the customer and attract new business. These efforts to position for the future, however, require an investment. While our net interest income and non interest income increased by over $1,000,000 in 1997, our overhead costs increased by approximately $1,700,000 thus resulting in a reduced net income for the year. A significant portion of increased costs are non-recurring and associated with the branch acquisitions, the merger in progress with The Farmers State Bank, and the introduction of new products and services. We look forward to welcoming the shareholders of The Farmers State Bank to First Citizens Banc Corp and are confident it is a merger that will benefit everyone. As we have stated in the past, we intend to continue our significant dividend payout subject to continuing strong earnings and a capital base sufficient to support operations. Your Board of Directors and employees are committed to the growth and financial strength of First Citizens Banc Corp. Sincerely, David A. Voight President
4 FIRST CITIZENS BANC CORP FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY <TABLE> <CAPTION> 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Earnings Net income (000) $ 3,434 $ 3,965 $ 3,682 $ 3,658 $ 3,555 Per Common Share (1): Earnings $ 1.13 $ 1.30 $ 1.21 $ 1.20 $ 1.16 Book value 11.42 11.28 11.08 10.46 9.67 Dividends paid 1.07 1.02 0.71 0.41 0.36 Balances (in millions) Assets $ 325.9 $ 302.8 $ 304.0 $ 303.0 $ 288.7 Deposits 265.0 240.5 242.3 244.1 245.5 Net loans 221.8 202.5 193.3 183.6 158.4 Shareholders equity 34.8 34.4 33.8 31.9 29.5 Performance ratios Return on average assets 1.09% 1.32% 1.23% 1.22% 1.25% Return on average equity 9.80 11.52 11.34 11.95 12.53 Shareholders' equity to assets ratio 10.69 11.37 11.12 10.53 10.22 Net loans to deposit ratio 83.68 84.20 79.74 75.22 64.52 Allowance for loan losses to total loans 1.25 1.29 1.33 1.28 1.30 </TABLE> (1) Per share data has been adjusted for a 300% stock split paid in April 1996.
5 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0 - 25980 --------- FIRST CITIZENS BANC CORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 34-1558688 - ---------------------------------- ------------------------- State or other jurisdiction of (IRS Employer incorporation or organization Identification No.) 100 East Water Street, Sandusky, Ohio 44870 - ---------------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (419) 625 - 4121 --------------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, No par value -------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 1998 was $88,286,540. As of January 31, 1998, there were 3,051,504 shares of no par value common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement to be dated approximately March 9, 1998, are incorporated by reference into Item 10. Directors and Executive Officers of the Registrant; Item 11. Executive Compensation; Item 12. Security Ownership of Certain Beneficial Owners and Management; and Item 13. Certain Relationships and Related Transactions, of Part III. This document, including exhibits, contains 59 pages. The Exhibit Index is on page 58. 1
6 INDEX <TABLE> <S> <C> PART I Item 1. Business............................................................................................ 3 Item 2. Properties.......................................................................................... 19 Item 3. Legal Proceedings................................................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders................................................. 19 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters............................... 20 Item 6. Selected Financial Data............................................................................. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 22 Item 7a. Quantitative and Qualitative Disclosures About Market Risk......................................... 29 Item 8. Financial Statements and Supplementary Data Independent Auditor's Report........................................................................ 33 Financial Statements................................................................................ 34 Notes to Consolidated Financial Statements.......................................................... 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 55 PART III Item 10. Directors and Executive Officers of the Registrant.................................................. 56 Item 11. Executive Compensation.............................................................................. 57 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 57 Item 13. Certain Relationships and Related Transactions...................................................... 57 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 58 Signatures.................................................................................................... 59 </TABLE> 2
7 FIRST CITIZENS BANC CORP - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS - ----------------- (a) General Development of Business ------------------------------- First Citizens Banc Corp (the "Corporation") was organized under the laws of the State of Ohio on February 19, 1987 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The principal office of the Corporation is located at 100 East Water Street, Sandusky, Ohio. The Corporation had total consolidated assets of $325,923,098 at December 31, 1997. On July 3, 1997, the Corporation entered into an agreement to acquire all of the common stock of the Farmers State Bank of New Washington, Ohio (Farmers). Pending regulatory and shareholder approvals, the acquisition is expected to be consummated early in the second quarter of 1998 through the issuance of 6.06 shares of the Corporation for each share of Farmers. 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) and one branch banking office in Berlin Heights, Ohio. This subsidiary accounts for approximately 83% of the Corporation's consolidated assets at December 31, 1997. THE CASTALIA BANKING COMPANY (Castalia), owned by the Corporation since 1990, was organized and chartered under the laws of the State of Ohio in 1907. Castalia is an insured bank under the Federal Deposit Insurance Act. Castalia operates from one location, 208 South Washington Street, Castalia, Ohio. Castalia, Ohio is located approximately 10 miles from Sandusky, Ohio. This subsidiary accounts for approximately 16% of the Corporation's consolidated assets at December 31, 1997. SCC RESOURCES, INC. (SCC) was organized under the laws of the State of Ohio. Begun as a joint venture of three local Sandusky, Ohio banks in 1966, SCC provides data processing services for financial institutions, including the Banks, and other nonrelated entities. The Corporation acquired total ownership of SCC in February 1993. This subsidiary accounts for less than one percent of the Corporation's consolidated assets as of December 31, 1997. R. A. REYNOLDS APPRAISAL SERVICES, INC. (Reynolds), owned by the Corporation since 1993, was organized under the laws of the State of Ohio in September 1993. Reynolds provides real estate appraisal services, for lending purposes, to the Banks and to other financial institutions. This subsidiary accounts for less than one percent of the Corporation's consolidated assets as of December 31, 1997. (b) Financial Information About Industry Segments --------------------------------------------- The Corporation is a bank holding company. Through its two subsidiary banks, the Corporation is primarily engaged in the business of commercial banking, which accounts for substantially all of its revenue, operating income and assets. Reference is made to the statistical information regarding the Corporation included elsewhere herein and to items of this Form 10K for financial information about the Corporation's banking business. 3
8 (c) Narrative Description of Business --------------------------------- General ------- The Corporation's primary business is incidental to its two subsidiary banks. Both Citizens and Castalia, Located in Erie County, Ohio, conduct a general banking business which involves collecting customer deposits, making loans and purchasing securities. Neither Citizens nor Castalia has a trust department. Interest and fees on loans accounted for 68.9% of total revenue for 1997 and 68.0% of total revenue for 1996. The primary focus of lending is real estate mortgages. Real estate mortgages comprised 61.6% of the total loan portfolio in 1997 and 65.1% of the total loan portfolio in 1996. Citizens' and Castalia's loan portfolios do not include any foreign-based loans, loans to lesser-developed countries or loans to the Corporation. Citizens has a loan to SCC, which is secured by real estate. On a parent company only basis, the Corporation's only source of funds is the receipt of dividends paid by its subsidiaries, principally the Banks. The ability of the Banks to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, each Bank may declare a dividend without the approval of the State of Ohio Division of Financial Institutions unless the total of the dividends in a calendar year exceeds the total net profits of the bank for the year combined with the retained profits of the bank for the two preceding years. Earnings have been sufficient to support asset growth at the Banks and at the same time provide funds to the Corporation for shareholder dividends. The Corporation has no debt service obligations. The Corporation's business is not seasonal, nor is it dependent on a single or small group of customers. In the opinion of management, the Corporation does not have exposure to material costs associated with environmental hazardous waste cleanup. Competition ----------- The primary market area for Citizens and Castalia is Erie County. A secondary market includes portions of Huron and Ottawa counties. Citizens and Castalia are operated as independent commercial banks in their market area. Traditional financial service competition for the Banks consists of large regional financial institutions, two thrifts and two credit unions. A growing nontraditional source of competition for deposit dollars comes from brokerage companies, insurance companies and direct mutual funds. Employees --------- The Corporation has no employees. The subsidiary companies employ approximately 196 full-time equivalent employees to whom a variety of benefits is provided. The Corporation and its subsidiaries are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good. 4
9 Supervision and Regulation -------------------------- The Corporation, as a registered bank holding company, is subject to regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (the "Act"). The Act limits the activities in which the Corporation and the Banks may engage to those activities that the Federal Reserve Board finds, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A favorable determination by the Federal Reserve Board as to whether any such new activity by the Corporation or the Banks is in the public interest, taking into account both the likely adverse effects and the likely benefits, is also necessary before any such activity may be engaged in. The Federal Reserve Board is empowered to differentiate between activities which are initiated de novo by a bank holding company or a subsidiary and activities commenced by acquisition of a going concern. The Federal Reserve Board also possesses cease and desist powers over bank holding companies and their nonbank subsidiaries for activities that are deemed by the Board of Governors to constitute a serious risk to the financial safety, soundness or stability of a bank holding company, that are inconsistent with sound banking principles or that are in violation of law. Further, under Section 106 of the 1970 Amendments to the Board's regulations, bank holding companies and their subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of services. The Act also requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of any voting shares of any other bank, if, after such acquisition, it would own or control any such bank. In making such determinations, the Federal Reserve Board considers the effect of the acquisition on competition, the financial and managerial resources of the holding company and the convenience and needs of affected communities. Furthermore, a bank holding company is prohibited from acquiring direct or indirect ownership or control of any company that is not a bank or bank holding company unless its business and activities would be acceptable for the bank holding company itself. The Federal Reserve Board has adopted final risk-based capital guidelines for purposes of evaluating the adequacy of capital of bank holding companies and state member banks. The guidelines involve a process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the holding company's capital base. The risk-based capital ratios of the Corporation and the Banks at December 31, 1997 were above the minimum requirements. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") contains provisions that directly affect thrifts, banks, thrift holding companies and bank holding companies. First, FIRREA abolished the Federal Savings and Loan Insurance Corporation and required the Federal Deposit Insurance Corporation ("FDIC") to establish two separate funds, the Bank Insurance Fund ("BIF") to insure banks and the Savings Association Insurance Fund ("SAIF") to insure savings and loan associations. Second, FIRREA amended the Bank Holding Company Act of 1956 to permit bank holding companies to acquire thrift institutions; before FIRREA, bank holding companies were permitted to acquire only failing thrift institutions. FIRREA also abolished the restrictions on tandem operations of acquired thrift institutions and the in-state preference for acquisitions of failing thrifts. Finally, FIRREA increased the authority of bank regulators. 5
10 Additional Regulation --------------------- In addition to regulation of the Corporation, the Corporation's banking subsidiaries are subject to federal regulation as to such matters as required reserves, limitation as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirement of their own securities, limitations on the payment of dividends and other aspects of banking operations. The activities and operations of Citizens and Castalia are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. In addition, as Ohio chartered banks, Citizens and Castalia are supervised and regulated by the Ohio Division of Financial Institutions. The deposits of Citizens and Castalia are insured by the BIF of the FDIC and both entities are subject to the applicable provisions of the Federal Deposit Insurance Act. A subsidiary of a bank holding company can become liable for reimbursing the FDIC if the FDIC incurs or anticipates a loss because of a default of another FDIC insured subsidiary of the bank holding company or FDIC assistance provided to such subsidiary is in danger of default. Restrictions on Transactions with Affiliates -------------------------------------------- Each of the Banks is subject to Sections 23A and 23B of the Federal Reserve Act, which impose certain restrictions on loans and extensions of credit by a bank to its affiliates, on investments by a bank in the stock or securities of its affiliates, on acceptance of such stock or securities as collateral for loans by the bank to any borrower and on leases and service and other contracts between a bank and its affiliates. For purposes of Sections 23A and 23B of the Federal Reserve Act, the affiliates of a bank include its holding company and all other companies (including other banks) controlled by the holding company. Transactions between banks that are at least 80% owned by the same holding company (such as the Corporation's subsidiary banks) are exempt from certain restrictions of Sections 23A and 23B of the Federal Reserve Act under the so-called "sister bank" exemption. Interstate Banking and Community Development Legislation -------------------------------------------------------- In September 1994, legislation was enacted that is expected to have a significant effect in restructuring the banking industry in the United States. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 facilitates interstate expansion and consolidation of banking operations by (i) permitting adequately capitalized and managed bank holding companies, one year after enactment of the legislation, to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state; (ii) permitting interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or to "opt out" of this authority before that date; (iii) permitting banks to establish new branches on an interstate basis provided such action is specifically authorized by the law of the host state; (iv) permitting foreign banks to establish, with approval of regulators in the United States, branches outside their home states to the same extent that national or state banks located in the home state would be authorized to do so; and (v) permitting, beginning September 29, 1995, banks to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same state or a different state. One effect of this legislation is to permit the Corporation to acquire banks located in any state and to permit bank holding companies located in any state to acquire banks and bank holding companies in Ohio. Overall, this legislation is likely to have the effect of increasing competition and promoting geographic diversification in the banking industry. 6
11 The Riegle Community Development and Regulatory Improvement Act of 1994, also enacted in September 1994, is intended to (i) increase the flow of loans to businesses in distressed communities by providing incentives to lenders to provide credit within those communities; (ii) remove impediments to the securitization of small business loans; (iii) provide for a reduction in paperwork and to streamline bank regulation through, for example, the coordination of examinations in a bank holding company context, a reduction in the number of currency transaction reports required, improvements to the National Flood Insurance Program that include enabling lenders to force place flood insurance; and (iv) increase the level of consumer protection provided to customers in banking transactions. The Corporation believes that these provisions of the new law have not had a material effect on its operations. Citizens and Castalia, as Ohio chartered banks, are supervised by the State of Ohio Division of Financial Institutions. The Banks are also members of the Federal Reserve System and are subject to its supervision. As such, the Banks are subject to periodic examinations by both the Ohio Division of Financial Institutions and the Federal Reserve Board. These examinations are designed primarily for the protection of the depositors of the Banks and not for their shareholders. Effects of Government Monetary Policy ------------------------------------- The earnings of the Banks are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. Federal Reserve Board monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including the Banks, and are expected to continue to do so in the future. (d) Financial Information About Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales ----- The Corporation and its subsidiaries do not have any offices located in a foreign country, nor do they have any foreign assets, liabilities, or related income and expense for the years presented. (e) Statistical Information ----------------------- Pages 8 through 19 present various statistical disclosures required for bank holding companies. 7
12 Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential ---------------------------------------- The following table sets forth, for the years ended December 31, 1997, 1996 and 1995, the distribution of assets, liabilities and shareholders' equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities: <TABLE> <CAPTION> 1997 1996 1995 ---------------------------- ---------------------------- ------------------------- Average Yield/ Average Yield/ Average Yield/ Assets balance Interest rate balance Interest rate balance Interest rate - ------ ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans (1)(2)(3) $ 215,648 $ 18,462 8.56% $ 197,795 $ 17,144 8.67% $191,030 $16,618 8.70% Taxable securities(4) 43,122 2,513 5.81 46,007 2,721 5.90 50,317 2,839 5.64 Nontaxable securities(4)(5) 24,333 1,307 5.46 25,676 1,431 5.66 27,885 1,630 5.85 Federal funds sold 8,826 483 5.47 9,575 508 5.31 9,827 575 5.85 Interest-bearing deposits in other banks 719 33 4.59 82 4 4.88 55 3 5.45 --------- -------- --------- -------- -------- ------- Total interest-earning assets 292,648 22,798 7.80 279,135 21,808 7.82 279,114 21,665 7.76 -------- -------- ------- Noninterest-earning assets: Cash and due from banks 10,503 11,509 10,701 Office premises and equipment, net 6,551 6,345 6,289 Accrued interest receivable 1,982 1,908 2,280 Intangible assets 2,935 1,787 1,988 Other assets 2,624 2,026 1,514 Less allowance for possible loan losses (2,742) (2,638) (2,507) --------- --------- -------- Total $ 314,501 $ 300,072 $299,379 ========= ========= ======== Liabilities and Shareholders' Equity - ------------------------------------ Interest-bearing liabilities: Savings, NOW and Money Market deposit accounts $ 123,190 3,231 2.62 $ 119,449 3,145 2.63 $122,798 3,253 2.65 Time deposits 100,115 5,220 5.21 92,434 4,802 5.20 90,455 4,610 5.10 Federal Home Loan Bank borrowings 15,126 866 5.73 16,279 932 5.73 17,361 993 5.72 Securities sold under repurchase agreements 8,432 440 5.28 8,207 335 4.08 6,800 336 4.94 U.S. Treasury demand notes payable 979 53 5.41 746 37 4.96 963 54 5.61 --------- -------- --------- -------- -------- ------- Total interest- bearing liabilities 247,842 9,810 3.96 237,115 9,251 3.90 238,377 9,246 3.88 --------- -------- --------- -------- -------- ------- Noninterest-bearing liabilities: Demand deposits 29,249 25,900 26,264 Other liabilities 2,359 2,627 2,255 --------- --------- -------- 31,608 28,527 28,519 Shareholders' equity 35,051 34,430 32,483 --------- --------- -------- Total $ 314,501 $ 300,072 $299,379 ========= ========= ======== Net interest income $12,988 $ 12,557 $12,419 ======= ======== ======= Net yield on interest- earning assets 4.44% 4.47% 4.45% ==== ==== ==== </TABLE> (1) For purposes of these computations, the daily average loan amounts outstanding are net of unearned income. (2) Included in loan interest income are loan fees of $865,486 in 1997, $734,109 in 1996, and $681,038 in 1995. (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. 8
13 Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate ---------------------------------------------------- The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate: <TABLE> <CAPTION> 1997 compared to 1996 1996 compared to 1995 Increase (decrease) Increase (decrease) due to (1) due to (1) -------------------------------------- --------------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Interest income: Loans $ 1,531 $ (213) $ 1,318 $ 586 $ (60) $ 526 Taxable securities (169) (39) (208) (228) 110 (118) Nontaxable securities (96) (28) (124) (147) (52) (199) Federal funds sold (41) 16 (25) (14) (53) (67) Interest-bearing deposits in other banks 29 29 1 1 --------- ---------- ---------- ---------- ---------- ---------- Total interest- earning assets $ 1,254 $ (264) $ 990 $ 198 $ (55) $ 143 ========= ========== ========== ========== ========== ========== Interest expense: Savings, NOW and Money Market deposit accounts $ 98 $ (12) $ 86 $ (88) $ (20) $ (108) Time deposits 400 18 418 101 91 192 Federal Home Loan Bank borrowings (66) (66) (62) 1 (61) Securities sold under repurchase agreements 9 96 105 63 (64) (1) U.S. Treasury demand notes payable 12 4 16 (11) (6) (17) --------- ---------- ---------- ---------- ---------- ---------- Total interest- bearing liabilities $ 453 $ 106 $ 559 $ 3 $ 2 $ 5 ========= ========== ========== ========== ========== ========== Net interest income $ 801 $ (370) $ 431 $ 195 $ (57) $ 138 ========= ========== ========== ========== ========== ========== </TABLE> (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. 9
14 Security Portfolio ------------------ The following table sets forth the carrying amount of securities at December 31. <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- (Dollars in thousands) AVAILABLE FOR SALE <S> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 33,140 $ 36,904 $ 37,138 Obligations of states and political subdivisions (1) 19,802 18,456 17,198 Other securities, including mortgage-backed securities(1) 5,527 3,611 3,375 ----------- ----------- ----------- Total $ 58,469 $ 58,971 $ 57,711 =========== =========== =========== HELD TO MATURITY U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 1,000 $ 1,000 $ 1,500 Obligations of states and political subdivisions (1) 4,004 6,329 10,380 Other securities, including mortgage-backed securities(1) 1,733 2,461 4,856 ----------- ----------- ----------- Total $ 6,737 $ 9,790 $ 16,736 =========== =========== =========== </TABLE> (1) The Corporation has no securities of an "issuer" where the aggregate carrying value of such securities exceeded ten percent of shareholders' equity. The following tables set forth the maturities of securities at December 31, 1997 and the weighted average yields of such securities. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions. <TABLE> <CAPTION> Maturing ------------------------------------------------------------------------------------ After one After five Within but within but within After one year five years ten years ten years -------- ---------- --------- --------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> AVAILABLE FOR SALE (4) U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 16,955 5.32% $ 16,185 6.00% Obligations of states and political subdivisions (1) 314 7.36 8,481 5.63 $ 9,872 4.88% $ 1,134 5.44% Other securities (2) 699 6.26 ---------- ------ ---------- ------ --------- ------ --------- ------- Total $ 17,269 5.36% $ 25,365 5.88% $ 9,872 4.88% $ 1,134 5.44% ========== ====== ========== ====== ========= ====== ========= ======= </TABLE> 10
15 <TABLE> <CAPTION> Maturing ------------------------------------------------------------------------------------- After one After five Within but within but within After one year five years ten years ten years Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- HELD TO MATURITY <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 1,000 8.03% Obligations of states and political subdivisions (1) 3,650 6.21 $ 355 4.96 Other securities (3) ---------- ---- ---------- ---- Total $ 4,650 6.60% $ 355 4.96% ========== ==== ========== ==== </TABLE> (1) Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security. (2) Excludes $1,050,000 of mortgage-backed securities; and $3,165,000 of Federal Home Loan Bank stock, $588,000 of Federal Reserve stock, and $25,000 of Independent State Bank of Ohio stock which have no stated maturity. (3) Excludes $1,733,000 of mortgage-backed securities. (4) The weighted average yield has been computed using the historical amortized cost for available-for-sale securities. 11
16 Loan Portfolio -------------- Types of Loans - -------------- The amounts of gross loans outstanding at December 31 are shown in the following table according to types of loans: <TABLE> <CAPTION> 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Commercial and agricultural $ 47,043 $ 42,038 $ 45,024 $ 45,229 $ 43,129 Real estate mortgage 135,636 131,492 120,783 114,952 93,452 Real estate construction 2,653 2,080 1,130 40 47 Consumer 38,621 29,232 28,984 25,609 23,257 Credit card and other 1,694 1,450 1,117 1,327 1,725 ------------ ------------- ------------ ------------ ------------ $ 225,647 $ 206,292 $ 197,038 $ 187,157 $ 161,610 ============ ============= ============ ============ ============ </TABLE> Commercial loans are those made for commercial, industrial and professional purposes to sole proprietorships, partnerships, corporations and other business enterprises. Agricultural loans are for financing agricultural production, including all costs associated with growing crops or raising livestock. These loans may be secured, other than by real estate, or unsecured, requiring one single repayment or on an installment repayment schedule. The loans involve certain risks relating to changes in local and national economic conditions and the resulting effect on the borrowing entities. Secured loans not collateralized by real estate mortgages maintain a loan-to-value ratio ranging from 50% as in the case of certain stocks, to 90% in the case of collateralizing with a savings or time deposit account. Unsecured credit relies on the financial strength and previous credit experience of the borrower and in many cases the financial strength of the principals when such credit is extended to a corporation. Real estate mortgage loans are made predicated on security interest in real property and secured wholly or substantially by that lien on real property. Real estate mortgage loans are primarily loans secured by one- to four-family real estate. At year-end 1997, loans secured by one- to four-family real estate represented 84% of total real estate mortgage loans (83% in both 1996 and 1995). The balance of the loans is mostly for commercial purposes, secured by real estate. Real estate mortgage loans are secured with a maximum loan to appraisal value of 80% and generally pose less risk to the Banks. Real estate construction loans are for the construction of new buildings or additions to existing buildings. Generally, these loans are secured by one- to four-family real estate. The Banks control disbursements. Consumer loans are made to individuals for household, family and other personal expenditures. These include the purchase of vehicles or furniture, educational expenses, medical expenses, taxes or vacation expenses. Consumer loans may be secured, other than by real estate, or unsecured, generally requiring repayment on an installment repayment schedule. Consumer loans pose a relatively higher credit risk. This higher risk is moderated by the use of certain loan value limits on secured credits and aggressive collection efforts. The collectibility of consumer loans is influenced by local and national economic conditions. Credit card loans are made as a convenience to existing customers of the Banks. All such loans are made on an unsecured basis, lines over $5,000 require documentation on the financial strength of the borrower. As unsecured credit, they pose the greatest credit risk to the Banks. 12
17 Letters of credit represent extensions of credit granted in the normal course of business which are not reflected in the Corporation's consolidated financial statements. As of December 31, 1997 and 1996, the Banks were contingently liable for $447,000 and $62,000 of letters of credit. In addition, the Banks had issued lines of credit to customers. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 1997 and 1996, the Banks had commitments to extend credit in the aggregate amounts of approximately $20,114,000 and $18,316,000. Of these amounts, $16,945,000 and $14,081,000, represented lines of credit and construction loans, and $3,169,000 and $4,235,000, represented credit card commitments. Such amounts represent the portion of total commitments that had not been used by customers as of December 31, 1997 and 1996. Maturities and Sensitivities of Loans to Changes in Interest Rates - ------------------------------------------------------------------ The following table shows the amount of commercial and agricultural loans outstanding as of December 31, 1997, which, based on the contract terms for repayments of principal, are due in the periods indicated. In addition, the amounts due after one year are classified according to their sensitivity to changes in interest rates. <TABLE> <CAPTION> Maturing ----------------------------------------------------------------- After one Within but within After one year five years five years Total -------- ---------- ---------- ----- (Dollars in thousands) <S> <C> <C> <C> <C> Commercial and agricultural $ 15,806 $ 9,192 $ 22,045 $ 47,043 ============ ============= ============ ============ Interest Sensitivity ------------------------------ Fixed Variable rate rate ---- ---- (Dollars in thousands) Due after one but within five years $ 4,999 $ 4,193 Due after five years 3,599 18,446 ------------ ------------- $ 8,598 $ 22,639 ============ ============= </TABLE> The preceding maturity information is based on contract terms at December 31, 1997 and does not include any possible "rollover" at maturity date. In the normal course of business, the Banks consider and act on the borrower's request for renewal of loans at maturity. Evaluation of such requests includes a review of the borrower's credit history, the collateral securing the loan and the purpose for such request. 13
18 Risk Elements - ------------- The following table presents information concerning the amount of loans at December 31 that contain certain risk elements: <TABLE> <CAPTION> 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Loans accounted for on a nonaccrual basis (1) $ 1,205 $ 468 $ 1,331 $ 1,155 $ 832 Loans contractually past due 90 days or more as to principal or interest payments (2) 1,480 501 907 401 691 Loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (3) ---------- --------- --------- --------- --------- Total $ 2,685 $ 969 $ 2,238 $ 1,556 $ 1,523 ========== ========= ========= ========= ========= Impaired loans, including $627,000, $468,000 and $1,034,000 on nonaccrual basis and $-0-, $501,000 and $186,000 contractually past due 90 days or more at December 31, 1997, 1996 and 1995. $ 1,817 $ 1,982 $ 2,338 ========== ========= ========= </TABLE> Commercial loans totaled approximately 53%, 49% and 35% of the total nonperforming loans at December 31, 1997, 1996 and 1995. Real estate loans totaled approximately 45%, 42% and 61% of nonperforming loans at December 31, 1997, 1996 and 1995. Commercial real estate and the personal guarantee of the principals involved generally secure the commercial loans. Annual net charge-offs of commercial loans have been less than $53,000 per year for the years 1993 through 1997. Real estate loans generally have a loan to appraisal ratio of 80% or lower. Foreclosure proceedings are begun when other collection efforts are unsuccessful. Net charge-offs (recoveries) on real estate loans were $(2,000) in 1997, $30,000 in 1996, $(4,000) in 1995, $37,000 in 1994, and $163,000 in 1993. There are no loans as of December 31, 1997, other than those disclosed above, where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. No concentrations of loans exceeded 10% of total loans. 14
19 (1) Loans are placed on nonaccrual status when doubt exists as to the collectibility of the loan, including any accrued interest. With a few immaterial exceptions, commercial and real estate loans past due 90 days are placed on nonaccrual unless they are well collateralized and in the process of collection. Generally, consumer loans are charged off within 30 days after becoming past due 90 days unless they are well collateralized and in the process of collection. Credit card loans are charged off before reaching 120 days of delinquency. Once a loan is placed on nonaccrual, interest is then recognized on a cash basis where future collections of principal is probable. The amount of additional interest income that would have been recorded had all nonaccrual loans been current in accordance with their terms is shown below: <TABLE> <CAPTION> 1994 1993 1992 ---- ---- ---- <S> <C> <C> <C> Interest income, full accrual $ 86,000 $ 75,000 $ 151,000 Actual interest income, cash basis 39,000 13,000 51,000 ----------- ----------- ------------ Interest not reported $ 47,000 $ 62,000 $ 100,000 =========== =========== ============ 1997 1996 1995 ---- ---- ---- Interest income on impaired loans, including interest income recognized on a cash basis $ 133,000 $ 139,000 $ 225,000 =========== =========== ============ Interest income on impaired loans recognized on a cash basis $ 133,000 $ 139,000 $ 225,000 =========== =========== ============ </TABLE> (2) Excludes loans accounted for on a nonaccrual basis. (3) Excludes loans accounted for on a nonaccrual basis and loans contractually past due ninety days or more as to principal or interest payments. 15
20 Summary of Loan Loss Experience ------------------------------- Analysis of the Allowance for Possible Loan Losses - -------------------------------------------------- The following table shows the daily average loan balances and changes in the allowance for possible loan losses for the years indicated: <TABLE> <CAPTION> 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Daily average amount of loans, net of unearned income $ 215,648 $ 197,795 $ 191,030 $ 177,110 $ 153,505 ============ ============= ============= ============= ============== Allowance for possible loan losses at beginning of year $ 2,642 $ 2,602 $ 2,390 $ 2,083 $ 2,080 Loan charge-offs: Commercial and agricultural 18 34 94 5 Real estate mortgage 32 24 43 167 Real estate construction Consumer 365 328 174 150 185 Credit card and other 47 51 42 27 41 ------------ ------------- ------------- ------------- -------------- 430 445 334 220 398 Recoveries of loans previously charged off: Commercial and agricultural 11 32 41 87 5 Real estate mortgage 2 2 28 6 4 Real estate construction Consumer 121 71 73 95 63 Credit card and other 18 12 27 16 100 ------------ ------------- ------------- ------------- -------------- 152 117 169 204 172 ------------ ------------- ------------- ------------- -------------- Net charge-offs (1) (278) (328) (165) (16) (226) Additions to allowance charged to expense (2) 435 368 377 323 229 ------------ ------------- ------------- ------------- -------------- Allowance for possible loan losses at end of year $ 2,799 $ 2,642 $ 2,602 $ 2,390 $ 2,083 ============ ============= ============= ============= ============== Allowance for possible loan losses as a percent of loans at year-end 1.25% 1.29% 1.33% 1.28% 1.30% ======== ======= ======== ======== ======= Ratio of net charge-offs during the year to average loans outstanding .13% .17% .09% .01% .15% ======== ======= ======== ======== ======= </TABLE> (1) The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy and specific business segments. Net charge-offs increased in 1997 and 1996 primarily due to an increase in the write-off of consumer loans. (2) The determination of the balance of the allowance for loan losses is based on an analysis of the loan portfolio and reflects an amount that, in management's judgment, is adequate to provide for probable loan losses. Such analysis is based on a review of specific loans, the character of the loan portfolio, current economic conditions, past loan loss experience and such other factors as management believes require current recognition in estimating probable loan losses. 16
21 Allocation of Allowance for Possible Loan Losses - ------------------------------------------------ The following table allocates the allowance for possible loan losses at December 31 to each loan category. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probable losses estimated to be incurred within the following categories of loans at the dates indicated: <TABLE> <CAPTION> 1997 1996 ---- ---- Percentage Percentage of loans to of loans to (Dollars in thousands) Allowance total loans Allowance total loans ---------- ----------- ------------- ------------ <S> <C> <C> <C> <C> Commercial and agricultural $ 710 20.9% $ 691 20.4% Real estate mortgage 315 60.1 146 63.7 Real estate construction 1.2 1.0 Consumer 352 17.1 222 14.2 Credit card and other 15 .7 11 .7 Unallocated 1,407 1,572 ----------- -------- ----------- ------------- $ 2,799 100.0% $ 2,642 100.0% =========== ======== =========== ============= 1995 1994 ---- ---- Percentage Percentage of loans to of loans to Allowance total loans Allowance total loans --------- ----------- --------- ----------- Commercial and agricultural $ 703 22.9% $ 408 24.2% Real estate mortgage 418 61.3 315 61.4 Real estate construction .6 Consumer 308 14.7 285 13.7 Credit card and other 11 .5 67 .7 Unallocated 1,162 1,315 ----------- -------- ----------- ----------- $ 2,602 100.0% $ 2,390 100.0% ========== ======== =========== ======= 1993 Percentage of loans to Allowance total loans --------- ----------- Commercial and agricultural $ 341 26.7% Real estate mortgage 336 57.8 Real estate construction Consumer 248 14.4 Credit card and other 58 1.1 Unallocated 1,100 ----------- ---------- $ 2,083 100.0% =========== ========== </TABLE> 17
22 The adequacy of the allowance for possible loan losses is determined based on an analysis of specific credits which are generally selected based on size and relative risk, portfolio trends, current and historical loss experience, prevailing economic conditions and other relevant factors. While the allocation of the allowance has been based on the results of specific credit analysis and historical charge-off experience, the allowance is available to absorb losses from any segment of the portfolio. The increase in the allowance and the unallocated portion since 1993 resulted from average total loans increasing 40% from $153,505,000 in 1993 to $215,648,000 in 1997. Deposits - -------- The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated: <TABLE> <CAPTION> 1997 1996 1995 ------------------------ -------------------------- -------------------------- Average Average Average Average Average Average balance rate paid balance rate paid balance rate paid ------- --------- ------- --------- ------- --------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Noninterest-bearing demand deposits $ 29,249 N/A $ 25,900 N/A $ 26,264 N/A Interest-bearing demand deposits 35,165 2.15% 26,311 2.02% 24,584 2.07% Savings, including Money Market deposit accounts 88,025 2.81 93,138 2.81 98,214 2.79 Time deposits 100,115 5.21 92,434 5.20 90,455 5.10 ------------ ------------ ------------ $ 252,554 $ 237,783 $ 239,517 ============ ============ ============ </TABLE> Maturities of certificates of deposits and individual retirement accounts of $100,000 or more outstanding at December 31, 1997 are summarized as follows: <TABLE> <CAPTION> Individual Certificates Retirement of Deposits Accounts Total ----------- -------- ----- (Dollars in thousands) <S> <C> <C> <C> 3 months or less $ 2,945 $ 2,945 Over 3 through 6 months 4,223 $ 137 4,360 Over 6 through 12 months 8,640 259 8,899 Over 12 months 1,542 283 1,825 ----------- ---------- ----------- $ 17,350 $ 679 $ 18,029 =========== ========== =========== </TABLE> Short-term Borrowings - --------------------- No short-term borrowings were outstanding in 1997, 1996 or 1995 for which the average balance exceeded thirty percent of shareholders' equity at the end of any year. 18
23 Return on Equity and Assets - --------------------------- The ratio of net income to daily average total assets, average shareholders' equity and certain other ratios, are as follows: <TABLE> <CAPTION> December 31, ------------------------------- 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Percentage of net income to: Average total assets 1.09% 1.32% 1.23% Average shareholders' equity 9.80 11.52 11.34 Percentage of dividends declared per common share to net income per common share 94.69 78.46 59.01 Percentage of average shareholders' equity to average total assets 11.14 11.47 10.85 </TABLE> ITEM 2. PROPERTIES - ------------------- The Corporation neither owns nor leases any properties. The Citizens Banking Company maintains its main office at 100 East Water Street, Sandusky, Ohio, which is also the office of the Corporation. Citizens also owns and operates three branch banking offices in Perkins Township (Sandusky, Ohio), and one branch banking office in Berlin Heights, Ohio. The Castalia Banking Company owns its main office located at 208 South Washington Street, Castalia, Ohio. SCC Resources, Inc. owns its processing center located at 1845 Superior Street, Sandusky, Ohio; leases offices in downtown Sandusky, Ohio and leases a storefront for its retail operations in Perkins Township (Sandusky, Ohio). R. A. Reynolds Appraisal Services, Inc. leases offices in downtown Sandusky, Ohio. The Corporation has two wholly owned subsidiary banks, a wholly owned data processing company subsidiary and a wholly owned real estate appraisal company subsidiary. ITEM 3. LEGAL PROCEEDINGS - ------------------------- Corporation management is aware of no pending or threatened litigation in which the Corporation or its subsidiaries face potential loss or exposure that will materially affect the consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. 19
24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- The Corporation has no established public trading market for its common stock. On March 21, 1994, shareholders of the Corporation were notified that the brokerage firms of Kemper Securities, Merrill Lynch, McDonald & Company and The Ohio Company would handle the sale and purchase of the Corporation's stock. However, such firms are not "market makers" of such stock since they do not purchase and hold for investment purposes any such shares. Information below is the range of sale prices as reported by the brokerage firms. <TABLE> <CAPTION> 1997 ---- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> $30.11 to $33.56 $34.31 to $35.50 $35.75 to $37.19 $38.00 to $39.16 1996 ---- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- $19.88 to $20.25 $20.25 to $22.25 $22.81 to $26.38 $26.63 to $28.63 </TABLE> The Corporation has no outstanding options or warrants to purchase shares of its common stock or securities convertible into shares of common stock. The number of holders of record of the Corporation's common stock at December 31, 1997 was 584. Dividends per share declared by the Corporation on common stock were as follows as retroactively restated for the effect of the 4-for-1 stock split paid in the form of a 300% stock dividend approved April 16, 1996. <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> February $ .14 $ .12 May .14 .13 August .14 .13 November .65 .64 -------- ------- $ 1.07 $ 1.02 ======== ======= </TABLE> 20
25 ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- Five-Year Selected Consolidated Financial Data - ---------------------------------------------- The following table sets forth certain selected consolidated financial information of First Citizens Banc Corp and subsidiaries, and is qualified in its entirety by reference to the detailed information and financial statements of the Corporation included in Item 8 hereof. <TABLE> <CAPTION> Year ended December 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> Statements of income: Total interest income $ 22,798 $ 21,808 $ 21,665 $ 20,031 $ 19,418 Total interest expense 9,810 9,251 9,246 7,949 7,905 ------------ ------------- ------------ ------------ ------------ Net interest income 12,988 12,557 12,419 12,082 11,513 Provision for loan losses 435 368 377 323 229 ------------ ------------- ------------ ------------ ------------ Net interest income after provision for loan losses 12,553 12,189 12,042 11,759 11,284 Security gains (losses) (1) 214 53 (221) (700) Other noninterest income 3,798 3,357 2,957 2,350 2,337 ------------ ------------- ------------ ------------ ------------ Total noninterest income 4,012 3,410 2,736 2,350 1,637 Total noninterest expenses 11,839 10,089 9,784 9,329 8,360 ------------ ------------- ------------ ------------ ------------ Income before federal income taxes 4,726 5,510 4,994 4,780 4,561 Federal income tax expense 1,292 1,545 1,312 1,122 1,006 ------------ ------------- ------------ ------------ ------------ Net income $ 3,434 $ 3,965 $ 3,682 $ 3,658 $ 3,555 ============ ============= ============ ============ ============ Per share of common stock (2): Net income $ 1.13 $ 1.30 $ 1.21 $ 1.20 $ 1.16 Dividends 1.07 1.02 .71 .41 .36 Book value 11.42 11.28 11.08 10.46 9.67 Average common shares outstanding (2) 3,051,504 3,051,504 3,051,504 3,051,504 3,051,504 Year-end balances: Loans, net $ 221,758 $ 202,485 $ 193,267 $ 183,552 $ 158,388 Securities 65,206 68,761 74,447 82,795 95,318 Total assets 325,923 302,778 304,062 302,951 288,725 Deposits 265,003 240,498 242,342 244,104 245,486 Borrowings 24,281 26,218 25,543 25,650 12,616 Shareholders' equity 34,848 34,427 33,807 31,910 29,511 Average balances: Loans, net $ 212,906 $ 195,157 $ 188,523 $ 174,903 $ 151,364 Securities 67,455 71,683 78,202 93,636 92,083 Total assets 314,501 300,072 299,379 300,402 284,321 Deposits 252,554 237,783 239,517 241,404 241,109 Borrowings 24,537 25,232 25,124 24,297 11,507 Shareholders' equity 35,051 34,430 32,483 30,603 28,377 </TABLE> 21
26 <TABLE> <CAPTION> Year ended December 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Selected ratios: Net yield on average interest- earning assets 4.44% 4.47% 4.45% 4.33% 4.35% Return on average total assets 1.09 1.32 1.23 1.22 1.25 Return on average shareholders' equity 9.80 11.52 11.34 11.95 12.53 Average shareholders' equity as a percent of average total assets 11.14 11.47 10.85 10.19 9.98 Net loan charge-offs as a percent of average loans .13 .17 .09 .01 .15 Allowance for possible loan losses as a percent of loans at year-end 1.25 1.29 1.33 1.28 1.30 Shareholders' equity as a percent of total year-end assets 10.69 11.37 11.12 10.53 10.22 </TABLE> (1) Other-than-temporary declines in the values of a security of $226,000 and $700,000 were recorded during 1995 and 1993 respectively. Partial recoveries of $214,000 and $39,000 were received in 1997 and 1996. (2) Restated for 1996 stock split. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------------------------------------------------------------------- AND RESULTS OF OPERATIONS - AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996 ------------------------------------------------------------------------- AND FOR THE YEARS ENDING DECEMBER 31, 1997, 1996 AND 1995 --------------------------------------------------------- General - ------- At December 31, 1997, total assets were $325,923,000 compared to $302,778,000 at December 31, 1996. Net income for the year ended December 31, 1997 totaled $3,434,000 or $1.13 per common share. This is a 13.3% decrease compared to 1996 net income of $3,965,000 or $1.30 per common share. Earnings for 1995 were $3,682,000 or $1.21 per common share. On October 3, 1996, Citizens entered an agreement with EST National Bank for the acquisition of banking offices in Sandusky, Ohio and Berlin Heights, Ohio and the assumption of $14,577,000 in deposits of the two banking offices. With the settlement of the transaction in January 1997, Citizens took possession of the properties and assumed the deposits. The value of properties and equipment was $956,000 and a deposit premium of 10.25% or $1,494,000 was paid. The transaction gives Citizens a presence in the southeast area of its market and a facility in the expanding commercial area along U.S. Route 250. 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, 1997 and 1996, and during the three-year period ended December 31, 1997. This discussion should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements, which are included elsewhere in this report. 22
27 Loans, Deposits, Borrowings, Securities and Stockholders' Equity - ---------------------------------------------------------------- Total loans increased $19,430,000, or 9.5%, from 1996 to 1997. Consumer loans experienced the greatest growth, increasing $9,389,000, or 32.1%, over 1996 to a total of $38,621,000. Commercial and agricultural loans increased $5,005,000, or 11.9%, from 1996 to a total of $47,043,000. Real estate mortgages increased by $4,144,000, or 3.1%, from 1996 to 1997 to a total of $135,636,000. After two years of heavy demand, the market for conventional real estate mortgages softened through most of 1997, beginning to increase at the end of the year. In 1997, the Banks became involved in selling mortgages on the secondary market. In addition to the $4,144,000 increase in real estate mortgages in 1997, the Banks sold newly originated mortgages totaling $2,201,000. In general, 30-year fixed-rate loans are being sold in order to reduce interest rate risk. Many commercial loans and lines of credit are cyclical, depending on the type of business. However, additional calling and marketing efforts have been made in the commercial loan area to increase the Corporation's share of the commercial market. Increased consumer demand coupled with the Corporation's increasing competitiveness on rates on new cars and home improvement lending resulted in consumer lending growth of $9,389,000, or 32.1%, from 1996 to 1997 and totaled $38,621,000 at December 31, 1997. The Corporation, through its more competitive pricing as well as increasing marketing efforts, generated $4,191,000 of installment loans secured by second mortgages in 1997. Also, in 1997, the Corporation generated $4,722,000 of consumer loans not secured by real estate, much of which were secured by vehicles. Average deposit balances for 1997 were $252,554,000, compared to $237,783,000 for 1996, an increase of $14,771,000, or 6.2%. The deposit growth is mainly attributed to the deposits acquired in the purchase of two EST First Merit branches. Deposit growth outside of the branch acquisition has been limited as a result of increased competition for deposit dollars from traditional and nontraditional financial service providers and increasingly sophisticated consumers utilizing alternatives to traditional banking deposits. Noninterest-bearing deposits averaged $29,249,000 for 1997 compared to $25,900,000 for 1996, increasing $3,349,000, or 12.9%. Savings, NOW, and MMIA accounts averaged $123,190,000 for 1997 compared to $119,449,000 for 1996. Average time deposits increased $7,681,000 to a total average balance of $100,115,000 for 1997. Borrowings from the Federal Home Loan Bank of Cincinnati decreased from $15,672,000 at December 31, 1996 to $14,488,000 at December 31, 1997. This decrease of $1,184,000 was a result of scheduled paydowns on previous advances. The Corporation had no new advances from the Federal Home Loan Bank in 1997 as the cash received from the branch purchase provided sufficient liquidity. The Banks offer repurchase agreements in the form of sweep accounts to commercial checking account customers. At December 31, 1997, total repurchase agreements in the form of sweep accounts totaled $6,879,000. This compares to $9,157,000 at December 31, 1996. The securities pledged as collateral for the repurchase agreements are United States Treasury Notes maintained under the Banks' control. Securities decreased $3,555,000, or 5.2%, from $68,761,000 on December 31, 1996 to $65,206,000 on December 31, 1997. This decrease provided additional funding for increased loan demand for the same period. 23
28 Securities held to maturity at December 31, 1997, had unrealized gains of approximately $67,000 and unrealized losses of approximately $8,000. Since management intends to hold this portion of the portfolio to maturity, the unrealized gains and losses have no impact on operations of the Corporation. Securities available for sale had an estimated fair value at December 31, 1997 of $58,469,000. This fair value includes unrealized gains of approximately $693,000 and unrealized losses of approximately $63,000. The effect of the unrealized gains and losses on securities available for sale, net of deferred taxes, was a positive adjustment to shareholders' equity of $416,000. Mortgage-backed securities totaled $2,783,000 at December 31, 1997 and none are considered unusual or "high risk" securities as defined by regulating authorities. Of this total, $531,000 are pass-through securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC); $1,990,000 are CMOs and REMICs issued by FNMA and FHLMC; and $262,000 are privately issued and are collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA. The average interest rate of the portfolio at December 31, 1997 was 6.6%. Also, 9.4% of the December 31, 1997 portfolio, or $262,000, are floating rate securities adjusting at least quarterly. The average maturity at December 31, 1997 was approximately 26 months. The Corporation has not invested in any derivative securities such as step-ups, multi-steps or dual index floaters. Total shareholders' equity increased $421,000, or 1.2%, during 1997 to $34,848,000. The ratio of total shareholders' equity to total assets was 10.7% in 1997 and 11.4% in 1996. The decrease in this ratio is a result of management's strategy of increasing dividend payments to better leverage shareholders' equity as long as retention of earnings is not necessary to support asset growth. Net Interest Income - ------------------- Net interest income for 1997 was $12,988,000, an increase of $431,000, or 3.4%, over 1996. Net interest income was $12,557,000 in 1996, an increase of $138,000, or 1.1%, over 1995. The increase in the net interest income for 1997 was the net result of an increase in interest income of $990,000 less an increase in interest expense of $559,000. Total interest income increased $990,000, or 4.3%, for 1997 compared to an increase of $143,000, or 0.7%, for 1996. This increase in the growth of interest income can be attributed to an increase in average interest earning assets from $279,135,000 to $292,648,000, or $13,513,000 between 1996 and 1997. The increase in volume of average interest earning assets offset a decrease in the average yield on earning assets of two basis points, from 7.82% in 1996 to 7.80% in 1997. The increase in interest income for 1996 is primarily a result of a shift in asset mix from securities to loans, which provide a higher yield. Total interest expense increased $559,000, or 6.0%, for 1997 compared to an increase of $5,000, or 0.1%, in 1996. The increase in interest expense can be attributed to an increase in average interest-bearing liabilities from $237,115,000 to $247,842,000, or $10,727,000 from 1996 to 1997. Interest expense for 1996 compared to 1995 reflected no significant change as both the average balance and the average yield of interest bearing liabilities remained relatively constant. Refer to "Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential" and "Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate" for further analysis of the impact of changes in interest-bearing assets and liabilities on the Corporation's net interest income. 24
29 Allowance for Possible Loan Losses - ---------------------------------- The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for possible loan losses for the three-year period ended December 31, 1997: <TABLE> <CAPTION> As of and for the year ended December 31, ----------------------------------------- 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Net loan charge-offs $ 278,000 $ 328,000 $ 165,000 Provision for loan losses charged to expense 435,000 368,000 377,000 Provision for loan losses more than net loan charge-offs 157,000 40,000 212,000 Net loan charge-offs as a percent of average outstanding loans .13% .17% .09% Allowance for possible loan losses $ 2,799,000 $ 2,642,000 $ 2,602,000 Allowance for possible loan losses as a percent of year-end outstanding loans 1.25% 1.29% 1.33% Allowance for possible loan losses as a percent of impaired loans 154.05 133.30 111.29 Impaired loans $ 1,817,000 $ 1,982,000 $ 2,338,000 Impaired loans as a percent of gross year-end loans .81% .97% 1.19% Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans 1.20 .47 1.14 </TABLE> The Corporation's policy is to maintain the allowance for possible loan losses at a level to provide for reasonably foreseeable 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. Statement of Financial Accounting Standards Nos. 114 and 118 were effective January 1, 1995 and require recognition of loan impairment. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of collateral if the loan is collateral dependent. A portion of allowance for loan losses is allocated to impaired loans. The effect of adopting these standards is included in the 1995 provision for loan losses and was not material. Management analyzes commercial and commercial real estate loans on an individual basis and classifies a loan as impaired when an analysis of the borrower's operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Often this is associated with a delay or shortfall in payments of 90 days or more. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one- to four-family residences, residential construction loans and consumer automobile, boat, home equity and credit card loans with balances less than $300,000. 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. 25
30 Noninterest Income - ------------------ Noninterest income totaled $4,012,000 in 1997 compared to $3,410,000 in 1996 and $2,736,000 in 1995. Income from the data processing and computer services division totaled $2,191,000 for 1997, a 4.7% increase over 1996 income of $2,092,000. Income for this division for 1995 was $1,806,000. Service charges on deposit accounts totaled $531,000 in 1997, an increase of $46,000, or 9.5%, over 1996 income of $485,000. This compares to service charge income of $445,000 in 1995. Additional services and account features have been introduced to generate increased noninterest income from the deposit accounts of the Banks. In addition, service charges are reviewed annually to ensure reasonable compensation for the services provided. 1997 also included service charges on the accounts acquired from EST National Bank. Other noninterest income totaled $1,016,000 in 1997 compared to $780,000 in 1996 and $706,000 in 1995. Increases in other noninterest income are a result of additional products and services introduced to generate noninterest income. 1997 noninterest income increased $236,000, or 30.2%, from 1996. The increase is mainly attributed to three areas: Brokerage fees, ATM fee income and Credit Card Merchant fees. Brokerage fees increased $50,000 in 1997 due to increased volume. With the purchase of EST National Bank branches, the Corporation acquired three additional ATMs. The additional volume of the new ATMs, combined with an ATM surcharge instituted in January of 1997, led to an increase in fee income of $65,000. Also, in 1997, fees charged to credit card merchants were increased. The increase in fees, coupled with an increase in the number of credit card merchants, led to an increase in fee income of $84,000. For 1997, the Corporation received $214,000 in payments against a previously written off investment security. As a result of the filing of bankruptcy by the Towers Financial Corporation (parent company) in 1993, the Corporation determined that an other than temporary decline in the value of Tower Healthcare Receivables Corp. bonds had occurred. Accordingly, a $700,000 writedown in the cost of those bonds was made in 1993, and a writedown of $226,000 was made in 1995. The carrying value of these securities was $ -0- at December 31, 1997 and 1996. Noninterest Expense - ------------------- Noninterest expense totaled $11,839,000 in 1997, an increase of $1,750,000, or 17.3%, over 1996. Noninterest expense increased $305,000, or 3.1%, in 1996 as compared to 1995. The following discussion highlights the significant items that resulted in increases or decreases in the components of noninterest expense. Salaries, wages and benefits totaled $5,917,000 in 1997, compared to $5,246,000 in 1996 and $5,071,000 in 1995. Salary increases totaled $556,000 in 1997 compared to 1996, and $97,000 in 1996 compared to 1995. Increases in benefits totaled $115,000 in 1997 compared to 1996 and $78,000 in 1996 compared to 1995. The increase for 1997 relates primarily to employees of the two branches purchased in early 1997. Net occupancy expense totaled $564,000 in 1997, compared to $546,000 in 1996 and $548,000 in 1995. The increase in occupancy expense 1997 was also due to the acquisition of two branches from EST First Merit. Equipment expense totaled $813,000 in 1997, compared to $630,000 in 1996 and $565,000 in 1995. Increases in 1997 of $183,000 are attributed to additional equipment at the two acquired branches, as well as additional image processing equipment at SCC Resources. 26
31 FDIC premiums totaled $31,000 in 1997, compared to $3,000 in 1996 and $284,000 in 1995. Changes in the premium rate by the FDIC resulted in the decreases from 1995 to 1996. The increase in FDIC premiums of $28,000 from 1996 to 1997 is a result of changes in the assessment calculation in the Deposit Insurance Fund Act of 1996 as well as higher deposit balances. State of Ohio Franchise taxes were $436,000 in 1997, compared to $419,000 in 1996 and $438,000 in 1995. The franchise taxes are based on the capital positions of the Banks. The current dividend policy of the Banks, combined with a lack of growth, results in a relatively constant capital position of the Banks and hence little changes in the amount of the franchise tax. Professional fees represent legal, audit and outside consulting fees paid by the Corporation. Professional fees totaled $641,000 in 1997, compared to $331,000 in 1996 and $309,000 in 1995. Increases in these fees represent the additional consulting costs involved in the acquisition of the EST First Merit branches by Citizens, as well as consulting costs involved in the planned acquisition of The Farmers State Bank of New Washington, scheduled for completion early in the second quarter of 1998. Amortization of intangible assets increased $125,000 in 1997. The increase is attributed to the amortization of the deposit premium paid to EST National Bank in the acquisition of two branches. The premium paid was 10.25% or $1,494,000 and is being amortized on a straight-line method over 12 years. Other operating expenses totaled $3,112,000 in 1997 compared to $2,711,000 in 1996 and $2,367,000 in 1995. Increases in 1997 over 1996 represent increased expenditures in advertising, marketing, and employee education and training in customer service and cross selling. Income Tax Expense - ------------------ Income before federal income taxes amounted to $4,727,000 in 1997, $5,510,000 in 1996 and $4,994,000 in 1995. The Corporation's effective income tax rate was 27.3% in 1997 compared to 28.0% in 1996 and 26.3% in 1995. The effective tax rate has increased since 1995 due to the Banks having less tax-exempt income on state and municipal securities and political subdivision loans. Liquidity and Capital Resources - ------------------------------- The Banks maintain a conservative liquidity position. Liquidity is evidenced by 1997 year-end balances of $10,400,000 in federal funds sold and by approximately $58,469,000 in securities available for sale. Additionally, Citizens received $12,154,000 in cash in January 1997 with the settlement of two branch purchases from EST National Bank. The Consolidated Statements of Cash Flows contained in the consolidated financial statements detail the Corporation's cash flows from operating activities resulting from net earnings. Cash provided by operations for 1997 was $4,001,000. This includes earnings of $3,434,000 plus net adjustments of $567,000 to reconcile net earnings to net cash provided by operations. From the cash generated from operations, $18,169,000 was the net amount used in investing activities. This includes loans made to customers net of principal payments received. Cash from financing activities for 1997 totaled $16,881,000. This includes the settlement of two branch purchases, the net change in deposits, repayments of FHLB borrowings and the payments of dividends. Cash generated by operating activities and financing activities exceeded cash used by investing activities by $2,713,000, which resulted in an increase in cash and due from banks to $14,328,000. Future loan demand of the Banks can be funded by proceeds from payments on existing loans, the maturity of securities, the sale of securities classified as available for sale and the use of excess funds invested in the federal funds market. Additional sources of funds may also come from borrowing in the federal funds market and/or borrowing from the Federal Home Loan Bank. 27
32 On a separate entity basis, the Corporation's only source of funds is dividends paid primarily by the subsidiary Banks. The ability of the Banks to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to applicable minimum capital requirements, the Banks may declare a dividend without the approval of the State of Ohio 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. The amount of unrestricted dividends available to be paid by the Banks to the Corporation was approximately $1,166,000 at December 31, 1997. Management believes the future earnings of the Banks will be sufficient to support anticipated asset growth at the Banks and provide funds to the Corporation to continue dividends at their current level. Capital Adequacy - ---------------- The Corporation's policy is, and always has been, to maintain its capital levels above the minimum regulatory standards. Under the regulatory capital standards, total capital has been defined as tier I (core) capital and tier II (supplementary) capital. The Corporation's tier I capital includes shareholders' equity (net of unrealized security gains) and tier II capital includes the allowance for possible loan losses. The definition of assets has also been modified to include items both on and off the balance sheet. Each item is then assigned a risk weight or risk adjustment factor to determine ratios of capital to risk adjusted assets. The standards require that total capital (tier I plus tier II) be a minimum of 8% of risk adjusted assets, with at least 4% being in tier I capital. The Corporation's ratios as of December 31, 1997 and 1996 were 19.3% and 22.2% respectively for total capital, and 18.1% and 20.8% respectively for tier I capital. Additionally, the Federal Reserve Board has adopted minimum leverage-capital ratios. These standards were established to supplement the previously issued risk based capital standards. The leverage ratio standards use the existing tier I capital definition but the ratio is applied to average total assets instead of risk adjusted assets. The standards require that tier I capital be a minimum of 4% of total average assets for high rated entities such as the Corporation. The Corporation's leverage ratio was 9.7% and 10.6% at December 31, 1997 and 1996. On July 3, 1997, the Corporation entered a definitive agreement to acquire The Farmers State Bank of New Washington, Ohio. This agreement , as amended, specifies that the Corporation will issue 6.06 shares of the Corporation's common stock for each of the 200,000 shares of Farmers outstanding. The merger is subject to the approval of both companies' regulatory agencies and the shareholders of both Farmers and First Citizens Bank Corp. The transaction is also subject to use of the pooling of interest method of accounting. Pending various approvals, the merger is expected to close sometime in the early part of the second quarter of 1998. See Note 16 of the consolidated financial statements for further information regarding the proposed merger. Effects of Inflation - -------------------- The Corporation's balance sheet is typical of financial institutions and reflects a net positive monetary position whereby monetary assets exceed monetary liabilities. Monetary assets and liabilities are those which can be converted to a fixed number of dollars and include cash assets, securities, loans, money market instruments, deposits and borrowed funds. During periods of inflation, a net positive monetary position may result in an overall decline in purchasing power of an entity. No clear evidence exists of a relationship between the purchasing power of an entity's net positive monetary position and its future earnings. Moreover, the Corporation's ability to preserve the purchasing power of its net positive monetary position will be partly influenced by the effectiveness of its asset/liability management program. Management does not believe that the effect of inflation on its nonmonetary assets (primarily bank premises and equipment) is material as such assets are not held for resale and significant disposals are not anticipated. 28
33 Fair Value of Financial Instruments - ----------------------------------- The Corporation disclosed the estimated fair value of its financial instruments at December 31, 1997 and 1996 in Note 15 to the consolidated financial statements. The fair value of the Corporation's financial instruments generally increased relative to their carrying values during 1997 as compared to 1996. The fair value of loans at December 31, 1997 was 100.0% of the carrying value compared to 99.5% at December 31, 1996. The fair value of securities held to maturity at December 31, 1997 was 100.9% compared to 101.6% at December 31, 1996. The fair value of deposits at December 31, 1997 was 100.3% of the carrying value, compared to 100.1% at December 31, 1996. Year 2000 - --------- The Corporation has been aware of the potential impact of the Year 2000 on data processing and technology. The Corporation's data processing subsidiary, SCC, is totally dependent on its ability to process for the Corporation's subsidiary banks and other banking customers. SCC developed a Year 2000 project plan which was introduced in May 1997. This project plan has outlined the approach to the Year 2000 as being 1) an initial planning phase, 2) an assessment phase, 3) a strategy phase, and 4) an overall testing phase. Management of SCC has made the commitment that processing applications classified as high priority and determined to be essential for the ongoing operation of the Banks and banking customers will be Year 2000 compatible by December 31, 1998. Other processing applications having lesser priority or where date calculations have no impact will be Year 2000 compliant by June 30, 1999. SCC communicates monthly with its customer banks on the status of its Year 2000 project. The board of directors of both Citizens and Castalia have named Year 2000 coordinators. Both Banks have conducted assessments to identify hardware, software and other processes that may be affected by the Year 2000 date change and that are not included in services provided to the Banks by SCC. Throughout 1998, additional efforts are planned to renovate or replace functions determined by the assessment to not be Year 2000 compliant. In addition to the impact on its own systems by the Year 2000, the Banks have recognized that borrowing customers could be impacted by the Year 2000 and that impact could impair the customers' ability to meet their obligations. The Banks are communicating to significant borrowers the need to evaluate their systems. Management recognizes that costs are associated with the Year 2000 efforts, but does not believe that these costs will materially affect the operations, liquidity, or capital resources of the Corporation. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The Corporation's primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Corporation's transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Interest-rate risk (IRR) is the exposure of a banking organization's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of IRR can pose a significant threat to the Corporation's earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to the Corporation's safety and soundness. 29
34 Evaluating a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization's quantitative level of exposure. When assessing the IRR management process, the Corporation seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires the Corporation to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality. The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution's assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institutions interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment. Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Corporation is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Corporation's primary asset/liability management technique is the measurement of the Corporation's asset/liability gap, that is, the difference between the cash flow amounts of interest-sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset-sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability-sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest-rate changes for assets and liabilities are of the same magnitude, whereas actual interest-rate changes generally differ in magnitude for assets and liabilities. 30
35 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, 1997, based on the information and assumptions set forth in the notes. The Corporation believes that the assumptions utilized, which are based on statistical data provided by a federal regulatory agency in the Corporation's market area, are reasonable. The Corporation had no derivative financial instruments or trading portfolio as of December 31, 1997. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding as set forth in the notes. From a risk management perspective, the Corporation believes that repricing dates for adjustable-rate instruments, as opposed to expected maturity dates, may be a more relevant measure in analyzing the value of such instruments. The Corporation's borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates. On-Balance-Sheet Financial Instruments (Dollars in thousands) <TABLE> <CAPTION> 1998 1999 2000 2001 2002 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans receivable(1)(2) Fixed rate $ 14,694 $ 8,073 $ 8,883 $ 6,990 $ 9,326 $ 59,713 $ 107,679 $ 107,692 Avg. int. rate 9.51% 9.71% 9.47% 9.07% 8.34% 7.71% 8.39% Adj. rate $ 12,852 $ 1,476 $ 1,578 $ 1,795 $ 2,247 $ 98,020 $ 117,968 $ 117,982 Avg. int. rate 9.62% 9.19% 8.95% 8.49% 8.33% 7.68% 7.95% Mortgage-backed securities(3) Fixed rate $ 206 $ 306 $ 1,951 $ 2,463 $ 2,472 Avg. int. rate 8.00% 6.63% 6.41% 6.57% Adj. rate $ 303 $ 303 $ 305 Avg. int. rate 6.50% 6.50% Securities(4) $ 26,371 $ 11,765 $ 7,785 $ 4,402 $ 1,372 $ 10,745 $ 62,440 $ 62,488 Avg. int. rate 5.64% 6.20% 6.21% 6.40% 5.05% 5.34% 5.81% Fed Funds Sold $ 10,400 $ 10,400 $ 10,400 Aug. int. rate 5.47% 5.47% Total $ 64,523 $ 21,620 $ 18,246 $ 13,187 $ 12,945 $170,732 $ 301,253 $ 301,339 </TABLE> 31
36 On-Balance-Sheet Financial Instruments (Dollars in thousands) <TABLE> <CAPTION> 1998 1999 2000 2001 2002 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest-bearing liabilities: Interest-bearing deposits and escrows(5) $ 128,593 $ 37,896 $ 23,726 $ 14,233 $ 66 $ 29,015 $ 233,529 $ 234,413 Avg. int. rate 3.85% 2.88% 3.10% 2.81% 5.40% 1.77% 3.29% Borrowings $ 11,046 $ 11,277 $ 559 $ 591 $ 625 $ 183 $ 24,281 $ 24,281 Avg. int. rate 5.02% 5.75% 5.74% 5.81% 6.15% 7.46% 5.44% Total $ 139,639 $ 49,173 $ 24,285 $ 14,824 $ 691 $ 29,198 $ 257,810 $ 258,694 </TABLE> Market Risk Disclosure Footnotes (1) Net of undisbursed loan proceeds and does not include net deferred loan fees or allowance for loan losses. (2) Substantially all of the Corporation's adjustable rate loans reprice on an annual basis based on either the National Average Contract Rate for Major Lenders on Previously Occupied Homes or Federal National Mortgage Association's 6/2 rate capped one-year adjustable rate. (3) Substantially all of the Corporation's adjustable rate mortgage-backed securities reprice on a monthly basis based on changes in the three-month LIBOR index. (4) Totals include the Corporation's investment in Federal Home Loan Bank stock. (5) For passbook and statement savings accounts, assumes an annual decay rate of 31% for year one, 29% for year two, 23% for year three and 17% for year four. The table below provides information about the Corporation's anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit. The Corporation used no derivative financial instruments to hedge such anticipated transactions as of December 31, 1997. Anticipated Transactions <TABLE> <CAPTION> Citizens Castalia Total -------- -------- ----- (Dollars in thousands) <S> <C> <C> <C> UNDISBURSED CONSTRUCTION LOANS Fixed Rate $ 375 $ 375 7.10% 7.10% Adjustable Rate $ 279 $ 100 $ 379 7.05% 6.66% 6.95% LOAN ORIGINATION COMMITMENTS Fixed Rate $ 2,742 $ 725 $ 3,467 9.02% 8.75% 8.96% Adjustable Rate $ 15,583 $ 310 $ 15,893 10.56% 8.42% 10.52% LETTERS OF CREDIT Fixed Rate $ 21 $ 336 $ 357 7.90% 9.14% 9.07% Adjustable Rate $ 90 $ 90 9.58% 9.58% </TABLE> 32
37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors First Citizens Banc Corp Sandusky, Ohio We have audited the accompanying consolidated balance sheets of First Citizens Banc Corp as of December 31, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1997 and 1996 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Citizens Banc Corp as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Columbus, Ohio January 30, 1998 33
38 FIRST CITIZENS BANC CORP CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 1997 1996 ---- ---- ASSETS <S> <C> <C> Cash and due from banks $ 14,328,125 $ 11,615,060 Federal funds sold 10,400,000 8,521,000 Securities Available for sale, at fair value 58,468,703 58,971,155 Held to maturity (Estimated fair values of $6,796,389 in 1997 and $9,948,509 in 1996) 6,737,206 9,789,977 Loans held for sale 690,998 Loans Total loans 224,557,029 205,127,385 Allowance for loan losses (2,799,000) (2,642,000) ----------------- ----------------- Net loans 221,758,029 202,485,385 Office premises and equipment, net 6,993,953 6,373,506 Accrued interest receivable 2,027,743 1,823,667 Intangible assets 2,847,511 1,679,465 Other assets 1,670,830 1,518,404 ----------------- ----------------- Total assets $ 325,923,098 $ 302,777,619 ================= ================= LIABILITIES Deposits Noninterest bearing $ 31,474,577 $ 24,624,624 Interest bearing 233,528,600 215,873,075 ----------------- ----------------- Total deposits 265,003,177 240,497,699 Federal Home Loan Bank borrowings 14,488,034 15,671,686 Securities sold under repurchase agreements 6,879,346 9,157,032 U.S. Treasury interest-bearing demand note payable 2,913,641 1,388,979 Accrued interest, taxes and other expenses 1,790,955 1,634,915 ----------------- ----------------- Total liabilities 291,075,153 268,350,311 ----------------- ----------------- SHAREHOLDERS' EQUITY Common stock, no par value, 10,000,000 shares authorized, 3,051,504 shares issued and outstanding 15,257,520 15,257,520 Retained earnings 19,174,257 19,005,014 Unrealized gain on securities available for sale 416,168 164,774 ----------------- ----------------- Total shareholders' equity 34,847,945 34,427,308 ----------------- ----------------- Total liabilities and shareholders' equity $ 325,923,098 $ 302,777,619 ================= ================= </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 34
39 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 18,461,451 $ 17,143,958 $ 16,617,684 Interest and dividends on securities Taxable 2,512,639 2,721,126 2,838,512 Nontaxable 1,307,425 1,430,575 1,630,036 Interest on federal funds sold 483,085 508,134 574,835 Other interest income 33,292 4,208 3,620 --------------- --------------- ---------------- Total interest income 22,797,892 21,808,001 21,664,687 --------------- --------------- ---------------- INTEREST EXPENSE Interest on deposits 8,450,754 7,947,510 7,863,437 Interest of Federal Home Loan Bank borrowings 866,482 931,866 993,255 Interest on other borrowings 492,478 371,774 389,029 --------------- --------------- ---------------- Total interest expense 9,809,714 9,251,150 9,245,721 --------------- --------------- ---------------- NET INTEREST INCOME 12,988,178 12,556,851 12,418,966 Provision for loan losses 434,663 368,350 377,477 --------------- --------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,553,515 12,188,501 12,041,489 --------------- --------------- ---------------- NONINTEREST INCOME Computer center data processing fees 2,191,004 2,091,847 1,805,685 Service charges on deposit accounts 530,525 485,316 445,487 Security gain (loss) 213,686 52,599 (221,142) Loan sale gain 61,317 Other operating income 1,015,627 780,432 706,417 --------------- --------------- ---------------- Total noninterest income 4,012,159 3,410,194 2,736,447 --------------- --------------- ---------------- NONINTEREST EXPENSE Salaries, wages and benefits 5,917,264 5,246,145 5,071,253 Net occupancy expense 563,504 546,399 547,841 Equipment expense 812,538 630,033 564,949 Federal deposit insurance premiums 31,145 3,000 284,384 State franchise tax 435,788 418,876 437,961 Professional fees 640,585 331,214 308,579 Amortization of intangible assets 326,048 201,528 201,528 Other operating expenses 3,112,097 2,711,416 2,367,030 --------------- --------------- ---------------- Total noninterest expense 11,838,969 10,088,611 9,783,525 --------------- --------------- ---------------- Income before taxes 4,726,705 5,510,084 4,994,411 Provision for income taxes 1,292,352 1,545,198 1,312,184 --------------- --------------- --------------- NET INCOME $ 3,434,353 $ 3,964,886 $ 3,682,227 =============== =============== =============== EARNINGS PER COMMON SHARE $ 1.13 $ 1.30 $ 1.21 ======== ========== ========= </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 35
40 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Unrealized Gain on Securities Total Common Stock Retained Available Shareholders' Shares Amount Earnings for Sale Equity ------ ------ -------- -------- ------ <S> <C> <C> <C> <C> Balance, January 1, 1995 762,876 $ 15,257,520 $ 16,652,732 $ 31,910,252 Net income 3,682,227 3,682,227 Cash dividends ($0.71 per share) (2,174,667) (2,174,667) Market adjustment at date of transfer on securities available for sale $ 388,979 388,979 ------------- -------------- -------------- ----------- --------------- Balance, December 31, 1995 762,876 15,257,520 18,160,292 388,979 33,806,791 Net income 3,964,886 3,964,886 Cash dividends ($1.02 per share) (3,120,164) (3,120,164) Four-for-one stock split effected in the form of a 300% stock dividend 2,288,628 Change in unrealized gain on securities available for sale (224,205) (224,205) ------------- -------------- -------------- ----------- --------------- Balance, December 31, 1996 3,051,504 15,257,520 19,005,014 164,774 34,427,308 Net income 3,434,353 3,434,353 Cash dividends ($1.07 per share) (3,265,110) (3,265,110) Change in unrealized gain on securities available for sale 251,394 251,394 ------------- -------------- -------------- ----------- --------------- Balance, December 31, 1997 3,051,504 $ 15,257,520 $ 19,174,257 $ 416,168 $ 34,847,945 ============= ============== ============== =========== =============== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 36
41 FIRST CITIZENS BANC CORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,434,353 $ 3,964,886 $ 3,682,227 Adjustments to reconcile net income to net cash from operating activities Security amortization, net of accretion 115,563 119,107 124,084 Depreciation 813,401 651,281 597,685 Amortization of intangible assets 326,048 201,536 201,536 Security gains (13,600) (4,500) Provision for loan losses 434,663 368,350 377,477 Write-down of investment security 225,642 Loans originated for sale (2,892,410) Proceeds from sale of loans 2,262,728 Gain on sale of loans (61,316) Deferred income taxes (107,200) 93,700 (57,800) Change in Net deferred loan fees (74,794) (4,235) (45,384) Accrued interest receivable (204,076) 545,974 (224,358) Other assets (69,227) (68,521) (196,689) Accrued interest, taxes and other expenses 22,877 (734,628) 940,250 --------------- -------------- --------------- Net cash from operating activities 4,000,610 5,123,850 5,620,170 --------------- -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Securities held to maturity Proceeds from maturities and repayments 3,479,365 7,320,484 22,651,788 Purchases (457,500) (415,000) (14,122,000) Securities available for sale Proceeds from maturities and repayments 15,902,360 11,735,600 62,107 Purchases (15,103,668) (13,400,452) Loan originations, net of loan payments (19,632,513) (9,582,957) (10,078,201) Proceeds from the sale of property and equipment 32,350 328,094 Property and equipment expenditures (510,053) (894,134) (870,082) Change in federal funds sold (1,879,000) (606,000) (2,052,000) --------------- -------------- --------------- Net cash from investing activities (18,168,659) (5,514,365) (4,408,388) --------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Branch acquisition 12,153,945 Net change in deposits 9,928,955 (1,844,485) (1,762,114) Repayment of Federal Home Loan Bank borrowings (1,183,652) (1,118,267) (1,056,880) Net change in securities sold under repurchase agreements (2,277,686) 722,982 1,510,248 Cash dividends paid (3,265,110) (3,120,164) (2,174,667) Change in U.S. Treasury interest-bearing notes payable 1,524,662 1,069,599 (559,734) --------------- -------------- --------------- Net cash from financing activities 16,881,114 (4,290,335) (4,043,147) --------------- -------------- --------------- Net change in cash and cash equivalents 2,713,065 (4,680,850) (2,831,365) Cash and cash equivalents at beginning of year 11,615,060 16,295,910 19,127,275 --------------- -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,328,125 $ 11,615,060 $ 16,295,910 =============== ============== =============== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 37
42 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the accounting policies adopted by First Citizens Banc Corp which have a significant effect on the financial statements. CONSOLIDATION POLICY: The consolidated financial statements include the accounts of First Citizens Banc Corp (Corporation) and its wholly-owned subsidiaries, The Citizens Banking Company (Citizens), The Castalia Banking Company (Castalia), SCC Resources, Inc. (SCC), and R. A. Reynolds Appraisal Services, Inc. (Reynolds). All significant intercompany balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS: The Corporation is primarily engaged in the business of commercial and retail banking in the communities of Sandusky and Castalia, Ohio. The Banks provide a broad range of banking and financial services including accepting demand, savings and time deposits and granting commercial, real estate and consumer loans. Citizens conducts its business through its main office and four branches, located in Sandusky and the nearby community of Berlin Heights. Castalia conducts its business through its main office. SCC provides data processing for 14 financial institutions in addition to the two subsidiary banks. SCC accounts for 8.2% of the Corporation's total revenues. Reynolds provides real estate appraisal services for lending purposes to the subsidiary banks and other financial institutions. Reynolds accounts for less than 1% of total Corporation revenues. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: In preparing financial statements, management must make estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenue, and expenses, as well as the disclosures provided. Future results could differ from the current estimates. Estimates that are more susceptible to change in the near term include the collectibility of loans, the fair values of financial instruments and the status of contingencies. CASH: For purposes of reporting cash flows, the Corporation considers "cash and cash equivalents" to include cash on hand and demand deposits with financial institutions. The Corporation reports net cash flows for federal funds sold, customer loan transactions, deposit transactions, securities sold under agreements to repurchase and other short-term borrowings. For the years ended December 31, 1997, 1996 and 1995, the Corporation paid interest of $9,755,000, $9,459,000, and $9,056,000, and income taxes of $1,554,000, $1,615,000, and $975,000. Noncash transactions included transfers from loans to other real estate owned totaling $32,000 in 1995. SECURITIES: The Corporation classifies securities as either held to maturity or available for sale. Securities held to maturity are those the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities available for sale are those the Corporation may sell if needed for liquidity, asset-liability management, or other reasons even if management does not have a present intention of such a sale. Equity securities that have a readily determinable fair value are also classified as available for sale. Securities available for sale are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. In November 1995, the Financial Accounting Standards Board (FASB) issued a Question and Answer Implementation Guide to Statement of Financial Accounting Standards (SFAS) No. 115. Based on the reading thereof and in accordance with the provisions of the implementation guidance, the Corporation conducted a one-time reassessment of the appropriateness of its securities classifications and transferred securities with an amortized cost of $56,541,376 from held to maturity to available for sale. The unrealized gain at the time of the transfer was approximately $589,000. - -------------------------------------------------------------------------------- (Continued) 38
43 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Realized gains or losses are determined based on the amortized cost of the specific security sold. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. LOANS RECEIVABLE: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value taken together. Net unrealized losses are recognized through a valuation allowance by charges to income. Mortgage servicing rights, representing the right to service mortgage loans for others, are recorded by allocating the total cost of the mortgage loans sold to mortgage servicing rights and to loans (without the mortgage servicing rights) based on their relative fair values. Mortgage servicing rights recorded as a separate asset are amortized in proportion to, and over the period of, estimated net servicing income. The balance of mortgage servicing rights is not material at December 31, 1997. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. 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. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Management analyzes commercial and commercial real estate loans on an individual basis and classifies a loan as impaired when an analysis of the borrower's operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Often this is associated with a delay or shortfall in payments of 90 days or more. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one- to four-family residences, residential construction loans, and consumer automobile, boat, home equity and credit card loans with balances less than $300,000. In addition, loans held for sale and leases are excluded from consideration as impaired. Nonaccrual loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. INTEREST AND FEES ON LOANS: Interest on loans is accrued over the term of the loan based on the principal outstanding. Management reviews loans delinquent 90 days or more to determine if interest accrual should be discontinued. The carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in bad debt expense. Loan fees and certain direct costs in the origination of loans are deferred and amortized over the contractual lives of the related loans as an adjustment of yield using the interest method. - -------------------------------------------------------------------------------- (Continued) 39
44 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both straight-line and accelerated methods over the estimated useful life of the asset. These assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. Maintenance and repairs are expensed and major improvements are capitalized. INTANGIBLE ASSETS: Amounts as reported on the consolidated balance sheets represent goodwill that arose from the purchase of Castalia in 1990 and core deposit intangibles that arose from the purchase of two branch offices and assumption of related deposits in 1997. Goodwill is being amortized on the straight-line method over 15 years and core deposits are being amortized on the straight-line method over 12 years. The Corporation assesses the recoverability of intangible assets by determining whether the balance can be recovered through undiscounted future operating cash flows of Castalia and the branches. At December 31, 1997, the remaining balances of goodwill and core deposit intangibles totaled $1,478,000 and $1,370,000. OTHER REAL ESTATE: Real estate owned, other than that used in the normal course of business, is included in other assets at fair value less estimated costs to sell. Any reduction from carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair value is recognized in a valuation allowance by charges to income. Other real estate owned included in other assets totaled approximately $26,000 at December 31, 1997 and $28,000 at December 31, 1996. INCOME TAXES: The Corporation follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded at enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as "temporary differences." A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. CONCENTRATIONS OF CREDIT RISK: Most of the business activity of the subsidiary banks is with customers located within the Sandusky, Berlin Heights and Castalia, Ohio areas. As of December 31, 1997 and 1996, the subsidiary banks had no significant concentration of loans in any one single industry. RETIREMENT PLANS: The Corporation and its subsidiaries sponsor a noncontributory defined benefit retirement plan for all full-time employees who have attained the age of 21 and have a minimum of six months of service. Accrued pension costs are funded to the extent deductible for federal income tax purposes. The Corporation and its subsidiaries also provide a savings and retirement 401(k) plan for all full-time eligible employees who elect to participate. The decision to make contributions to the plan, which represent a match of a portion of the salary deferred by participants, is made annually by the Board of Directors. Such contributions are funded as they are accrued. EARNINGS PER SHARE: A 4-for-1 stock split effected in the form of a 300% stock dividend was paid to shareholders of record as of April 16, 1996. Earnings per share is computed based on the weighted average number of shares of capital stock outstanding during each year as restated for the stock split, which totaled 3,051,504 shares in 1997, 1996 and 1995. Dividends per share are based on the number of shares outstanding at the declaration date giving retroactive effect to the stock split. - -------------------------------------------------------------------------------- (Continued) 40
45 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) FINANCIAL STATEMENT PRESENTATION: Certain items in the 1996 and 1995 financial statements have been reclassified to correspond with the 1997 presentation. NOTE 2 - SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at December 31, 1997 and 1996 are as follows: <TABLE> <CAPTION> 1 9 9 7 ------------------------------- ------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- <S> <C> <C> <C> <C> AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 33,085,104 $ 101,144 $ (46,511) $ 33,139,737 Obligations of state and political subdivisions 19,233,997 583,780 (16,135) 19,801,642 Other securities, including mortgage- backed securities 5,519,045 8,537 (258) 5,527,324 --------------- -------------- ------------- ---------------- Total securities available for sale $ 57,838,146 $ 693,461 $ (62,904) $ 58,468,703 =============== ============== ============= ================ HELD TO MATURITY U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,000,000 $ 2,500 $ 1,002,500 Obligations of state and political subdivisions 4,004,519 50,389 $ (5,613) 4,049,295 Other securities, including mortgage- backed securities 1,732,687 13,974 (2,067) 1,744,594 --------------- -------------- ------------- ---------------- Total securities held to maturity $ 6,737,206 $ 66,863 $ (7,680) $ 6,796,389 =============== ============== ============= ================ </TABLE> - -------------------------------------------------------------------------------- (Continued) 41
46 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) <TABLE> <CAPTION> 1 9 9 6 ------------------------------- ------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- <S> <C> <C> <C> <C> AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 37,000,835 $ 58,526 $ (155,293) $ 36,904,068 Obligations of state and political subdivisions 18,109,603 433,174 (86,282) 18,456,495 Other securities, including mortgage- backed securities 3,611,060 (468) 3,610,592 --------------- -------------- ------------- ---------------- Total securities available for sale $ 58,721,498 $ 491,700 $ (242,043) $ 58,971,155 =============== ============== ============= ================ HELD TO MATURITY U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,000,000 $ 23,125 $ 1,023,125 Obligations of state and political subdivisions 6,329,284 141,366 $ (7,318) 6,463,332 Other securities, including mortgage- backed securities 2,460,693 12,007 (10,648) 2,462,052 --------------- -------------- ------------- ---------------- Total securities held to maturity $ 9,789,977 $ 176,498 $ (17,966) $ 9,948,509 =============== ============== ============= ================ </TABLE> The amortized cost and estimated fair value of securities at December 31, 1997, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. <TABLE> <CAPTION> Estimated Amortized Fair Cost Value ---- ----- <S> <C> <C> AVAILABLE FOR SALE Due in one year or less $ 17,302,117 $ 17,269,178 Due after one year through five years 24,275,924 24,666,036 Due after five years through ten years 9,620,535 9,871,919 Due after ten years 1,120,525 1,134,246 Mortgage-backed securities 42,388 42,130 Other securities 5,476,657 5,485,194 --------------- --------------- Total securities available for sale $ 57,838,146 $ 58,468,703 =============== =============== </TABLE> - -------------------------------------------------------------------------------- (Continued) 42
47 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) <TABLE> <CAPTION> Estimated Amortized Fair Cost Value ---- ----- <S> <C> <C> HELD TO MATURITY Due in one year or less $ 4,649,519 $ 4,696,104 Due after one year through five years 355,000 355,691 Mortgage-backed securities 1,732,687 1,744,594 --------------- --------------- Total securities held to maturity $ 6,737,206 $ 6,796,389 =============== =============== </TABLE> During 1995, management concluded that the remaining bonds of Tower Healthcare Receivables Corp. had no market value. Therefore, the Corporation eliminated the remaining carrying value of the bonds which was $226,000 after cash payments received during 1995. These securities had previously been written down by $700,000 when Towers Financial Corp. (parent company) filed bankruptcy in 1993. The Corporation received $214,000 and $39,000 in recoveries from Tower Financial Corp. in 1997 and 1996. No securities were sold during 1997, 1996 or 1995. Securities called or settled by the issuer resulted in gains of $13,600 and $4,500 in 1996 and 1995. Securities with a carrying value of approximately $36,757,000 and $33,650,000 were pledged as of December 31, 1997 and 1996, to secure public deposits and other deposits and liabilities as required or permitted by law. NOTE 3 - LOANS Loans as presented on the balance sheet are comprised of the following classifications at December 31: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Commercial and agricultural $ 47,043,354 $ 42,038,299 Real estate mortgage 135,635,917 131,491,632 Real estate construction 2,652,565 2,079,810 Consumer 38,621,281 29,232,380 Credit card and other 1,693,798 1,449,945 Deferred loan fees (1,089,886) (1,164,681) ---------------- ----------------- Total loans $ 224,557,029 $ 205,127,385 ================ ================= </TABLE> Fixed rate loans approximated $108,357,000 at December 31, 1997 and $104,228,000 at December 31, 1996. Certain directors and executive officers, including their immediate families and companies in whom they are principal owners, are loan customers of the subsidiary banks. The following is a summary of activity during 1997 for such loans. <TABLE> <S> <C> Balance - January 1, 1997 $ 3,795,000 New loans and advances 1,726,000 Repayments (1,529,000) -------------- Balance - December 31, 1997 $ 3,992,000 ============== </TABLE> - -------------------------------------------------------------------------------- (Continued) 43
48 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses is as follows: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Balance - January 1 $ 2,642,000 $ 2,602,000 $ 2,390,000 Provision for loan losses 434,663 368,350 377,477 Loans charged off (429,539) (444,807) (334,078) Recoveries 151,876 116,457 168,601 --------------- -------------- -------------- Balance - December 31 $ 2,799,000 $ 2,642,000 $ 2,602,000 =============== ============== ============== </TABLE> Information with respect to impaired loans is as follows: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Balance of impaired loans for which no allowance for loss has been allocated $ -- $ -- Balance of impaired loans for which an allowance for loss has been allocated 1,817,000 1,982,000 Portion of allowance for loan loss allocated to impaired loans 466,000 495,000 Average balance of impaired loans during year 1,879,000 1,984,000 Interest income recognized during impairment 133,000 139,000 Interest income recognized on a cash basis 133,000 139,000 </TABLE> NOTE 5 - PREMISES AND EQUIPMENT Premises and equipment, at cost, and accumulated depreciation as of December 31, 1997 and 1996 are as follows: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Land and improvements $ 793,294 $ 693,600 Buildings and improvements 6,087,483 5,350,787 Furniture and equipment 6,193,333 5,965,555 --------------- ---------------- Total 13,074,110 12,009,942 Accumulated depreciation 6,080,157 5,636,436 --------------- ---------------- Premises and equipment, net $ 6,993,953 $ 6,373,506 =============== ================ </TABLE> The Corporation has no material future-lease commitments. - -------------------------------------------------------------------------------- (Continued) 44
49 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 6 - INTEREST-BEARING DEPOSITS Interest-bearing deposits as of December 31, 1997 and 1996 are summarized as follows: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Demand $ 38,917,063 $ 37,112,309 Statement and passbook savings 83,840,498 87,909,105 Certificates of deposit: In excess of $100,000 17,349,836 13,298,419 Other 75,893,000 59,936,503 Individual Retirement Accounts 17,528,203 17,616,739 ----------------- ----------------- Total $ 233,528,600 $ 215,873,075 ================= ================= </TABLE> At December 31, 1997, the scheduled maturities of certificates of deposit are as follows: <TABLE> <S> <C> 1998 $ 79,241,000 1999 9,206,000 2000 3,699,000 2001 913,000 2002 and thereafter 184,000 ---------------- Total $ 93,243,000 ================ </TABLE> NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS The Corporation has fixed-rate and mortgage-matched advances from the Federal Home Loan Bank. Mortgage-matched advances are utilized to fund-specific fixed-rate loans with certain prepayment of principal permitted without penalty. At December 31, 1997 and 1996, Federal Home Loan Bank borrowings consisted of the following: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> 5.95 percent secured note $ 8,263,827 $ 8,765,213 5.80 percent secured note 588,182 683,083 5.60 percent secured note 1,484,733 1,721,414 5.55 percent secured note 914,167 1,054,956 5.25 percent secured note 3,237,125 3,447,020 --------------- ---------------- $ 14,488,034 $ 15,671,686 =============== ================ </TABLE> The notes outstanding at December 31, 1997 had required annual principal payments as follows: <TABLE> <S> <C> 1998 $ 1,252,869 1999 11,276,204 2000 558,990 2001 591,260 2002 571,827 Thereafter 236,884 --------------- $ 14,488,034 =============== </TABLE> - -------------------------------------------------------------------------------- (Continued) 45
50 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS (Continued) Federal Home Loan Bank borrowings are collateralized by the subsidiary Banks' Federal Home Loan Bank stock and a blanket pledge of the Banks' residential mortgage loan portfolio. NOTE 8 - OTHER BORROWINGS Securities sold under agreements to repurchase and treasury tax and loan deposits are financing arrangements. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase and treasury tax and loan deposits is summarized as follows: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Average month-end balance during the year $ 9,411,000 $ 8,953,000 Average interest rate during the year 5.24% 4.15% Maximum month-end balance during the year $ 11,973,000 $ 12,871,000 </TABLE> Securities underlying repurchase agreements at year-end were as follows. <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Carrying value of securities $ 14,665,000 $ 10,385,000 Fair Value $ 14,665,000 $ 10,385,000 </TABLE> NOTE 9 - INCOME TAXES The provision for income taxes consists of the following: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Current $ 1,399,552 $ 1,451,498 $ 1,369,984 Deferred (107,200) 93,700 (57,800) --------------- -------------- -------------- Total provision for income taxes $ 1,292,352 $ 1,545,198 $ 1,312,184 =============== ============== ============== </TABLE> The differences between the financial statement provision and amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes are as follows: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Income taxes computed at the statutory federal tax rate $ 1,607,080 $ 1,873,429 $ 1,698,100 Add (subtract) tax effect of Nontaxable interest income, less related nondeductible interest expense (395,537) (436,909) (497,085) Amortization of goodwill 68,522 68,522 68,522 Other 12,287 40,156 42,647 --------------- -------------- -------------- Total income tax provision $ 1,292,352 $ 1,545,198 $ 1,312,184 =============== ============== ============== </TABLE> - -------------------------------------------------------------------------------- (Continued) 46
51 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (Continued) The tax effects of principal temporary differences and the resulting deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Allowance for loan losses $ 634,600 $ 581,500 Deferred loan fees 370,600 396,000 Other 64,200 22,800 -------------- -------------- Deferred tax asset 1,069,400 1,000,300 -------------- -------------- Tax depreciation in excess of book depreciation (385,000) (486,600) Discount accretion on investment securities (18,800) (19,400) Pension costs (96,100) (114,000) Undistributed equity earnings of computer center (269,700) (269,700) Federal Home Loan Bank stock dividends (259,300) (185,400) Unrealized gain on securities available for sale (214,300) (84,900) Intangible asset amortization (135,400) (136,100) Other (8,800) -------------- Deferred tax liability (1,387,400) (1,296,100) -------------- -------------- Net deferred tax liability $ (318,000) $ (295,800) ============== ============== </TABLE> NOTE 10 - RETIREMENT PLANS The Corporation and its subsidiaries sponsor a savings and retirement 401(k) plan which covers all employees who meet certain eligibility requirements and who choose to participate in the plan. The matching contribution to the 401(k) plan was $47,000, $44,000 and $42,000 in 1997, 1996 and 1995. The Corporation and its subsidiaries also sponsor a pension plan which is a noncontributory defined benefit retirement plan for all employees who have attained the age of 21, completed six months of service and work 1,000 or more hours per year. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. No contributions were allowable in 1997, 1996 or 1995. Pension expense included the following components: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Service cost - benefits earned during the year $ 253,096 $ 210,335 $ 189,997 Interest cost on projected benefit obligation 259,514 216,600 227,899 Actual return on plan assets (580,437) (265,410) (553,914) Net amortization and deferral 120,351 (105,368) 94,970 ------------ ------------ ------------ Net pension expense (income) $ 52,524 $ 56,157 $ (41,048) ============ ============ ============ </TABLE> - -------------------------------------------------------------------------------- (Continued) 47
52 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 10 - RETIREMENT PLANS (Continued) The following table sets forth the funded status of the plan as of December 31, 1997 and 1996: <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,575,544 in 1997 and $2,097,524 in 1996. $ (2,611,524) $ (2,157,628) Provision for future salary increases (1,021,817) (1,283,318) -------------- --------------- Projected benefit obligation (3,633,341) (3,440,946) Plan assets at fair value, representing fixed income and equity fund investments of insurance company 4,935,505 4,450,990 -------------- --------------- Net excess of plan assets over projected benefit obligation 1,302,164 1,010,044 Unrecognized prior service cost 129,421 142,479 Unrecognized net loss (gain) (534,344) (123,453) Unrecognized net transition asset at January 1, 1989, being recognized over 17 years (654,266) (733,571) -------------- --------------- Prepaid pension expense included in other assets $ 242,975 $ 295,499 ============== =============== </TABLE> <TABLE> <CAPTION> Significant assumptions used: 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Discount rate 7.71% 7.71% 6.89% Rate of increase in compensation levels 5.00 5.00 5.00 Long-term rate of return on assets 9.00 9.00 9.00 </TABLE> NOTE 11 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK The Bank subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of their customers. These include commitments to make or purchase loans, undisbursed lines of credit, undisbursed credit card balances and letters of credit. The Banks' exposure to credit loss in case of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Banks follow the same credit policy to make such commitments as they use for loans recorded on the balance sheet. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained relating to the commitments is determined using management's credit evaluation of the borrower and may include real estate, vehicles, business assets, deposits and other items. The Banks do make fixed rate loan commitments for short periods of time. However, such commitments were immaterial as of and for the years ending December 31, 1997 and 1996. - -------------------------------------------------------------------------------- (Continued) 48
53 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 11 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK (Continued) Commitments to extend credit and letters of credit approximated the following amounts at December 31, 1997 and 1996: <TABLE> <CAPTION> Contract Amount --------------- 1997 1996 ---- ---- <S> <C> <C> Commitments to extend credit: Lines of credit and construction loans $ 16,945,000 $ 14,081,000 Credit cards 3,169,000 4,235,000 Letters of credit 447,000 62,000 --------------- ---------------- $ 20,561,000 $ 18,378,000 =============== ================ </TABLE> Citizens and Castalia 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 for the years ended December 31, 1997 and 1996 approximated $1,682,000 and $1,702,000. In the normal course of business, the Corporation and its subsidiaries are involved in various legal actions but, in the opinion of management and its legal counsel, ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements. NOTE 12 - RESTRICTIONS ON RETAINED EARNINGS The Corporation's primary source of funds for paying dividends to its shareholders and for operating expenses is dividends received from the Banks. Payment of dividends by the Banks to the Corporation is subject to restrictions by their regulatory agencies. These restrictions generally limit dividends to the current and prior two years retained earnings as defined by the regulations. In addition, dividends may not reduce capital levels below minimum regulatory requirements. Under the most restrictive of these requirements, the Corporation estimates that retained earnings available for payment of dividends by the Banks to the Corporation approximates $1,166,000 and $2,549,000 at December 31, 1997 and 1996. NOTE 13 - REGULATORY MATTERS The Corporation and its subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and the Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. - -------------------------------------------------------------------------------- (Continued) 49
54 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 13 - REGULATORY MATTERS (Continued) Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). As of December 31, 1997, the most recent notification from the Federal Reserve categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. At December 31, 1997 and 1996, the Corporation's actual capital levels (in millions) and minimum required levels were: <TABLE> <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 1997 ---- <S> <C> <C> <C> <C> <C> <C> Total capital (to risk weighted assets) $ 33.1 19.3% $ 13.7 8.0% $ 17.0 10.0% Tier I capital (to risk weighted assets) $ 31.0 18.1% $ 6.8 4.0% $ 10.3 6.0% Tier I capital (to average assets) $ 31.0 9.7% $ 12.8 4.0% $ 15.9 5.0% 1996 ---- Total capital $ 34.3 22.2% $ 12.4 8.0% $ 15.5 10.0% (to risk weighted assets) Tier I capital $ 32.0 20.8% $ 6.2 4.0% $ 9.3 6.0% (to risk weighted assets) Tier I capital $ 32.0 10.6% $ 12.0 4.0% $ 15.0 5.0% (to average assets) </TABLE> The regulatory capital ratios of the Banks' are similar to the Corporation ratios. - -------------------------------------------------------------------------------- (Continued) 50
55 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION A summary of condensed financial information of the parent company at December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 are as follows: <TABLE> <CAPTION> CONDENSED BALANCE SHEETS 1997 1996 ---- ---- Assets: <S> <C> <C> <C> Cash $ 3,937,595 $ 4,483,894 Investment in subsidiaries 30,878,600 30,332,695 Other assets 426,322 119,749 --------------- ---------------- Total assets $ 35,242,517 $ 34,936,338 =============== ================ Liabilities and Shareholders' Equity: Deferred income taxes and other liabilities $ 394,572 $ 509,030 Common stock 15,257,520 15,257,520 Retained earnings 19,174,257 19,005,014 Unrealized gain on securities available for sale 416,168 164,774 --------------- ---------------- Total liabilities and shareholders' equity $ 35,242,517 $ 34,936,338 =============== ================ CONDENSED STATEMENTS OF INCOME 1997 1996 1995 ---- ---- ---- Dividends from subsidiaries $ 3,413,249 $ 3,964,820 $ 3,699,618 Other income 24,417 7,448 8,333 Expenses - other, net (297,824) (154,283) (45,313) -------------- -------------- --------------- Earnings before equity in undistributed net earnings of subsidiaries 3,139,842 3,817,985 3,662,638 Equity in undistributed net earnings of subsidiaries 294,511 146,901 19,589 -------------- -------------- --------------- Net income $ 3,434,353 $ 3,964,886 $ 3,682,227 ============== ============== =============== </TABLE> - -------------------------------------------------------------------------------- (Continued) 51
56 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 14 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued) <TABLE> <CAPTION> CONDENSED STATEMENTS OF CASH FLOWS 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Operating activities: Net income $ 3,434,353 $ 3,964,886 $ 3,682,227 Adjustment to reconcile net income to net cash provided by operating activities: Change in other assets and other liabilities (121,031) 272,720 (70,729) Equity in undistributed net earnings of subsidiaries (294,511) (146,901) (19,589) -------------- -------------- --------------- Net cash from operating activities 3,018,811 4,090,705 3,591,909 -------------- -------------- --------------- Investing activities: Loan to subsidiary (300,000) 50,000 (100,000) -------------- -------------- --------------- Net cash from investing activities (300,000) 50,000 (100,000) -------------- -------------- --------------- Financing activities: Cash dividends paid (3,265,110) (3,120,164) (2,174,666) -------------- -------------- --------------- Net cash from financing activities (3,265,110) (3,120,164) (2,174,666) -------------- -------------- --------------- Net increase in cash (546,299) 1,020,541 1,317,243 Cash at beginning of year 4,483,894 3,463,353 2,146,110 -------------- -------------- --------------- Cash at end of year $ 3,937,595 $ 4,483,894 $ 3,463,353 ============== ============== =============== </TABLE> NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair values of financial instruments are as follows at December 31, 1997 and 1996: <TABLE> <CAPTION> December 31, 1997 December 31, 1996 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- <S> <C> <C> <C> <C> Financial assets: Cash and due from banks $ 14,328,000 $ 14,328,000 $ 11,615,000 $ 11,615,000 Federal funds sold 10,400,000 10,400,000 8,521,000 8,521,000 Securities available for sale 58,469,000 58,469,000 58,971,000 58,971,000 Securities held to maturity 6,737,000 6,796,000 9,790,000 9,949,000 Loans, net of allowance for loan losses 221,758,000 221,785,000 202,485,000 201,554,000 Accrued interest receivable 2,028,000 2,028,000 1,824,000 1,824,000 Financial liabilities: Deposits (265,003,000) (265,888,000) (240,498,000) (240,239,000) Federal Home Loan Bank borrowings (14,488,000) (14,488,000) (15,672,000) (15,672,000) Securities sold under repurchase agreements and other borrowings (9,793,000) (9,793,000) (10,546,000) (10,546,000) Accrued interest payable (444,000) (444,000) (389,000) (389,000) </TABLE> - -------------------------------------------------------------------------------- (Continued) 52
57 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. Estimated fair value for loans is based on the rates charged at year end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. Estimated fair value for time deposits is based on the rates paid at year end for new deposits, applied until maturity. Estimated fair value for other financial instruments and off-balance-sheet loan commitments are considered nominal. NOTE 16 - PROPOSED MERGER On July 3, 1997, the Corporation entered a definitive agreement to acquire The Farmers State Bank ("Farmers") of New Washington, Ohio. This agreement, as amended, specifies that the Corporation will issue 6.06 shares of the Corporation's common stock for each of the 200,000 shares of Farmers outstanding. The merger is subject to the approval of both companies' regulatory agencies and the shareholders of both Farmers and First Citizens Bank Corp. The transaction is also subject to use of the pooling of interest method of accounting. Pending various approvals, the merger is expected to close sometime in the early part of the second quarter of 1998. The following unaudited pro forma condensed combined financial statements have been prepared to reflect the transaction had it occurred in the earliest period presented. They are not necessarily indicative of the financial condition or results of operations that would have occurred had the transaction actually been effective at the beginning of the periods indicated. Pro forma combined net income per share is based on the issuance of 1,212,000 shares of the Corporation, assuming that none of the Farmers shareholders exercise dissenters rights and demand payment in cash. - -------------------------------------------------------------------------------- (Continued) 53
58 FIRST CITIZENS BANC CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 16 - PROPOSED MERGER (Continued) Pro forma condensed balance sheet (unaudited) (in thousands) December 31, 1997 Pro forma <TABLE> <CAPTION> Combined -------- <S> <C> Assets Cash and due from banks $ 17,696 Federal Funds sold 17,600 Interest-bearing deposits 347 Securities available for sale 84,510 Securities held to maturity 58,724 Net loans 288,429 Premises and equipment 7,563 Other assets 8,442 -------------- Total assets $ 483,311 ============== Liabilities and Shareholders' equity Deposits $ 402,722 Securities sold under repurchase agreements and other borrowed funds 10,711 Federal Home Loan Bank advances 14,488 Other liabilities 4,389 Shareholders' equity 51,001 -------------- Total liabilities and shareholders' equity $ 483,311 ============== </TABLE> Pro forma condensed statement of income (unaudited) (in thousands) <TABLE> <CAPTION> December 31, 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Interest income Loans, including fees $ 23,659 $ 21,967 $ 20,765 Securities, federal funds sold and other 10,463 10,374 10,403 ------------ ------------ ------------ Total interest income 34,122 32,341 31,168 Interest expense Deposits 15,247 14,498 13,698 Repurchase agreements and other borrowed funds 1,428 1,358 1,423 ------------ ------------ ------------ Total interest expense 16,675 15,856 15,121 Net interest income 17,447 16,485 16,047 Provision for loan losses 1,129 733 458 Net interest income after provision for loan losses 16,318 15,752 15,589 Other income 4,291 3,643 2,976 Other expenses 14,191 11,900 11,572 ------------ ------------ ------------ Income before income taxes 6,418 7,495 6,993 Income taxes 1,701 1,927 1,715 ------------ ------------ ------------ Net income $ 4,717 $ 5,568 $ 5,278 =========== ============ ============ Net income per share $ 1.11 $ 1.31 $ 1.24 ============ ============ ============ </TABLE> - -------------------------------------------------------------------------------- 54
59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- The Corporation has had no disagreements with the independent accountants on matters of accounting principles or financial statement disclosure required to be reported under this item. 55
60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The following information is furnished with respect to directors and executive officers of the Corporation as of December 31, 1997: <TABLE> <CAPTION> Director Name Age Position since (1) ---- --- -------- -------- DIRECTORS - --------- <S> <C> <C> <C> John L. Bacon 72 Chairman Emeritus 1973 Mack Iron Works Company Mary Lee G. Close 82 Personal Investments 1983 Richard B. Fuller 76 Retired, former President of Universal 1960 Clay Products, Inc. H. Lowell Hoffman, M.D. 74 Retired, former Surgeon 1980 Lowell W. Leech 71 Chairman of the Board, 1975 First Citizens Banc Corp The Citizens Banking Company The Castalia Banking Company Dean S. Lucal 60 Attorney, Lucal & McGookey 1973 W. Patrick Murray 57 Attorney, Murray and Murray 1983 Company, L.P.A. George L. Mylander 65 Retired Educator 1965 Chairman, Firelands Community Hospital Paul H. Pheiffer 72 Chairman of the Board, 1968 Sandusky Bay Development Company (operates the Battery Park Marina in Sandusky, Ohio) David A. Voight 55 President, First Citizens Banc Corp 1989 President, Chief Executive Officer The Citizens Banking Company Richard O. Wagner 84 Retired, former Chairman of First Citizens 1968 Bank Corp and former President of The Citizens Banking Company </TABLE> 56
61 <TABLE> <CAPTION> Name Age Position ---- --- -------- EXECUTIVE OFFICERS - ------------------ <S> <C> <C> Donald E. Gosser 61 Senior Vice President and Treasurer, First Citizens Banc Corp The Citizens Banking Company James O. Miller 45 Senior Vice President and Controller First Citizens Banc Corp The Citizens Banking Company Jay R. Pressler 53 Senior Vice President First Citizens Banc Corp The Citizens Banking Company </TABLE> (1) Directorships were with The Citizens Banking Company alone until 1984 and with the Corporation since such date. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- The information contained under the caption "Executive Compensation" in the Proxy Statement, to be dated approximately March 9, 1998 utilized in connection with the Company's Annual Shareholders' Meeting is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------ The information contained under the caption "Nominees for Election as Directors" and "Directors Continuing in Office" in the Proxy Statement, to be dated approximately March 9, 1998 utilized in connection with the Company's Annual Shareholders' Meeting is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement, to be dated approximately March 9, 1998 used concerning the Company's Annual Shareholders' Meeting is incorporated herein by reference. 57
62 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) DOCUMENTS FILED AS A PART OF THE REPORT 1 FINANCIAL STATEMENTS. The following financial statements, together with the applicable report of independent auditors, can be located on the indicated pages of this 1997 Annual Report. <TABLE> <CAPTION> PAGE IN ANNUAL REPORT <S> <C> Independent Auditors' Report..................................................................... 33 Consolidated Balance Sheets...................................................................... 34 Consolidated Statements of Income................................................................ 35 Consolidated Statements of Shareholders' Equity.................................................. 36 Consolidated Statements of Cash Flows............................................................ 37 Notes to Consolidated Financial Statements....................................................... 38 </TABLE> 2 FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3 EXHIBITS *(3)(i) Articles of Incorporation of First Citizens Banc Corp *(3)(ii) Code of Regulations of First Citizens Banc Corp *(4) Certificate for Registrant's Common Stock *(10)(i) Supplemental Retirement Benefit Agreement - Donald E. Gosser **(10)(ii) Agreement and Plan of Reorganization by and between First Citizens Banc Corp and The Farmers State Bank (incorporated by reference in Exhibit 2(1) to the Form S-4 Registration Statement No. 333-42299 of First Citizens Banc Corp. **(10)(iii)Administrative Services Agreement by and between First Citizens Banc Corp and The Farmers State Bank. ***(20) Proxy Statement for the 1997 Annual Meeting of the Shareholders *(21) Subsidiaries of the Registrant **(27) Financial Data Schedule **(99) Safe Harbor Under the Private Securities Litigation Reform Act of 1995 * The indicated exhibits were previously filed by the Corporation as Exhibits to the Corporation's Application for Registration on Form 10 or on prior years' Form 10K and such documents are incorporated herein by reference. ** The indicated exhibit has been filed as separate pages of the 1997 Form 10-K and is available to shareholders on request. *** The indicated exhibit was previously filed by the Corporation and such document is incorporated herein by reference. (b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during the fourth quarter of the year ended December 31, 1997. 58
63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) First Citizens Banc Corp -------------------------------------------------------------------- By /s/ David A. Voight ----------------------------------------------------------------------------- David A. Voight, President (Principal Executive Officer) By /s/ James O. Miller ----------------------------------------------------------------------------- James O. Miller, Senior Vice President and Controller (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on this twenty-eighth day of February 1997 by the following persons (including a majority of the Board of Directors of the Registrant) in the capacities indicated: /s/ Lowell W. Leech /s/ David A. Voight - ---------------------------------- ---------------------------- Lowell W. Leech David A. Voight Chairman of the Board President, Director /s/ John L. Bacon /s/ W. Patrick Murray - ---------------------------------- ---------------------------- John L. Bacon W. Patrick Murray Director Director /s/ Mary Lee G. Close /s/ George L. Mylander - ---------------------------------- ---------------------------- Mary Lee G. Close George L. Mylander Director Director /s/ Richard B. Fuller /s/ Paul H. Pheiffer - ---------------------------------- ---------------------------- Richard B. Fuller Paul H. Pheiffer Director Director /s/ H. Lowell Hoffman, M.D. /s/ Richard O. Wagner - ---------------------------------- ---------------------------- H. Lowell Hoffman, M.D. Richard O. Wagner Director Director /s/ Dean S. Lucal - ---------------------------------- Dean S. Lucal Director 59
64 FIRST CITIZENS BANC CORP <TABLE> <CAPTION> DIRECTORS --------- <S> <C> JOHN L. BACON W. PATRICK MURRAY Chairman Emeritus Attorney, Murray and Murray Company, L.P.A. Mack Iron Works Company GEORGE L. MYLANDER MARY LEE G. CLOSE Retired Educator and City Official RICHARD B. FULLER Chairman, Firelands Community Hospital H. LOWELL HOFFMAN, M.D. PAUL H. PHEIFFER LOWELL W. LEECH Sandusky Bay Development Company Chairman of the Board DAVID A. VOIGHT The Citizens Banking Company President, Chief Executive Officer The Castalia Banking Company The Citizens Banking Company DEAN S. LUCAL RICHARD O. WAGNER Attorney, Lucal & McGookey OFFICERS -------- LOWELL W. LEECH DONNA J. DALFERRO Chairman of the Board Vice President and Secretary DAVID A. VOIGHT MARY K. SCHLESSMAN President Vice President and Compliance Officer DONALD E. GOSSER KAREN S. RUTGER Senior Vice President and Treasurer Assistant Vice President and Personnel Officer JAMES O. MILLER BRENDA R. LEAL Senior Vice President and Controller Auditor JAY R. PRESSLER Senior Vice President </TABLE>
65 DIRECTORS OF AFFILIATED COMPANIES <TABLE> <CAPTION> The Citizens Banking Company - ----------------------------------------------------------- --------------------------------------------------------- <S> <C> JOHN L. BACON GRADY MCDONALD Chairman Emeritus W. PATRICK MURRAY Mack Iron Works Company Attorney, Murray and Murray Company, L.P.A. MARY LEE G. CLOSE GEORGE L. MYLANDER RICHARD B. FULLER Retired Educator and City Official ANTHONY S. GUERRA Chairman, Firelands Community Hospital President, LEWCO, Inc. PAUL H. PHEIFFER H. LOWELL HOFFMAN, M.D. Sandusky Bay Development Company LOWELL W. LEECH DAVID A. VOIGHT Chairman of the Board President, Chief Executive Officer The Citizens Banking Company The Citizens Banking Company DEAN S. LUCAL RICHARD O. WAGNER Attorney, Lucal & McGookey Director Emeritus LELAND J. WELTY, CPA The Castalia Banking Company - ----------------------------------------------------------- --------------------------------------------------------- JOHN L. BACON LOWELL W. LEECH Chairman Emeritus Chairman of the Board Mack Iron Works Company The Castalia Banking Company JACK D. BOHN W. PATRICK MURRAY Partner, Bohn Implement Company Attorney, Murray and Murray Company L.P.A. Farmer ROBERT L. RANSOM JOYCE A. KELLER Funeral Director, Ransom Funeral Home President and Secretary DAVID H. STRACK, D.D.S. The Castalia Banking Company Bay Area Dental, Inc. SCC Resources, Inc. - ----------------------------------------------------------- --------------------------------------------------------- H. LOWELL HOFFMAN, M.D. MELVIN J. ROHRBACHER LEROY C. LINK DAVID A. VOIGHT President, SCC Resources, Inc. President, Chief Executive Officer The Citizens Banking Company R. A. Reynolds Appraisal Services, Inc. - ----------------------------------------------------------- --------------------------------------------------------- DEAN S. LUCAL DAVID A. VOIGHT Attorney, Lucal & McGookey President, Chief Executive Officer ROBERT A. REYNOLDS The Citizens Banking Company President, R. A. Reynolds Appraisal Services, Inc. </TABLE>
66 OFFICERS OF AFFILIATED COMPANIES The Citizens Banking Company - -------------------------------------------------------------------------------- Chairman of the Board Lending Officers - --------------------- ---------------- Lowell W. Leech Richard C. Finneran, Jr. President, Chief Executive Officer James P. Greek - ---------------------------------- Connie M. Heuberger David A. Voight David G. Majoy Senior Vice Presidents Donna M. Miller - ---------------------- Christina A. Raftery Donald E. Gosser Brenda J. Stallard James O. Miller Suellen M. Williams Jay R. Pressler Mortgage Loan Administrator Vice Presidents --------------------------- - --------------- Kenneth C. Hahn Donna J. Dalferro, Secretary Operations Officers Lee A. Jordan ------------------- David L. Ott Ann E. Baum Charles C. Riesterer Joann M. Geis Assistant Vice President Shirley J. Hoover - ------------------------ Susan A. Winkel Judy A. Burkey Personal Banking Officer Marcia A. Gasteier ------------------------ Robin J. Grathwol Phyllis L. Bransky Karen S. Rutger Sales, Marketing and CRA Officer Cashier -------------------------------- - ------- Christine J. Kane Douglas A. Greulich Senior Operations Officer Controller ------------------------- - ---------- David J. Dillon Todd A. Michel Paula J. York Credit Card Administrator - ------------------------- Paul D. Mesenburg Customer Service Officer - ------------------------ Linda G. Kelley Beverly A. Knupke Deborah E. Morrow The Castalia Banking Company - -------------------------------------------------------------------------------- Chairman of the Board Assistant Vice President - --------------------- ------------------------ Lowell W. Leech Sharon K. Keimer President & Secretary Lending Officer - --------------------- --------------- Joyce A. Keller Virginia L. Bluhm Senior Vice President Operations Officers - --------------------- ------------------- Bruce A. Bravard, Cashier Rae L. Cox Vice President Mary K. Meyer - -------------- Kenneth R. Lehrer Mary K. Schlessman
67 OFFICERS OF AFFILIATED COMPANIES, CON'T. SCC Resources, Inc. - -------------------------------------------------------------------------------- President Secretary-Treasurer - --------- ------------------- LeRoy C. Link James O. Miller Vice Presidents Operations Officer - --------------- ------------------ William E. Couch Geriann M. Sartor Ralph M. Chicotel Thomas C. York, Jr. R. A. Reynolds Appraisal Services, Inc. - -------------------------------------------------------------------------------- President Secretary - --------- --------- Robert A. Reynolds Jay R. Pressler Executive Vice President Treasurer - ------------------------ --------- John F. Stauffer James O. Miller
68 FIRST CITIZENS BANC CORP SHAREHOLDER INFORMATION The Annual Meeting of the Shareholders of First Citizens Banc Corp will be held at The Citizens Banking Company, 100 East Water Street, Sandusky, Ohio on April 21, 1998 at 2:00 p.m. Notice of the meeting and a proxy statement will be sent to shareholders in a separate mailing. REGISTRAR AND TRANSFER AGENT Fifth Third Bank Corporate Trust Stock Transfer Division 38 Fountain Square Plaza Cincinnati, Ohio 45202 FIRST CITIZENS BANC CORP 100 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-4121 Fax: (419) 627-0103 AFFILIATE The Citizens Banking Company 100 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-4121 Fax: (419) 627-0103 The Castalia Banking Company 208 South Washington Street Castalia, Ohio 44824 Tel: (419) 684-5333 Fax: (419) 684-7051 SCC Resources, Inc. 165 East Water Street Sandusky, Ohio 44870 Tel: (419) 625-1605 Fax: (419) 625-0081 R. A. Reynolds Appraisal Services, Inc. 165 East Water Street Sandusky, Ohio 44870 Tel: (419) 627-4543 Fax: (419) 625-0081